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Is Your Business Losing Money Through Refunds and Chargebacks?

Frequent refunds and chargebacks can negatively affect your profits, and in some cases lead to a loss. It’s important that you take measures to reduce both refunds and chargebacks. This post explains exactly how you can do this.

What’s the difference between refunds and chargebacks?

Refunds and chargebacks are two different ways in which customers can demand their money back if they are not happy with a purchase. 

In the case of a refund, the company directly pays the customer. Usually, the customer will ask for a refund, although there may be times when a customer complains and a company offers a refund voluntarily. The whole amount may be refunded, or a partial refund may be given. 

Chargebacks occur when a customer uses a credit card to make a purchase. In these cases, the customer approaches their credit card provider and the credit card provider pays the customer – not the company. While the company does not have to pay back the customer directly in these cases, they will still receive chargeback fees from their payment processor to cover costs. If chargebacks keep occurring, you may eventually be classed as a high risk merchant – you could experience higher chargeback fees and fines, be blacklisted by certain credit card providers and even have your merchant account closed. 

Which is least desirable – refunds or chargebacks?

Both refunds and chargebacks are not something that you want to happen too regularly. They can both result in you losing money. However, chargebacks can typically cause more damage than refunds. 

This is because refunds are handled privately between you and the customer. With chargebacks, there are third parties involved that can further penalise you. Chargeback fees are often more expensive than a refund, plus you could lose your rights to accept credit card payments if you receive too many chargebacks. For companies that rely on credit card payments, this could potentially cut off your source of income. 

As a result, if a customer is likely to want their money back, it’s better to steer them towards a refund rather than letting them file a chargeback. This involves not making it too difficult for customers to ask for a refund – refund policy information should be easy to find and customers shouldn’t have to go through a complicated process to apply for a refund. A chargeback management system can also be useful for companies to keep track of chargebacks and help find ways to reduce them (particularly fraudulent chargebacks).

What are some ways to avoid refunds and chargebacks?

While refunds are more preferable than chargebacks, you should try to avoid either where possible. This ensures that you’re not spending money delivering products and services without making a return. There are many different reasons a customer may ask for a refund or file a chargeback, and therefore many different preventative measures that could be worth taking. Below are just some of the biggest ways to avoid refunds and chargebacks.

Be honest and transparent with product/service information

Customers are likely to demand a refund if they receive a product or service that they feel was falsely advertised. Not being honest or totally transparent about important information could also result in you receiving negative reviews and even possibly a lawsuit in the case of big ticket items and costly services. Serious forms of misrepresentation could meanwhile cause you to receive fines.

As a result you shouldn’t try to exaggerate or hide information about your product/service that could be perceived as deceptive by consumers. Make sure to provide clear photos of products and only make claims about your products that you can say are completely true. 

Provide clear and accurate information on product measurements

Refunds and chargebacks may also be issued if a customer buys a product in the wrong size – especially if information on measurements was not clear or accurate. It’s important to make sure that measurements are clearly provided in product information to reduce the risk of this happening.

Some customers may still order the wrong size accidentally. You are not entitled to issue a refund if you think the measurements were made clear. That said, if they have not used the product and can return it in good condition, it may be worth offering a refund to keep them happy. Even better, offer to exchange it for a product in the right size (providing you sell the product in the size they want).

Choose a reputable shipping service

If a customer receives a damaged product or their product is not delivered by an agreed time, they may also ask for a refund or file a chargeback. This may not be your fault, and could instead be a fault with the shipping company.

Hiring a reputable shipping company can reduce the chance of your products arriving damaged or late. Always look at reviews when choosing a courier and don’t be afraid to switch to a different shipping company if you’d had a few issues with your current service. 

Be careful as to what you promise in contracts

If you promise to deliver something in a legal contract and you don’t deliver on that promise, the customer may not just want a refund/chargeback – they may even sue you depending on the ramifications. This is most commonly a threat in service-based industries.

Always be careful as to what you promise in your contracts with customers. Be realistic when agreeing to deadlines and don’t make claims that you can definitely achieve something if it’s not something you can guarantee. Hiring professional legal writers will also ensure that no information in contracts is misconstrued. 

Make sure your staff are well trained

Staff errors can also lead to refunds being requested or chargebacks being filed. While you can’t always prevent employees from making mistakes, you can reduce the risk of errors being made by training your staff well.

Make sure that all new employees are given full training on how to carry out duties. Try to provide training in-person if you can. E-learning can be a good supplementary form of training. It’s also worth creating a handbook that employees can check to familiarise themselves with company protocols if they forget their training. 

Put in place quality testing checks

Customers may also ask for their money back if a certain level of quality is not achieved. To make sure that your staff know exactly what this level of quality is, it’s important to set quality standards and carry out quality testing checks to make sure that these standards are being met. 

This could include manually inspecting products before delivery or testing software to make sure it functions well. This allows you to prevent a product or service being delivered that is not up to the mark. 

Take measures against fraud 

Unfortunately, fraud is one of the most common reasons for returns and chargebacks. Refund fraud is very common with products and may include a customer falsely claiming that a product arrived damaged or falsely claiming that they did not receive the product. Chargeback fraud (more commonly known as friendly fraud) meanwhile occurs when a customer files a chargeback for a product or service with claims that it was faulty or that someone else stole their card.

To prevent cases of refund fraud, there are a few things you may be able to do. When delivering products, you can usually prevent refund fraud by tracking deliveries and taking photo evidence of products before delivery and once they have arrived. 

When it comes to friendly fraud, a chargeback management system can help by identifying sources of chargebacks and intervening if you think a claim was fraudulent. 

What are some other ways to protect your business against refunds and chargebacks?

You may not always be able to prevent refunds and chargebacks occuring. However, there could still be ways to protect your business against the consequences. This could include:

*Taking out insurance such as shipping cover. This could allow you to claim back any money given out in refunds so that you’re not losing too much money (useful for big-ticket items).

*Asking customers to return products that are undamaged and offering to exchange them instead of just offering a refund. You do not have to refund a customer who bought a product in the wrong size, however offering an exchange could prevent them filing a chargeback instead. 

*Rejecting customers who repeatedly use your business and ask for refunds/file chargebacks. Such customers may be taking advantage of your company and you are in your right to refuse them business if their requests for a refund are often unjustified.

Make sure that your return policy is not too relaxed nor too strict. Customers should have a limited number of days to make a return and should have to prove their purchase with a receipt. However, you should be careful of providing too many other conditions that could prompt a customer to file a chargeback instead.

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