Difference Between Refunds and Chargebacks and How to Avoid Them

April 18, 2023

Difference Between Refunds and Chargebacks and How to Avoid Them

Refunds and chargebacks are significant issues for e-commerce businesses. While a customer may request any of the two based on their level of satisfaction with the business, the two have a substantial effect on the income of online sellers.

According to the National Retail Federation and Appriss Retail report, merchants expect more than $761 billion in merchandise sold in 2021 to be returned. This accounts for an average of 16.6% of total U.S. retail sales compared to 10.6% in 2020.

The same report has also found that chargebacks have increased 2x in the last few years. The merchants surveyed in the 2021 Chargebacks Field Report noted a 25% increase in chargeback issuances, and this trend is likely to continue.

Both chargebacks and refunds are often used with the same connotation, but it is important to understand that these two are very different.

Understanding the difference between refunds and chargebacks is important for merchants so as to resolve them quickly.

Merchants should understand when to provide refunds and when to use refunds to prevent chargebacks. So, in this article, we will extensively talk about chargebacks and refunds and how to avoid them.

What are chargebacks?

Chargebacks occur when customers do not contact the merchant for order issues and instead file a complaint with their card issuing bank. Before contacting the merchant, the card-issuing bank credits the customer's account.

For example, a customer placed an order with an online store. Now they have an order issue. In this case, the customer will raise and dispute with their bank and not the merchant asking for a chargeback.

Customers can ask for a chargeback with their bank for many reasons like:

  • Order not received
  • Poor quality merchandise
  • Item not as described
  • Does not recognize the transaction made
  • Delayed shipment or delivery
  • Not able to reach out to the merchant

Worse, customers can also claim that they never received the product even if they do. This is known as "friendly fraud." According to the 2021 Chargebacks911 Field Report, 8 out of 10 merchants have seen an increase in friendly fraud.

In the situations above, instead of contacting merchants, customers raise the dispute with their respective banks.

What are Refunds?

A refund is a procedure in which a business agrees to return money to consumers. Refunds, like chargebacks, are initiated by consumers with merchants.

Customers request refunds for a variety of reasons, including:

  • Unhappy with the product or service
  • The product is faulty or damaged
  • Delivery was delayed
  • The incorrect item was provided
  • The item was never delivered

Once a customer makes a Shopify refund request, it is up to the merchant to determine whether or not the request is valid. Upon verification, merchants can either return the money or refuse the request with a reason.

Difference between refunds and chargebacks

From a customer's viewpoint, both chargeback and refund look the same.


Because in both cases, they are getting money back. However, as a merchant, it is important to understand the difference between refunds and chargebacks as it will help you tackle these issues promptly.

1. Communication

In case of a chargeback, the customer decides to communicate with their bank but during the refund process merchant and customers are in direct touch with each other.

2. Clarity

Merchants take action based on assumptions that may or may not be true for a chargeback. However, in the case of a refund, the customer states a reason, and it is the merchant who has to decide whether it is valid or not.

3. Financial loss

Once customers file a chargeback, merchants’ funds are put on hold as PayPal reserve and the disputed amount is credited to the customer account without warning. In contrast, merchants are aware of revenue losses in case of refunds.

4. Merchandise

Since money is automatically deducted in case of a chargeback, merchants lose money and their merchandise. In a refund, the item is returned by the customers, and merchants can sell it again.

5. Fees

Chargebacks come with a fee. This fee can range anything from $20 to $100. The chargeback fee depends on the type of industry and the chargeback history of the merchant. Merchants in a high-risk industry generally have to pay high charges, and if these charges exceed certain thresholds, often around 0.9%-1%, it can result in the closure of a merchant account.

On the other hand, refunds come with no added cost.

6. Reputation

Increasing chargebacks indicate that merchant account fall into the high-risk category. Since customers are risk-averse, they might avoid business with such merchants. While refunds are normal in every business, they have less to no impact on merchant reputation.

7. Resolution

Resolving chargebacks can take from a few days to weeks to a month or even longer. However, disputes related to refunds are often resolved by merchants within 24-48 hrs.

Refunds or Chargebacks - Which has a lesser impact on your business?

Now that we have cleared the difference between refunds and chargebacks, you might wonder which is better - or which has a lesser impact on your business growth.

