Can You Refund a Customer After a Chargeback Starts?

Every merchant knows that chargebacks can be devastating. You lose the money from a sale, you pay extra fees, you often lose whatever product was shipped out, and if your chargeback rate gets too high, there are even worse penalties.

At the heart of every chargeback is a customer who wants their money back. We merchants already have a tool for that: it’s called a refund. So, a reasonable question arises. Could you just issue a refund when you receive a chargeback, and stop the process before the penalties?

The Simple Answer

Let’s start with the simple answer: yes, technically, you can issue a refund after a chargeback has been initiated.

However, you should never do it without a very good reason and a plan in place.

Why? Issuing a refund does not cancel the chargeback process.

That means the chargeback will still go through, the payment gateway will still claw back funds and return them to the customer’s bank, and you’re still dinged with the downsides of a chargeback on your account.

But you refunded the customer, right? That’s cool and all, but there’s a pretty good chance that the customer is going to get both sets of money. It’s called a double refund or a refund chargeback, and it’s a huge hassle to deal with.

The good news is, there are a lot of protections in place to minimize the chances of this happening. Banks don’t like having to deal with the administrative burden of the back-and-forth, after all.

There’s also a very good way you can proactively issue refunds when a chargeback is incoming, but before it becomes a chargeback (in other words, when it’s still in the dispute phase), which I’ll talk about later in this post.

First, though, let’s go through the dispute and chargeback process, where refunds might come into play, and why you want to be proactive with them.

Refunds Vs. Chargebacks

A refund is pretty simple. A customer has an issue with their product, or with shipping, or somewhere else in the process, and they request a refund. You consult your refund policy. Are they within a refund window or have a qualifying reason for a refund request? If so, you can easily issue a refund, no questions asked.

If they aren’t within the bounds of a standard refund, you have to have your customer support team either use their judgment, or escalate to someone empowered to make that choice. Sometimes, a customer is trying to do something crazy, like request a refund on food they ate, or request a refund a year after their refund window expired. Those are clear denials. Other times, extenuating circumstances (package theft or damage in transit, for example) can mean a refund is ideal to resolve the circumstances.

The key is that a refund is a friendly sort of process. The customer reaches out with an issue, and you respond with a refund. No banks are involved, no one else is making a determination, and as long as everything is handled properly, the customer is satisfied… or at least not too irate.

A chargeback is a more intense and contentious process. The customer, instead of (or after) reaching out to you, reaches out to their bank. They file a dispute on the transaction, with a claim about an item arriving damaged, or not arriving, or the charge simply being fraudulent. If their bank agrees, they pass along the dispute.

The Dispute and Chargeback Process

Since the dispute process involves third parties (particularly the banks and the credit card processor) there are a lot more rules and processes in play. Here’s more or less how it works.

First, the dispute goes to your bank, and your bank hands over the funds and charges you fees according to their contract and terms. You are, however, given the option to fight the dispute. You can submit a rebuttal letter and offer proof that the dispute is false. Valid proof includes things like:

• Transaction data with timestamps and validation information.
• Proof positive the customer made the transaction, like delivery verification and CV2s.
• Transaction history from the customer proving past valid transactions.
• Previous communications with the customer where they admit to something contradictory.

The bar is high, but it’s not unreachable. You do, however, need to have the right kinds of proof; simply saying you believe they’re trying to pull a fast one on you isn’t enough for the banks.

If you successfully rebut the dispute, the customer’s chargeback is cancelled and the whole thing, more or less, goes away. On the other hand, if your proof is deemed insufficient, the customer gets their money back and you’re on the hook for the fees.

You do have a chance to appeal, but this is where arbitration comes into play, where the credit card network takes a closer look and makes a judgment, assuming the customer doesn’t back down. The loser in that judgment comes off way worse, with potentially hundreds of dollars in arbitration fees and more.

During this process, you may have the opportunity to reach out to a customer to try to resolve the situation before the chargeback is processed. When you receive notice of a chargeback, you might be able to reach out and ask the customer if a refund is acceptable instead. If so, you can issue the refund, they can cancel the dispute, and both parties move along with the minimum damage done.

Unfortunately, by the time you receive notice that there’s a dispute, it’s likely already deep in the chargeback process, and your easiest window for a refund has passed. There’s a way around this, which I’ll get to later, but assuming you haven’t set it up, you’re a lot more limited.

Why Customers Opt for Disputes Instead of Refunds

Why might a customer go to their bank with a dispute instead of asking you for a refund? There are a few reasons.

For one thing, from the customer’s perspective, the end result is the same. A refund gives them their money back, and a chargeback gives them their money back. They don’t know (or care) that a refund costs you nothing while a chargeback has penalties and fees.

