How Strict Refund Policies Can Hurt You

July 1, 2023

Every retailer attempts to create a refund policy that will protect each purchase. Most payment processors prefer at least a 30-day unconditional refund policy. Many insist their customer take back the unused part of their merchandise.

No merchant wishes to be taken advantage of having their product used and have the customer get all the guaranteed benefits, only to then request a refund just because consumers can refund it.

Think of it this way, managing refunded products can prove expensive in several ways. Your payment processing company may charge you for the effort to receive and track your returned items. Clients often get lazy or upset with the concept of sending back products, because it’s time consuming to pack and arrange shipping; and sometimes clients are averse to paying the postage charges to ship a returned item.

Some payment processors are now requiring that merchants provide refunds without getting the unused part of their merchandise back. The idea is to take a long-term approach, even if it means taking a couple of hits along the way. The goal is to assure that customers don’t contact their bank card company and initiate a chargeback.

A Refund Versus a Chargeback

Not providing a refund can cause an unwanted chargeback, which can be very detrimental to a merchant’s long-term goals.

A chargeback is a refund that the merchant is forced to give, as opposed to a refund voluntarily given. If a company’s chargebacks exceed 1% of their total sales, you could end up pay fines or even having your merchant account shut down completely.

Once you’re in chargeback trouble, applying for another merchant account becomes even more difficult, especially for those who need a high risk merchant account, and many payment processors will deny your application.

Other payment processing companies may take you, however, charge higher fees that can be double, and you’ll be requested for a larger reserve upfront.

Needless to say, chargebacks are expensive, time-consuming, and resource draining. They’re burdensome for all merchants, but smaller retailers can especially struggle if they do not have the necessary in-house expertise to make an impact.

How to Mitigate Chargebacks

The truth is, chargebacks can occur for a variety of reasons, but one thing is for certain: chargebacks account for revenue loss. While you do not need to be a chargeback know-it-all, comprehending the challenge you’re up against can make it possible to improve your operational measures to help you stop chargebacks dead in their tracks.

Stay ahead of chargebacks by always making refunds in a timely manner and do so to the same credit or debit card the consumer paid with. Failure of timely refunds can result in a return item chargeback or a basic credit card chargeback.

Another important tip is to always make sure you communicate to your customer how long it will take before they see the refund. This information may seem basic to some people, but when it comes to the integrity of how your business is conducted and your consumer retention, it’s always best to cross your T’s and dot your I’s.

Above all else, be sure that your company chooses a secure high risk merchant account to deflect many of these stressors and for all your payment processing needs.