Are You Paying A Credit Card Refund Fee?
When it comes to refunds, the interplay between a merchant and customer can be a tense one, or it can be an opportunity to build trust. What most merchants and customers alike may not be aware of is that merchants often have to deal with extra costs with every return. A merchant may be on the hook for a credit card refund fee, or they may still have to pay fees from the original credit card transaction. While small items may not make a big dent in the larger scheme of things, larger ticket items could impact a merchant more than you might think.
This situation is ripe for potential irritation, but there are some things you can do as a merchant to appease your customers while still keeping your bottom line in mind. Read on as we explore what to expect in the return process from both the customer and merchant’s perspective — and get some much-needed tips on making returns as painless as possible.
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How Does A Credit Card Refund Work?
One thing that merchants have in common with customers is that everyone is a customer somewhere! So imagine you decide to take a rug back to a local shop, or maybe you decide a jacket you bought online doesn’t hug you in the right places. In one case you print out the return slip, stick the jacket in the mail, and wait. In the other, you just head down the block to return the rug you bought.
Every company has its own set of return policies and protocols. The item might be refunded in part or in full, the shipping may be comped or not, and a restocking fee may also be involved. Many of us don’t pay any mind to the return policy until it comes time to return, so a customer may or may not be happy before we’ve even gotten started with the return.
In both of the cases, let’s assume the merchant accepts the return. However, depending on the type of business and all the players involved with the transaction (e.g., merchant account, issuing bank, etc.), processing a credit card refund could take days, weeks, or even a month!
Basics Of A Return:
- Merchant refunds the full or a partial amount to the customer’s credit card via their POS or back-office portal.
- The funds appear as a credit on the customer’s credit card statement (typically several business days or more).
- The issuing bank reverses of any promotional points or “cash back” balance from the original purchase
You can imagine some of the antsier customers getting irritated at the amount of time it can take to see the funds in their account. Part of what contributes to a customer feeling it’s taking too long is that, unlike credit authorizations that put a visible hold on the amount at the time of purchase, a customer can’t see the money reflected in their account until the return process is complete.
A Few Things To Keep In Mind About Returns
If a customer pays for an item close to the end of their billing cycle, waits a day or two, and then heads to the store for a return, they may still need to make a payment on their charged item. That’s because the return isn’t reflected on that billing cycle yet. It’s just the way things go in the world of credit, and it’s not the fault of the merchant. It’s good for merchants and customers alike to understand that in a credit card transaction, it’s no longer a direct exchange. More than one bank is likely involved, so things take a bit longer each way — whether it’s a purchase or a return.
Another essential thing to remember is that a merchant pays a transaction fee for a customer’s convenience to pay with a credit card, and merchants don’t always recoup that fee after the return. Let’s take a look at a return process for merchants and see how credit card processing companies differ in their approach with credit card refund fees and more.
The Credit Card Refund Process For Merchants
If you take a broad view of things, the return process is relatively simple from the vantage point of both the customer and the merchant alike. However, more variables come into play when we consider whether merchants sell online or in person. Even within the world of eCommerce, a merchant meets several variables, some of which they can’t control.
For instance, consider that online marketplaces have become an accessible way for a merchant to “set up shop” on some of the largest companies in the world. And that is great. Places like Amazon allow merchants to sell on their site, but it’s under the umbrella of their shipping and returns policies and guidelines.
In general, marketplaces typically allow for a seller to make some minor decisions, but sometimes the marketplace handles it all for the seller. While this can be a convenient solution for all involved, the merchant has less say in how long a buyer has to return an item, if shipping is covered or not, and even if they want to accept the return at all.
Overall a marketplace has one goal — keep customers happy. And this setup can be useful for merchants because, through unambiguous and consistent return policies, chargebacks and unhappy customers are kept to a minimum. However, it’s clear merchants do lose some control and decision-making power in the process.
The majority of sellers who don’t sell through a marketplace go into their own payment processor dashboard and issue the refund. For in-person sales, merchants can scan the barcode on the receipt and swipe the card to return funds. After the initial transaction, it’s a waiting game between the original issuer and acquirer for fund transfer. And for the merchant, a return may represent a loss of more than just the sale — read on to find out more about the hidden costs of returned merchandise.
Where Does the Credit Card Refund Fee Come In?
When you issue a refund to your customer for the full amount, your customer sees every penny reflected back on their account. It may be a different story for you, however. Let’s look at how a few big name processors handle refund fees.
While you may or may not have heard of Stripe, this third-party credit card processor is behind some of the biggest names in retail — Target, Amazon, Adidas, and Lyft to name a few. (Read our Stripe review for a closer look at all its services.) Stripe works behind the scenes and is geared for those who want a completely branded and customized checkout — which is why many merchants don’t know the company by name. Surprisingly, we found that Stripe’s policies are to refund none of the transaction fees — which includes a flat rate of $0.30 per successful charge plus another 2.9% of the purchase price. Beyond that, there is no additional refund fee for the merchant.
Speaking of payment giants, let’s talk about the elephant in the room: PayPal. Under the initial policy, PayPal (a third-party processor) would refund the percentage fee from a transaction (2.9% for most online businesses), but not the additional $0.30 per transaction. However, that has changed. In the spring of 2019, the company announced policy change that affects refund fees — as of May 7, 2019, PayPal will no longer credit merchants for any of the original transaction fees.
