Chargeback vs Refund: Key Differences

What Are the Main Differences Between Chargeback vs Refund?

A refund happens when a customer contacts the merchant directly to return a purchase and get their money back. A chargeback is when the customer bypasses the merchant and asks their bank to reverse the charge, usually because they believe something went wrong.

Here’s what separates these two processes:

1. Initiator

Chargebacks occur when the customer calls their issuer, not you. Their issuing bank becomes the referee in a formal dispute. This means you’re immediately placed on the defensive without prior warning.

Refunds happen when the customer talks to you directly. You work together to solve the problem, maintaining a dialogue that preserves the customer relationship even if money is returned.

2. Control

With chargebacks, banks and card networks follow their own rules and timelines. You’re essentially subjected to their process.

For refunds, you decide what happens, subject to your refund policy, which should be well-defined and available online. Having a clear policy means that customers are more likely to reach out directly when an issue arises instead of filing a dispute. This allows you to evaluate each situation independently and make decisions aligned with your business policies and customer service goals.

3. Timeline

Chargebacks can take 2 to 6 weeks to resolve and could require you to provide evidence to dispute the claim.. This administrative burden and uncertainty are often not worth the effort of fighting the dispute.

Refunds typically return money to customers within 3-7 business days and require less administrative work. This often means customers remain satisfied even after experiencing a problem with their purchase.

4. Costs

Chargeback fees often cost between $20 and $100, not counting penalties if your chargeback rate climbs too high.

With refunds, you just return the payment amount, with minimal processing fees. The financial impact is predictable and limited to the transaction value itself.

5. Reputation Impact

Too many chargebacks can result in higher processing fees or loss of processing capabilities. For this reason, merchants often prefer refunds to the risk of higher chargebacks.

6. Complexity

Chargebacks involve a maze of administrative, evidence gathering, reason codes and possible arbitration. The process is administratively burdensome and diverts resources from core business activities.

Refunds offer a direct, simple process between you and your customer. This straightforwardness allows for quicker resolution and clearer communication.

How the Chargeback and Refund Processes Work

The paths money takes when returning to customers differ dramatically between chargebacks and refunds. Here’s what really happens behind the scenes:

The Chargeback Process

When customers bypass you and go straight to their bank, here’s the journey:

1. The customer tells their bank something’s wrong with a charge. They might claim fraud, non-delivery or quality issues.
2. The bank assigns a specific code to the dispute. Visa, Mastercard, and others each have their own classification systems.
3. The bank reviews the claim and asks for evidence.
4. If you believe the chargeback is wrong, you fight back with evidence such as delivery confirmations, customer messages or product details.
5. The acquirer forwards the information it collects from you to the payment card network, which forwards it to the issuer (issuing bank). 
6. The issuer makes the final determination on whether to grant or deny the chargeback.

This entire cycle typically goes on for 30-90 days or longer.

The Refund Process

Refunds take a much simpler path:

1. The customer tells you directly they’re unhappy.
2. You check their request against your refund policy.
3. If approved, you will send the money back through the original payment method.
4. Depending on the payment method used, a customer could receive their funds anywhere from instantly to up to 7 days.

International Complications

Cross-border transactions add several layers of complexity and businesses conducting international business need to be aware of these complexities to minimise disputes. 

For example, exchange rates shift between purchase and refund dates, which creates confusion about amounts. Payment networks often add currency conversion fees too, but businesses can reduce costs with Global ACH and real-time payments.

Consumer protection laws also vary across countries. EU customers often expect more extensive rights than those elsewhere.

Distance and anonymity in international sales increase fraud vulnerability. “Friendly fraud”—where customers dispute legitimate charges—becomes particularly hard to fight across borders.

Each card network has its own chargeback rules, timelines and evidence standards, which can make dispute handling more complex:

• Visa uses a streamlined process with fixed timeframes. Merchants typically have 30 days to respond to a Visa chargeback, and disputes are categorised under specific reason codes. If unresolved, the case may progress to pre-arbitration and arbitration phases.
• Mastercard allows slightly more time (up to 45 days) for merchants to respond. Its process includes a retrieval request stage, and evidence requirements can differ depending on the reason code.

Why Customers Request Chargebacks Instead of Refunds

Understanding the customer’s thinking helps you redirect them toward more constructive solutions.

Perceived Efficiency and Faster Resolution

Many customers wrongly believe banks work faster than merchants. Time zones create frustrating delays in merchant responses, while cross-border refunds seem to take forever due to processing. Banks often give provisional credits immediately during investigations, making the chargeback process appear more efficient from the customer’s perspective.

When a customer in New York buys from your Tokyo store and wants their money back, waiting through the night for your business hours feels like an eternity. This perception of delay often pushes customers toward their banks rather than waiting for your response.

Consumer Protection and Safety

Banks feel like powerful allies, especially in international purchases. Customers trust their bank to fight for them, finding comfort in the formal dispute process, which feels more secure than dealing with an unfamiliar foreign business. 

Banks follow predictable procedures that give customers confidence when facing uncertainty with an overseas merchant.

This safety blanket makes chargebacks attractive, particularly for high-value purchases from businesses customers don’t yet trust.

Avoiding Restrictive Merchant Policies

Some refund policies simply push customers toward chargebacks. 14-day return windows that expire before international packages even arrive create impossible situations for customers. 