So it is important to understand that both are losses to a merchant. Merchants do not want any of these. However, avoiding them is almost impossible.

While refunds or chargebacks are not ideal, refunds are the lesser of two evils. Chargebacks result in loss of revenue, merchandise, reputation, and customers for merchants.

Issuing Shopify refunds, however, allow merchants to prevent chargeback fee, save the merchandise and preserve their relationship with the customers.

Hence, refunds are better than chargebacks because:

  • Merchants can continue doing business with customers
  • Can address customer issues directly
  • Save money on chargebacks
  • Keep chargeback ratio under control

Since we know the difference between refunds and chargebacks it’s important to have different strategies in place to deal with them.  Let’s look at ways to deal with them separately.

How to deal with Refunds?

Though Shopify refunds are unfavorable for merchants, having a strategy to deal with them is important. Regardless of the reason for the return, how you respond to refund requests is critical to increasing the overall customer experience. Here is how to deal with a refund request:

1. Have a clear refund policy

You should clearly define your return policy and make it accessible to all visitors to the site. The policy should include the terms and conditions, deadlines, and acceptable reasons for product returns. You can direct consumers to their policy when they request a Shopify refund. Having a return policy also enables you to demonstrate authority if you have to deny the refund request.

2. Resolve refund request quickly

When customers want refunds, you should aim to respond quickly. Customers are already dissatisfied with the situation; keeping them waiting would be a terrible experience. You lose not just customers but also market reputation because of this experience. As many as 13% of customers tell 15 or more people if they have a negative experience.

Even if you are unsure what to do with a refund request, it is critical to acknowledge it and ensure the customer's best solution possible.

3. Stay professional

Customers may feel irritated and frustrated by the situation.They can say anything unfavorable about the product or service. You should avoid using the same tone and deal with the situation professionally. Because none of this would solve the problem or satisfy the consumer.

4. Explain the decision

An explanation is very important in the refund process. It is important to inform customers, justify your decision, and let them know the next steps in the process. If you are looking to return customer money, explain to them how. If they do not think the refund request is valid, clearly communicate it to customers.

5. Offer an alternative solution

Refunding customers is not always the solution. Keep an eye out for other options. Instead of repaying the customer's money, you might be able to manage their refund request differently. To do this, you must first understand the customer's needs and level of dissatisfaction before offering an alternate option that would be acceptable.

For example, if the delivery of an order is delayed. A customer may complain and ask for a refund. In this situation, you can reassure customers that delivery will take place shortly and provide a discount voucher as a token of apology.

6. Ask for customer feedback

A refund request is a great opportunity to get customer feedback. How? When a consumer requests a refund, you should inquire about what went wrong and how you fell short of customer expectations. You can also get feedback on whether or not customers got immediate assistance. Although this is not favorable feedback, it does provide vital information on how to improve.

How to deal with Chargebacks?

It is critical to understand the chargeback procedure before discussing how to handle them.

  • If something goes wrong with the order, customers might raise a dispute with PayPal or their credit card issuing company asking to reverse the amount paid.
  • The credit card company will further ask the merchant to submit evidence if the chargeback request is valid or not.
  • Merchant then collects all the evidence and forwards it to the credit card company claiming why they think the chargeback is not valid.
  • The credit card company reviews the evidence. The review usually takes 65 to 75 days after the transaction is made. In a few cases, the review can take longer than 75 days.
  • The credit card company then resolves the inquiry.

If the inquiry is closed in favor of the merchant, then the disputed amount is returned. If the cardholder wins, the credit card company takes the disputed amount and a fee from the merchant.

Here's how to deal with Shopify chargebacks on your PayPal account

1. Contact customers

Following notification of the chargeback, you must initially contact customers by phone or email. Customers can ask their bank to cancel the chargeback if they are willing to settle the issue and believe it is not required. You can even provide proof that customers have decided not to file a chargeback.

2. Collect evidence and submit it

When a cardholder disputes a chargeback with the bank, the bank asks merchants to provide proof if they think the chargeback is invalid. There is, however, a very short window of opportunity to provide evidence.

The type of evidence that merchants have to submit depends on the reason that customer asked for a chargeback.

For instance, the merchant can provide the bank with proof of delivery if the customer says they never received the goods.