However, that’s not always the case. Some processors do refund the original transaction fees to the merchant. It really just depends on who your processor is.
For example, Square, another large payment giant (and third-party processor) that is often grouped with Stripe and PayPal, refunds all of the transaction fees to the merchant. Square also doesn’t assess a chargeback fee, a practice very few other processors have adopted. The takeaway here is mostly that the actual processor’s business model doesn’t dictate the policy — it’s down the actual company itself.
Payment Depot, a top-rated processor that uses a subscription-based pricing model, also returns the payment processing fees to the merchant. The only exception is American Express interchange fees. Since Amex doesn’t refund the interchange fees, neither does Payment Depot.
Another top-rated processor at Merchant Maverick, National Processing, has opted for a different approach: When a merchant issues a refund to a customer, the company refunds the fees but will also charge a $0.05 transaction fee.
So you can see that there are many ways to go about handling the process of refunds and deciding whether to refund processing fees to you, the merchant. However, keep in mind that the processing companies in many cases may be passing down expenses incurred by the acquiring bank — or they’re simply recouping some of the risk involved with processing returns in general. Processing payments and returns are both services, and as such, we all can expect some fees for use. It’s frustrating, but not unreasonable, for the financial partners involved in a transaction to want to get paid for their parts in moving money around — even if it’s moving money back to the customer in the first place!
If you’re still deciding on a payment processor, a refund fee (or lack thereof) shouldn’t be the only major factor. Whoever you end up going with, it pays to consider the entire scope of benefits and costs when deciding on a company that’s right for you.
And if you already have a processor and you’re just now figuring out that the company hasn’t been returning the processing fees to you after a refund, don’t panic! It’s not the end of the world, especially if you’re otherwise happy with the service.
Below we have some tips you can do as a merchant to prevent or minimize returns from the get-go.
How To Handle Credit Card Refunds
Refunds can be a pain for the merchant and the customer alike. Your customer may have expected one thing but gotten another. Of course, this expectation is not always the merchant’s fault, but we still want the customer to leave happy. It’s true that going to the post office for a return or heading back to the store takes time for the customer, but the merchant also may lose time in repacking or re-stocking. And depending on the condition of the item, the product may not even be resellable when you get it back from the customer.
For all of these reasons, returns can be especially tricky for the merchant. On the one hand, you want to be approachable and fair for customers, but you also need to protect your business. Too strict of a return policy or an unclear return policy may make you vulnerable to a chargeback, so keep the entire landscape in mind when you start making decisions.
Setting up a clear return policy prevents a lot of issues down the line. Consider some of these questions when it comes to returns:
- How long does your customer have before returning an item?
- What constitutes a full vs. partial refund, exchange, or store credit?
- Will you offer partial credit for an opened package?
- Does it cost you to repackage or restock the item?
- Who pays return shipping?
Whatever you decide, make your return policies crystal clear on your site and on your packing slip or receipt, so your customers have no room for doubt. Check out our chargeback prevention post for tips on how to reduce this unpleasant and costly situation.
What About Restocking Fees?
When you are creating your return policy, consider a restocking fee for opened and customized items. If you are an eCommerce shop, a restocking fee can help you strike a balance between an overly strict or equally over-generous return policy.
You can deduct the restocking fee from the total amount of the return, which you’ll key in during the refund transaction. Whatever you decide as far as restocking fees, remember to be clear in your communication so that your customers understand exactly what to expect.
What About Shipping Costs?
Shipping is a pretty big consideration when you are creating your refund policy. You could approach returns from many different angles, but it ultimately comes down to your business model more than anything. If you have the people, you could manage returns and dole out shipping labels on a case-by-case basis, or you could be really generous and send out return labels with the items. Consider the demographics of your shopper as well as the size and weight of the item.
Whatever you decide, the truth is that shipping costs can be a deciding factor when shoppers make their way through the checkout. Studies show the majority of shoppers do review the return policy and want free return shipping. While this is true, shipping is certainly not the most important thing — your product and customer care are equally, if not more, important!
With shipping and returns, it can also be a bit of “smoke and mirrors” when you get down to it. eCommerce merchants often create a pricing structure that packs shipping into the cost of the item to give them more wiggle room. It’s all about perception, so make all of this information work for you and not against you when creating your shipping refund policy!
Can You Avoid Credit Card Refund Fees?
When it comes processing a return and all that comes with it — including credit card refund fees — don’t lose sight of the forest for the trees. While you could indeed find a processor that gives you back all of the original transaction fees, keep in mind the broader landscape. If your processor has rates you’re comfortable with and provides you with reliable service and help when needed, then you’ve found a gem.
In any case, it’s better for merchants to focus on preventing confusion during the return process in general. Creating an easy-to-understand return policy that makes things inviting for customers yet protects your bottom line is the more lucrative goal. However, if your business model inherently deals with a higher rate of returns (e.g., shoes or apparel), it might be worth it to find a company that makes returns easy and more cost effective. For more information on processors out there, check out the table below and start comparing services that matter most to you.
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General Purpose High-Risk, eCommerce, CBD Oil, Firearms & Ammunition, Adult, Credit Repair, Bad Credit, Vape/E-cigarettes, Airlines