For many customers, it’s also a potentially easier option. They already have easy, regular access to their bank. They can often dispute a transaction right from a banking app, and can do it with a simple form.

Meanwhile, if they have to contact you for a refund, they have to figure out what your policy is, how to contact you, how to navigate your contact process, how to request a refund with a valid reason, and potentially even have to fight you about it. Customers frequently don’t trust that companies will do the right thing and honor refund requests even if they’re valid, let alone if there are extenuating circumstances.

There are also always the contingent of customers who either know that chargebacks damage merchants and are intentionally trying to inflict that damage, or who are trying to commit fraud to get a product for free. Malicious intent doesn’t account for all chargebacks, but it does account for some of them.

There are steps you can take to minimize the chances of disputes, such as having clear refund policies and accessible customer service, but you’ll never be able to get rid of them entirely.

Why Customers are Hesitant to Cancel Disputes

If you’ve ever tried to issue a refund in place of a dispute, you may have encountered some hesitance from the customer. There’s a very good reason for that hesitance, and it leads to a game of chicken where no one wins.

From the customer’s point of view, a company offering a refund in exchange for cancelling a chargeback can seem like a meaningless distinction. There are benefits to the customer (in particular, disputes can take weeks or months to process, while a refund would occur right away), but there’s a big issue.

That issue is that, once a chargeback dispute is cancelled, it cannot be reissued for the same transaction. If the customer chancels their dispute, and the company does not actually process the refund, then the customer is out their money, time, product, and everything else. Their only recourse, if a refund isn’t processed, would be court.

For that reason, customers are routinely advised to never cancel a dispute until a refund is fully processed and the money is in their account.

The issue is that, as a business, you don’t want to preemptively issue a refund when a dispute is active. If the customer doesn’t cancel their dispute, you end up with the double-refund problem again, and have to present proof of the refund to get it returned. In the meantime, you’re out double the value of the transaction. In businesses with narrow margins, that can be very damaging as well.

So, you hesitate to issue a refund before a dispute is cancelled, but the customer doesn’t want to cancel the dispute until a refund is processed. You’re stuck until someone takes action, or until the chargeback happens and the penalties are finalized.

When to Issue a Refund to Preempt a Chargeback

There are, broadly speaking, three opportunities you have to issue a refund to avoid having to eat a chargeback.

The first is before a dispute is filed at all. The best way to deal with chargebacks is to avoid them in the first place, after all. You can cut down on chargebacks by identifying why they happen, and addressing those problems.

• If it’s customer dissatisfaction, figure out why your product is disappointing and fix it (or fix the ad copy that over-promises and under-delivers.)
• If it’s fulfillment issues, consider looking for alternative shipping and fulfillment processes.
• If it’s a lack of clarity within your customer service process or your refund policy, make changes to make it clearer, more customer-friendly, and more trustworthy.

If you find that a lot of your chargebacks come from so-called friendly fraud, you can also take actions to minimize it, like making your credit card descriptor more descriptive, processing orders faster, and so on.

Conversely, if you find a lot of your chargebacks are due to actual fraud, you can make use of fraud prevention tools provided to you by your payment processor, or even use third-party tools as well.

The second opportunity is when you’re notified of a chargeback. While you’re usually not notified very quickly and have relatively limited time to respond, you can proactively reach out to the customer and offer a refund in response to a chargeback. If you’re quick about it, and the customer accepts, you can issue the refund. Then, the customer can cancel the dispute. If they don’t, you have proof that you issued a refund, and can use it to halt the chargeback processing.

The third is after a chargeback has been processed. With the right timing on the refund, even if the chargeback finishes, it can be reversed. This is very rare, though, and at that point, even if it’s reversed, you often still have fees to pay. The one benefit is that you have a lower chargeback ratio, but it’s generally not worthwhile to be this late to the party.

How to Capture Chargebacks and Proactively Refund Customers

The biggest flaw in the dispute and chargeback system is that there’s a delay in between the customer filing their dispute, and you being notified of the dispute. Often, by the time you’re even told there’s a dispute, it’s because the banks are clawing money back out of your account and levying fees for you to pay. In other words, it’s very nearly too late.

The best option is to set up dispute alerts using a system like my FightDisputes.com. Through a direct connection with the payment gateways, we can identify when a dispute is filed and hit “pause” on it before it becomes a full chargeback.

This gives you an opportunity to reach out to the customer and ask if they’ll take a refund instead. If they accept, you issue the refund. The customer can then cancel the dispute, and if they don’t, you have adequate proof of refund to have the dispute cancelled when it un-pauses. It’s a win/win to keep your chargeback rate down and your customers as happy as they can be, so give me a call and we can talk about how it will work for you.