Chargeback vs. Refund: The Differences Explained

For UK merchants, chargebacks and refunds may seem similar since both involve returning money to a customer. However, the processes and consequences are entirely different. 

Refunds are initiated by the merchant and are typically used to resolve customer complaints or order issues directly. Chargebacks are triggered by the customer’s bank, often without warning, and can lead to lost revenue, additional fees, and increased exposure to fraud. 

Confusing the two can result in serious financial and operational risks. This article breaks down the key differences between chargebacks and refunds and outlines what UK businesses need to watch out for.

What Is a Refund and When Is It Used?

A refund is the process that involves the merchant and customer directly without the involvement of third parties or intermediaries. In this case, the customer has paid for a good or service using their debit or credit card and wants to return the item while getting their money back.

Here, the customer contacts the merchant who then initiates the refund into the customer’s account. This process can take several days to complete.

Refunds are issued for several reasons. These include defective or poor-quality items and unexpected shipping fees that the merchant failed to disclose.

What Is a Chargeback and How Does It Work?

A chargeback is also a process that involves the return of funds to a customer. But in this case, the customer approaches their bank or card issuer directly rather than speaking with the merchant first.

When the process is initiated, the customer’s bank will investigate the case. If it finds that the merchant was at fault, the merchant’s account will be debited with the fee for the product plus associated costs for the dispute management process.

These situations are detrimental to merchants even though they are able to dispute the event by providing compelling evidence to the contrary.

For example, if a merchant has a high chargeback ratio, meaning many customers dispute payments, this can expose them to serious risk and pressure.

Key Differences Between Chargeback and Refund

While a chargeback and a refund both involve a type of payment reversal, they are different processes whose differences merchants must know about. 

Here are a few to consider:

• Initiator: Refunds are initiated by the merchant, while chargebacks are initiated by the customer through their bank or card issuer.
• Process: Refunds follow a direct process between the customer and the merchant, whereas chargebacks involve the customer’s bank, card networks and sometimes the merchant’s bank.
• Customer intent: A refund is typically requested when a customer is unsatisfied but still wants to resolve the issue amicably; a chargeback is often used when the customer suspects fraud or cannot resolve the issue with the merchant.
• Time and cost: Refunds are generally faster, simpler and free for merchants, while chargebacks can be time-consuming, costly and may involve fees or penalties for the merchant.
• Impact on the merchant: Multiple chargebacks can lead to a higher chargeback ratio, which may damage the merchant’s reputation and lead to account holds or termination, unlike refunds which don’t affect risk ratings.
• Dispute option: Chargebacks allow merchants to dispute the claim with evidence (a process known as representment), while refunds are voluntary and typically not disputed once issued.
• Documentation: Refunds usually require minimal documentation; the chargeback process demands detailed proof of transaction validity, delivery and customer communication.

Put shortly, clear distinctions between refunds and chargebacks help manage payment risk and protect revenue. Encouraging refunds instead of chargebacks reduces fees, lowers operational strain, and limits reputational damage caused by high dispute ratios.

To prevent chargebacks, merchants need a strong refund policy, an easy return process, and responsive customer support. When chargebacks do occur, merchants should be prepared with solid documentation and a clear representment strategy to defend valid transactions and reduce financial losses.

Customer Rights Under UK Consumer Law

Under UK consumer law, customers are protected when making purchases, whether online or in-store. For this purpose, several pieces of legislation impose obligations on the merchants. 

These obligations include:

• Goods must be as described, of a satisfactory quality and fit for purpose.
• Customers must be clearly informed of their refund, cancellation and return rights before the purchase is completed.
• After the refund period has passed, consumers may still be entitled to a repair or a replacement.
• If a product is returned due to being faulty or not as described, the seller must cover return shipping costs.
• Services that are not provided with reasonable care and skill may entitle the customer to a price reduction or a repeat service.
• Extended warranties or return periods offered by retailers must not override or restrict the customer’s statutory rights.

UK consumer law gives customers strong protections, including the right to refunds, repairs or replacements for faulty goods, as well as cancellation rights for distance purchases. It is your obligation as a merchant to clearly communicate their policies and honour them when customers make these types of requests.

Common Reasons for Chargebacks in the UK

Common cases when chargebacks may occur in the UK include, but are not limited to, the following:

• The customer doesn’t recognise the payment reflected on their statement.
• The customer missed the refund deadline.
• The product arrived late or in a damaged condition or was defective.
• The customer’s card was stolen and used by the thief to fraudulently make numerous purchases. In such a case, the chargeback process is initiated so that the customer doesn’t need to approach every merchant for a refund.
• In the case of friendly fraud, the customer approaches their bank for a chargeback rather than speaking with the merchant directly.
• The merchant offers poor customer service without clearly specifying their contact details and/or the terms for their refund policy and refund process.
• And others.

Chargebacks in the UK can also occur because of unrecognised transactions, missed refund deadlines, damaged or defective goods and suspected fraud. They may also arise from poor customer service or unclear refund policies. 

All of these scenarios can lead to financial losses, higher risk and reputational damage for the merchant.

Role of Payment Providers Like myPOS in Dispute Resolution

When you choose myPOS as your payment provider, you’re choosing a trusted partner who acts as an intermediary between you and the customer initiating the chargeback process. We facilitate communication and gather evidence to ensure that the issue is resolved quickly, fairly and transparently for both parties.

With more than 300,000 merchants in Europe relying on us for compliant card machines and online payment solutions, we believe in offering you the full value of our service through mediation that facilitates a fast and transparent resolution process.

Best Practices for Merchants to Minimise Chargeback and Refund Risk

Chargebacks and refund disputes can be costly and damaging to a merchant’s reputation, so it’s essential to take proactive steps to reduce the risk. 

Here are a few best practices merchants can follow to minimise their risk:

• Communicate clearly by ensuring product descriptions, pricing, shipping times and terms and conditions are accurate and easy to understand.
• Provide a transparent and accessible refund policy, and display it prominently at checkout and in confirmation emails.
• Always issue refunds promptly when agreed and keep a detailed record of all transactions, customer interactions and delivery confirmations.
• Use secure payment systems and payment fraud detection tools to help prevent unauthorised transactions.
• Offer excellent customer service and make it easy for customers to contact you with queries or complaints. This can often resolve issues before they escalate to chargebacks. 
• Regularly review chargeback data and patterns to identify recurring problems and adjust your practices accordingly.

These steps can reduce risk while building trust and long-term customer loyalty.

Conclusion

While refunds and chargebacks both involve returning funds to the customer, they differ significantly in process, cost and consequences, particularly for merchants.

By understanding these differences, staying compliant with UK consumer law and following best practices for dispute prevention, merchants can reduce financial risk and improve customer satisfaction.

Prioritising transparency, clear communication and reliable payment solutions like myPOS card machines can go a long way in avoiding costly chargebacks and building long-term trust.

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