Requirements for pristine packaging after packages travel thousands of miles can be unrealistic, while refusal to cover international return shipping costs that often exceed the item’s value leaves customers feeling trapped.

When faced with these barriers, customers see chargebacks as their only viable option. Your policies, while designed to protect your business, might inadvertently be driving dispute behaviour.

Poor or Delayed Communication

Communication breakdowns trigger many chargebacks. Language barriers create misunderstandings about resolution options, time zone differences mean responses take days instead of hours and different cultural communication styles lead to frustration on both sides.

A British customer waiting 36 hours for responses from your Australian business might give up and call their bank, even if you’re responding as fast as business hours allow. These communication gaps often lead customers to assume you’re ignoring them.

Lack of Awareness About Refund Options

Many customers simply don’t know that refunds typically process faster than chargebacks or that chargebacks can hurt the merchant’s ability to serve future customers. 

This knowledge gap leads them down the more complicated path by default. Without clear education about the benefits of direct refund requests, customers choose what seems like the more powerful option.

Using Chargebacks as a Signal or Penalty

Some customers deliberately choose chargebacks to punish businesses when they feel customer service ignored them, after receiving damaged products or items nothing like their descriptions, or following multiple unsuccessful attempts to resolve issues directly.

What Chargebacks and Refunds Mean for Your Business

The distinction between chargebacks and refunds isn’t just technical, it’s financial. Here’s the real impact on your business:

Direct Financial Impact

Chargebacks hit your wallet from multiple angles. Each dispute comes with processor fees, and high-risk businesses often pay more. You suffer product and shipping losses as you lose the product, the shipping costs and the payment all at once.

The multiplier effect means a $100 chargeback actually costs you $240-$360 when you count all associated expenses. Refunds still mean returning money, but without the punishing extra fees and penalties that make chargebacks so damaging.

Think of it this way: If you process 1,000 orders monthly and have just a 1% chargeback rate, those 10 chargebacks could actually cost you $2,400-$3,600 in total losses.

Monitoring Programs and Penalties

Card networks watch your chargeback rate closely. Visa’s Dispute Monitoring Program (VDMP) kicks in when chargebacks exceed 1% of transactions, placing your account under increased scrutiny. After five months in monitoring, Visa charges $50 per chargeback.

These monitoring programs don’t distinguish between valid and invalid disputes, they only track volume, treating all chargebacks as equally problematic regardless of circumstances.

Operational Burden

Chargebacks drain more than money. Your team spends hours investigating claims and building cases instead of growing your business, creating an administrative overload that diverts resources from productive activities. 

Disputed funds vanish from your account, creating unpredictable cash shortfalls that complicate financial planning.

You’ll likely need specialised software just to keep up with dispute management, which is yet another expense.

This technology investment becomes mandatory rather than optional once disputes reach a certain volume.

Business Growth Implications

High dispute rates signal problems to customers and partners, creating reputational damage that can be difficult to overcome. 

Payment processor restrictions, including account termination or higher processing rates, may follow excessive chargebacks, while market expansion challenges arise as new international markets become harder to enter with a history of excessive disputes.

How to Prevent Unnecessary Chargebacks

Keeping chargebacks at bay saves money and preserves your reputation. These practical strategies encourage customers to work with you directly rather than going to their banks.

1. Create Clear, Accessible Policies

Your return policies serve as the first line of defence. Write refund and return policies in plain language and avoid legal jargon that confuses customers. 

Customise policies for different markets to match local consumer protection laws, recognising that a one-size-fits-all approach often fails internationally. Make policies impossible to miss during checkout and in order confirmations. Spell out exactly how long customers have to return items, what conditions qualify and the steps to start a return.

2. Provide Proactive Customer Service

Don’t wait for problems to find you. Staff support across time zones so international customers aren’t left hanging when issues arise in their local business hours. Offer help in languages that match your primary markets. 

Always send automatic order and shipping confirmations with clear tracking links so customers always know where their purchase stands.

3. Implement Technical Solutions

Technology is a great ally in preventing disputes. Use clear billing descriptors so customers recognise your charge on their statement and apply fraud detection tools like Address Verification Service (AVS), 3D Secure, and fraud management systems to prevent unauthorised transactions before they become chargebacks. 

Set up automated pre-dispute resolution systems that give you a chance to issue refunds before disputes become official. You can also document deliveries with confirmation services that prove products arrived, which establishes evidence that can prevent or overturn invalid disputes.

These technical safeguards work together to create multiple layers of protection and protect your business from chargeback fraud.

4. Create a Simplified Refund Process

Make the right path the easiest path. Build a refund request process that takes fewer clicks than filing a chargeback, so it’s more convenient for customers to work with you directly. Automate parts of your refund workflow to cut processing times.

When refunds become frictionless, customers naturally gravitate toward this simpler solution rather than escalating to their financial institution.

Reduce Chargebacks With Prevention and Communication

The distinction between chargebacks and refunds isn’t just technical. It’s financial and operational. Refunds put you in control, wrap up within days and cost you more than just the returned payment. Chargebacks hand control to banks, drag on for weeks and cost additional fees.

Smart dispute management comes down to prevention and communication. Clear policies, responsive service and fraud tools steer customers toward working with you directly instead of going to their bank.

For global businesses, the stakes are even higher. Currency issues, legal differences and communication barriers all increase dispute risks in cross-border sales. Yet these challenges also offer a chance to stand out by handling disputes exceptionally well.