You must ensure that the evidence they provide is relevant and to the point. Consider including proof of customer authorization, service provided, or item delivery. You can even add terms of service and refund policy. Any document or images submitted should be properly formatted so they can be viewed without zooming or cropping.

3. Accept the chargeback

If you think the Shopify chargeback request is valid, you should accept it without submitting the evidence. The disputed amount is returned to the customer, and the chargeback fee is deducted from your PayPal account.

4. Issue a refund to end an inquiry

You can cancel the inquiry by issuing a complete refund for the order after approving the chargeback request. A full chargeback is possible even if you only offer a partial refund. However, the cardholder won't be able to start a chargeback after the complete refund has been made.

Best Practices to Lower Refunds and Chargebacks

Shopify refunds and chargebacks cost you money in addition to reducing your credibility. Therefore, it's important to keep them under control.

You can always take preventative measures to decrease refunds and chargebacks on your PayPal merchant account, even when it's hard to eliminate customer disputes.

1. Make it easy for customers to contact you

Sometimes customers don’t want to initiate a chargeback at all. They only want their most recent order refunded. However, if customers discover that contacting the merchant is difficult, they may decide to initiate a chargeback with their bank. Therefore, you should make it simple for customers to contact you to prevent chargebacks initiated out of dissatisfaction. Make your contact information accessible on the website or offer a chat support option.

2. Create a strong refund policy

Having a strong refund policy can help you keep chargebacks and disputes under control. Having a refund policy will also encourage customers to try your products. A refund policy should clearly state:

  • Time frame for refunds
  • Terms and conditions for refund, fees and other important circumstances under which refunds won’t be provided

Refund policies can also help you establish authority by acting as strong proof in chargeback cases.

3. PCI Compliance

Customers may submit a chargeback stating that their card was used for an illegal or fraudulent purchase. Therefore, in this situation, you must comply with the recognized standard for protecting credit card data, PCI-DSS.

PCI offers anti-fraud measures to verify the card's authenticity and determine if it has ever been linked to suspicious transactions.

Accepting payments using a Payment Gateway that is already PCI-DSS compliant, like MYMOID, is the best approach to attain PCI Compliance.

4. Send confirmation email

You should provide customers a confirmation once they complete payment together with the invoice. Sending a second confirmation email with the shipment information and tracking data is advised after the goods have been dispatched. This can be used as proof to help you prevent Shopify chargebacks.

5. Provide order tracking details

Providing customer order tracking details is important as it makes your business look more trustworthy and dependable. However, it’s more important to provide these details in real-time. Why? Because customers want to track their orders immediately after making the payment, and when they can't find their order details, they might get anxious and raise a chargeback.

However, providing order details in real-time is challenging as most merchants do it manually. Imagine manually entering details for thousands of orders. The TrackiPal Shopify app can be useful here. The app allows Shopify stores to enter order details automatically without any intervention. This helps merchants provide order details in real-time and prevents errors.

6. Collect signature on delivery

One prominent reason for chargeback is that customers claim they haven’t received the product. While this may happen to anybody, customers can also make a false claim, leading to financial losses and reputation.

Hence, you should collect signatures from the receiver after delivery is made. This will help to decrease chargebacks for possibly false claims.

7. Make your subscriptions opt-in

After the free trial period, many businesses have the policy of automatically upgrading a consumer to the paid plan. Even though this is a relatively typical practice, particularly among SaaS companies, many customers may find it annoying and even hostile.

Because they did not want to join the premium service after the free trial, they would most likely submit a payment dispute if they cannot request a refund or money back.

Lower your refunds and chargebacks with TrackiPal

By 2023, experts estimate global chargeback costs to reach $117.47 billion. The increasing chargebacks and refunds should be a  concern as it delays payment and puts your money on hold.

Now that you understand the difference between refunds and chargebacks, you should develop a sound plan to reduce both. Refunds and chargebacks are a chance for you to learn about customer issues and take steps to avoid them in the future.

Considering that customers want to be informed about recent orders, make sure to update PayPal with the order details right away. However, doing it manually is a challenging task. It's where you can use the TrackiPal Shopify app. The app allows you to sync order details with PayPal automatically and get paid 10x quicker instantly.

The simple yet effective dashboard allows you to view your PayPal disputes, order data, and the status of your live sync.

Get TrackiPal for your Shopify store now.