What is the difference between a chargeback and a refund?

Numerous merchants and consumers around the globe do not have a comprehensive understanding regarding the fundamental differences between a refund and a chargeback. For consumer protection, it is essential for merchants to realize why both options exist for consumers and merchants alike. The following details will not only define both refunds and chargebacks, they will simplify the key differences that merchants must know in order to manage a successful merchant-business.

Let’s begin with the chargeback. A chargeback is a consumer originated recall of funds taken but not authorized beforehand by the merchant. Consumers typically start a chargeback by communicating with their issuing bank or credit card provider. The consumer files a verified complaint on debit items on their credit card or bank statement. An example of a chargeback: when a consumer orders a product using a credit card, the consumer does not receive the product; the consumer then calls their issuing bank in order to remove the charge from their account. Chargeback commonly refers to the return of funds to a consumer, by force, originated by the issuing bank used by the consumer. It is the reversal of a consumer transfer of funds.

A refund is frequently defined as a simple return of funds from the merchant to the consumer. An example of a refund: the merchant does not ship the product after receiving payment; the consumer notifies the merchant of their dissatisfaction with the purchase; and the merchant then issues a credit to cancel the charge.

Simply put, a chargeback is the procedure of a consumer receiving money back by complaining about a transaction. From the merchant perspective, it is then necessary for the merchant to provide real evidence against the complaint. A refund is the settlement between the consumer and the merchant directly, without the issuing bank's participation to return consumer funds.

The chargeback mechanism exists for the protection of the purchaser. Consumers with credit cards issued in the US are afforded reversal rights by Regulation Z of the Truth in Lending Act. US debit card holders are assured reversal rights by Regulation E of the Electronic Fund Transfer Act. Comparable rights range globally, pursuant to the rules recognized by the card associations and banking institutions.

A consumer may initiate a chargeback by contacting their issuing bank, and filing a complaint regarding one or more debit items on their statement. The threat of forced reversal of funds provides merchants with an incentive to provide quality products, helpful customer service, and timely refunds as appropriate. Chargebacks also provide a means for reversal of unauthorized transfers due to identity theft. Chargebacks can also occur as a result of friendly fraud, where the transaction was authorized by the consumer but the consumer later attempts to fraudulently reverse the charges.

Deceitful consumers often abuse the chargeback mechanism at the expense of the merchant. Such as, consumers who experience buyer's remorse, or engage in other forms of friendly fraud, frequently attempt to reverse transactions.

Card issuers who file a chargeback because of identity-theft, do not have an obligation (in reality have financial deterrent) to report the consumer's account as compromised. Consequently, deceitful consumers have motivation to report an unwanted item on their credit card statement as fraudulent.

Chargebacks can occur when a bank mistake credits a consumer bank account with additional funds than anticipated. Banks then must chargeback to fix the inaccuracy. When an overdraft results and it cannot be covered, banks have the option to take legal action. Where there is a direct deposit to an incorrect bank account or the deposit is a higher amount than anticipated, a chargeback is typically conducted to fix the mistake. Chargebacks also occur when an account holder deposits a check and it is returned due to non-sufficient funds (NSF), a closed account, or when it is discovered to be stolen, counterfeit, forged or altered.

Banks may take legal action against account holders when chargebacks are initiated due to fraudulent activity or insufficient funds are in the account to cover the chargebacks.