Credit Card Refund Guide: How Do Credit Card Refunds Work?

Merchants should understand how credit card refunds work before drafting their store’s refund policy. At the very least, business owners must be prepared to lose the payment processing fees they’ve paid for any returned payments.

Fortunately, credit card refunds are relatively simple and shouldn’t be too much of an issue for most merchants (unless they become excessive). This guide takes a deep dive into credit card refunds, including how credit card refunds work and how to handle card refund fees.

What Is A Credit Card Refund?

A credit card refund is the process in which a merchant sends payment to a customer’s card to credit them for the money spent on the purchase of an unsatisfactory product or service rendered.

Card refunds are typically issued to the same card that was used to make the purchase. However, a store may choose to issue store credit in lieu of a card refund.

What’s The Difference Between A Credit Card Refund & A Chargeback?

The difference between credit card refunds and chargebacks is which party issues the customer’s refund payment.

Credit card refunds are issued when a customer requests a refund directly from the business that sold the unsatisfactory products or services. In this case, the business has the choice to accept or decline the refund based on the business’s established return policy or rules.

Chargebacks occur when the customer goes to their bank or card issuer, disputes a payment made to a business, and the card issuer or bank refunds the payment to the customer. Chargebacks may cause merchants to incur significant fees, usually around $15 per chargeback occurrence.

Be aware that excessive chargebacks may cause merchant account holds and freezes.

Or worse — you may end up on the MATCH list.

How Does A Credit Card Refund Work?

The credit card refund process is essentially payment processing in reverse. Instead of the customer’s card being charged to cover a purchase, it is credited in exchange for a return.

Here’s a step-by-step breakdown of the credit card refund process:

1. The merchant refunds the full or partial purchase amount to the customer’s credit or debit via their POS, virtual terminal, or card machine
2. The funds are returned to the customer’s account as a credit and usually within five business days
3. Reward points, cash back, or any other promotional credits earned from the initial purchase are reversed by the card issuer

If the merchant sells through an eCommerce marketplace, refund policies and procedures are largely dictated by the platform they are using. Otherwise, the merchant may initiate refunds via their payment processor dashboard, in-person POS, or card swiper.

How Long Does A Credit Card Refund Take?

Most credit card refunds are completed within seven business days but may take up to 30 or more business days to process depending on the card issuer or issuing bank.

Additionally, many popular payment processors, including Square and PayPal, typically process card refunds within five business days.

What Is A Credit Card Refund Fee?

A credit card refund fee is the cost incurred by merchants to process card refunds. However, most credit card processing companies, such as Square, Stripe, and Helcim, don’t charge an actual fee for processing refunds, they simply keep the processing fees from the initial transaction.

In short, it’s not free for merchants to process credit card refunds, either because they will be charged a refund fee or because they will not be refunded for the processing fees they paid on the initial transaction.

Conversely, customers are refunded the full amount they paid for the transaction with no extra fees incurred on their end (barring shipping or restocking fees).

How To Create A Refund Policy

Refund policies make the process of handling refunds much simpler. Not only do refund policies help prevent chargebacks by providing the customer with a clear process for getting their funds back from you, but they can also be customized to reduce losses for your business.  

Consider the following questions when setting your business’s refund policy:

• 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?
• Will you charge a restocking fee?

Once you’ve outlined a basic refund policy for your business, display it clearly in-store, on your website, on receipts, and send it along with any customer shipments.

Can You Avoid Credit Card Refund Fees?

The vast majority of credit card processing companies have settled on not directly charging merchants for processing refunds, but not returning transaction fees. So, it’s unlikely that you’ll be able to completely avoid credit card refund fees.

However, it is possible to find a processor that returns transaction fees for refunds. If your business model inherently deals with a higher rate of returns (e.g., shoes or apparel), it might be worth looking into these companies to keep costs down for your business.

The Bottom Line On Credit Card Refunds

Credit card refunds shouldn’t have much of an impact on your business’s bottom line, since very few credit card processing companies charge additional fees for processing refunds. They may be a hassle for both you and your customers, but you can simplify and reduce the financial impact of the refund process by setting a refund policy for your business.

If you’re concerned about cost, the best cheap credit card processing companies will help you keep costs down by limiting penalty fees and keeping your overall processing fees low.

Better yet, there are plenty of free merchant account services and even opportunities to get free credit card readers for the budget-conscious business owner.

Credit Card Refund FAQs