Chargeback vs. Refund: What’s the Difference?

Apr 3rd, 2024

Eventually, all businesses face an inevitable part of doing business: a customer wanting their money back. While some businesses face the issue more often than others, even the best quality services won’t make you immune.

There are two primary ways that money can be returned: a refund or a chargeback. While both have essentially the same result for the customer, there are major differences for the merchant when it comes to a chargeback vs. refund.

Which one is better for your rental business and how can you make the most of a difficult situation with your customers? Here’s what you need to know about how chargebacks and refunds impact your rental business.

What is a Chargeback?

During a chargeback, the cardholder disputes the transaction at their bank. Once this is set in motion, the bank reverses the credit card transaction, taking the money from the merchant and returning it to their customer. The merchant does have the opportunity to respond to the dispute in most cases, but the debit is already in place.

In many instances, the customer often doesn’t even let the merchant know they’re unhappy with their purchase or give them a chance to make it right. They just skip straight to telling their bank that they want their money back.

While some chargebacks are initiated by customers who are genuinely unhappy with their experience, others are cases of fraud. For example, someone might have made a purchase with a stolen credit card – and understandably, the real cardholder told their bank that they never initiated that transaction. In other cases, the customer just wants to enjoy their purchase without having to pay for it.

The purpose of chargebacks is to offer protection for the consumer. However, chargebacks are difficult to defend against and create challenges for the businesses affected. The business loses out on the sale and is frequently hit with additional fees.

That said, the right systems in place can help a business reduce or prevent chargebacks.

What is a Refund?

A refund is a repayment of a sum of money where the merchant voluntarily returns some or all funds to the consumer. In this case, the customer reaches out directly to the merchant to request the refund rather than going to their bank.

Requests for refunds could happen for various reasons, such as the customer being unhappy with the service or changing their mind about the purchase. Sometimes the customer will request their money back even though they’re no longer in your refund/cancellation window. If you reject their refund request, they might move to plan B – initiating a chargeback with their bank instead.

Instead of the bank automatically returning the funds to the customer, the business has the flexibility to return the money to the customer based on their policies and timelines. In some cases, you might even be able to right the issue and convince the customer to change their mind.

Refunds can be issued directly, returning the funds to a customer’s account. However, they could also be issued in the form of credit toward future rentals or an exchange. The goal here is to delight your customer with the ease of getting their hard-earned money back and minimize the risk of them initiating a chargeback.

Chargeback vs. Refund: What the Difference Means for Businesses

The general consensus is that refunds are preferred over chargebacks. Here are a few ways chargebacks vs. refunds will affect your business.

Flexibility

Refunds offer more control and flexibility for the merchant. You can choose when and how to return the money to a customer, whereas a chargeback is issued automatically.

Costs

Chargebacks also come with extra costs and fees which eat into the profit on other sales. You’re already losing out on the benefits of a booking, so why should you pay even more for a sale you do not get to keep? The processing and admin fees on chargebacks add up.

Issuing a refund allows you to skip these costly fees. Instead, you’ll have only the lost sale.

Reputation

Chargebacks can damage your reputation with your processing bank. If you have an issue with repeated chargebacks, the bank might require you to pay higher admin and processing fees.

If your chargeback rate is especially high, you might not be allowed to accept certain types of credit cards.

Time Commitment

Finally, chargebacks require more of your time. If you want to rebut the chargeback, you have to put together documentation to prove that the dispute is not valid, which is time-consuming. Refunds can be less time-intensive, requiring only the time of your customer support team to try to mollify an unhappy customer.

Refunds Before Chargebacks

Because of all the disadvantages of chargebacks, most businesses are keen to stop the cycle and work out a solution with the guest before a chargeback is initiated. This lets you keep the dispute between you and the customer without involving the bank. Issuing a refund saves you both time and money while keeping you on better terms with the bank.

Refunds can be an opportunity to satisfy and delight your customer in a way that wins their loyalty forever. Customers often just want to be heard and understood. With excellent customer service, you can address their concerns and let them feel assured that you have their happiness in mind. Despite their initial complaint, they may be more likely to rent from you again since you’ve shown you’ll take care of them.

The open line of communication between you and the customer can also help you collect feedback, identify issues in your business, and make adjustments to avoid the same complaint going forward.

With chargebacks, your business won’t even have a chance to satisfy the demands of your customers or collect more detailed insights into how you can improve.

In some cases, the customer may claim they never received the refund even though it was processed on your end. They might then go to their bank to initiate a chargeback. In a worst-case scenario, you could end up returning the customer’s money twice – once through a refund, and once through a chargeback.

To prevent this from happening, clearly communicate with the customer and keep documentation of your own proving the refund went through. Always refund the money to the same credit or debit card so it can be easily matched to the original transaction.

Get Help with Refunds and Chargebacks

While there are certain steps your business can take to reduce or prevent chargebacks and refund requests, refunds and chargebacks will always be simply part of doing business.

Since refunds are the preferred way of dealing with unhappy customers, your rental company can save time and money by having policies in place to address customer complaints. It’s best to try working out a solution with the customer, which might mean issuing a refund, instead of waiting for customers to initiate a chargeback.

With decades of experience handling payment processing for rental companies, Ascent Payment Solutions can help you navigate this inevitable part of business. In addition to payment processing services, we can help your team avoid or fight back against chargebacks by offering:

Policy review to make sure you’re leveraging the correct verbiage
Fraud prevention technology to help you avoid fraudulent chargebacks
Tips to help you better dispute chargebacks, such as documentation best practices

Reach out to us today to learn how Ascent can help!