How Chargebacks vs Refunds Impact Your Business

A refund occurs when a merchant voluntarily returns a customer’s money. A chargeback occurs when a payment is reversed by the acquiring bank or payment issuer. Both processes involve returning a customer’s money, but each has different consequences for the merchant.

Refund	Chargeback
Who initiates it?	The merchant, usually at the request of the customer	The customer, usually through their bank
Who approves or denies it?	The merchant	The bank or card issuer
How much control does the merchant have?	Significant control (legal restrictions apply)	Very little
What costs are associated with the process?	The cost of the transaction plus any processing costs	The cost of the transaction plus a chargeback fee, shipping, and any administrative costs
Does it impact chargeback ratio?	No	Yes
How is it resolved?	Between the customer and the merchant	Arbitration may be required; the bank serves as an intermediary between the customer and the merchant
What are the potential consequences?	The loss of a sale	An increase in the chargeback ratio, which over time can put your merchant account in jeopardy

It’s important to note that chargebacks and refunds are both a normal part of doing business. Neither automatically indicates that the merchant did anything wrong. A chargeback may initially be provisional, and it can often be challenged. The key is to be diligent in your customer dealings and partner with a payment processor that offers dedicated chargeback prevention tools to keep your ratio as low as possible.

What Is a Refund?

A refund occurs when a merchant returns all or part of a customer’s payment using the original payment method. A refund may be initiated due to:

• An order cancellation
• A duplicate or incorrect charge
• A product return
• A faulty or damaged product
• A product that was not as described
• A friendly resolution to a dispute

A full refund occurs when the entire transaction amount is returned to the customer. A partial refund occurs when only a portion of the transaction amount is returned.

Although most refunds are at the merchant’s discretion, statutory refunds exist to protect consumers in certain legal instances, such as if a product isn’t delivered or is falsely advertised. It’s important to familiarise yourself with the laws in the region where you operate, as legally mandated consumer rights take precedence over any policies you may have in place.

How a Refund Normally Works

Under normal circumstances, the consumer will contact the merchant to request a refund. Then the merchant reviews the request and determines whether the customer is entitled to the refund, either due to a valid product or service concern, a legal mandate, or goodwill from the merchant.

If the refund request is deemed reasonable, the merchant approves the return of funds. The funds are then credited to the buyer’s original payment method.

What Is a Chargeback?

A chargeback occurs when a customer files a dispute with their bank or card issuer, formally requesting that a transaction be cancelled or reversed. The parties involved include the customer, the issuing bank, the payment processor, and the merchant.

A chargeback may be initiated due to:

• An unauthorised transaction (like if a credit card is stolen)
• Goods not received or not as advertised
• A faulty or defective product
• Poor or misleading service, according to the customer
• A recurring payment that the customer wants to cancel
• A duplicate charge
• An unsuccessful attempt to secure a refund from the merchant

The issuing bank assigns a reason code for the request and may provisionally credit the customer while the matter is investigated. The merchant may then dispute the chargeback, submitting evidence on their own behalf as part of the representment process.

For example, if a customer requests a chargeback claiming that a product was never delivered, the merchant may dispute the claim by submitting the relevant tracking information.

It’s important to note that some chargeback rights are dictated by card-scheme rules, but statutory protections for unauthorised payments are subject to consumer protection laws in the European Union and individual nations.

How the Refund and Chargeback Processes Differ

While refunds are processed directly between the merchant and the customer, chargebacks are processed through a multi-party banking and card-network process.

The Refund Process

1. The customer contacts the merchant.
2. The merchant reviews the request.
3. The merchant approves a partial or full refund.
4. The refund amount is sent to the original payment method.
5. The merchant notifies the customer.

The Chargeback Process

1. The customer disputes the payment with the card issuer.
2. The issuer reviews the claim.
3. The issuer sends a reason code and response deadline to the merchant.
4. The merchant accepts the chargeback or disputes it with evidence.
5. The issuer reviews the response.

If the merchant accepts the chargeback, the money is refunded to the customer’s original payment method. If the merchant disputes the chargeback with compelling evidence, the matter may proceed to arbitration.

Chargeback response windows can vary. It’s critical for merchants to heed the deadlines imposed by their acquiring bank.

How Chargebacks and Refunds Affect Merchants

A refund results in a short-term monetary loss for the merchant. A chargeback can result in additional fees and penalties. Over time, it can carry more severe payment processing consequences.

Financial Impact

Chargebacks and refunds both cost merchants the original transaction amount, as well as possible losses from processing fees and fulfilment costs. They can also result in temporary cash-flow uncertainty.

Chargebacks additionally result in losses from chargeback or dispute fees, and from the cost of labour required to address disputes and arbitration.

Chargeback Ratio and Account Risk

A merchant’s chargeback ratio measures the number or percentage of chargebacks against total transaction volume. The specific ratio may vary depending on the network, acquirer, or region. However, it’s important to keep your own chargeback ratio as low as possible. Potential consequences for too many chargebacks include:

• Heightened scrutiny and monitoring
• Increased processing costs
• Rolling reserves or withheld funds
• Termination of your merchant account

Depending on the provider and region, restrictions may begin when your chargeback ratio reaches 0.75 to 1 per cent. This is why it’s so important to maintain open communication and good relationships with customers. Studies show that 75 per cent of consumers go straight to the issuer with a payment dispute. Minimise this concern by implementing proactive strategies to prevent credit card chargebacks.

Friendly Fraud and Double-Refund Chargebacks

Friendly fraud occurs when a customer disputes a legitimate transaction without valid grounds for a chargeback. A double-refund chargeback occurs when a customer is reimbursed twice for the same transaction: once due to a refund from the merchant, and once from a chargeback dispute.

Friendly fraud may occur when:

• The customer doesn’t recognise the description on their billing statement
• The purchase was made by a family member, unbeknownst to the customer
• The customer forgot about a legitimate subscription
• The customer claims non-delivery despite receiving delivery confirmation
• The customer ignores the returns process and instead contacts the bank directly

A double-refund chargeback may occur when a customer requests a refund in the middle of an ongoing dispute. In such instances, the customer may receive twice the amount they paid (at least temporarily) unless the merchant identifies and challenges the duplication.

To minimise double chargebacks and chargeback fraud, always check the dispute status before you issue a refund and maintain refund timestamps. If a duplicate reimbursement does occur, use your dispute system to submit proof of the processed refund.

Make Refunds Part of Your Chargeback Strategy

A proactive refund policy, coupled with merchant protection services for chargebacks, reduces costly chargebacks while helping you to maintain good customer relationships. Refunds might feel like a loss to your business. However, they ultimately give you more control over the dispute process and will cost you less in the long run.

Maintain clear policies, responsive service, reliable transaction evidence, and careful payment monitoring to keep your payment processing services in good standing with customers and card networks.

Published: September 17, 2026
Last updated: October 13, 2026