Chargebacks and refunds are two terms that are sometimes used interchangeably, even though they refer to the outcomes of two different processes. This misunderstanding can lead to unnecessary complications—customers may experience delays in resolving payment issues, while merchants may face increased fees.

This chargeback vs. refund guide will help you understand their key differences, the processes behind the terms, and suitable cases for choosing each option. You’ll also learn how virtual cards can help you avoid some of the reasons for disputing payments in the first place and secure your online transactions. 

Is a Chargeback the Same as a Refund?

Both chargebacks and refunds are ways you can return your funds if you experience issues with the products or services you bought or the payments you made. However, a chargeback results from a successful charge dispute process, while refunds are awarded after a refund request. 

You can find the key differences between a chargeback and a refund in the table below:

While both chargebacks and refunds might result in lost sales and impact a merchant’s bottom line, merchants still prefer refunds over chargebacks, mainly because they’re less expensive and complicated.

Transaction disputes may incur operational costs of $15–$70 for every dispute raised^[2] and penalties if chargeback ratios exceed acceptable thresholds. High chargeback ratios can also damage a merchant’s reputation and may signal issues like poor product quality or unclear policies.

How Do Chargebacks and Refunds Work?

To fully understand how chargebacks and refunds work, it’s important to look at the processes that lead to them:

1. Refund process
2. Payment dispute process

Refund Process

The refund process typically starts when you’re dissatisfied with a product or service, receive a faulty item, don’t receive your merchandise at all, or notice something wrong with a charge on your account. Here’s what the process looks like:

1. You contact the merchant you made the purchase with and request a refund. You might need to provide essential transaction details, such as the purchase date, amount, order number, or receipt to expedite the process.
2. Once the merchant agrees to issue a refund, they’ll initiate the process through their payment processor. Depending on the merchant’s policies and processing speed, this step may take a few days.
3. After the payment processor forwards the refund to your issuing bank, the bank begins processing. At this stage, the bank authenticates the transaction details, which can take an additional three to five business days.
4. Once the issuer processes the refund, you might receive a confirmation via email or SMS or get an update on your credit card statement.

Payment Dispute Process

There are several legitimate reasons for disputing a payment, such as receiving damaged, late, or poor-quality merchandise or finding unusual charges on your credit card statement. In such situations, you should first try resolving the issue directly with the merchant through a refund request.

However, if the merchant is unresponsive or refuses the refund request, you may turn to your card-issuing bank to dispute the charge.

Here’s what the process typically looks like:

1. You contact your card issuer to dispute a transaction, along with details and evidence to support your claim.
2. The issuer verifies whether the dispute is valid and forwards the dispute details, including a dispute reason code, to the card network. Meanwhile, you may be awarded a temporary credit for the disputed amount while the case is being investigated.
3. The card network notifies the merchant’s acquiring bank about the dispute.
4. The acquiring bank informs the merchant of the charge dispute. At this point, the merchant should decide whether to accept the chargeback or fight it.
5. If disputing the chargeback, the merchant submits evidence (e.g., proof of delivery, receipts, or communications). A rebuttal letter and formal adjustment request are also required.
6. The acquiring bank reviews the merchant’s submission and passes it to the issuer. The issuer evaluates the evidence and decides whether to uphold or reverse the chargeback.
7. If the issuer decides to reverse the chargeback, the provisional credit is revoked, and the funds are returned to the merchant. If you win, you keep the credit.

When To Opt for a Chargeback Instead of a Refund (and Vice Versa)

Resolving purchase issues can be confusing and frustrating, particularly when deciding between filing a payment dispute or requesting a refund. Choosing the wrong approach can lead to unnecessary delays or strained relationships with merchants.

Payment disputes might be more appropriate in situations where direct resolution with the merchant is difficult or unlikely. Some examples are:

• If unauthorized charges appear on your card due to stolen card details or third-party fraud
• If you haven’t received purchased items or services, and the merchant is unresponsive

Given how chargebacks hurt businesses, as a responsible customer, it’s important first to attempt to resolve purchase conflicts by requesting a refund, especially in these situations:

• When the merchant has a clear refund or return policy and a reputation for resolving issues amicably
• When there’s no fraud involved, and the issue stems from minor mistakes like shipping delays or product errors

What Happens if I Get a Chargeback and a Refund?

You may mistakenly get a chargeback and a refund if you’ve contacted both the bank and the merchant about a transaction complaint. This situation is referred to as a double refund chargeback, and it might occur in both of these cases:

1. You file a payment dispute and then request a refund from the merchant. Afterward, the merchant issues the refund without realizing a dispute has already been filed.
2. You file a payment dispute after submitting a refund request with the merchant. This usually happens when the refund isn’t immediately reflected on your account.

If a merchant has issued you a refund and you still dispute the charge, they can use the refund records to fight your dispute. If the pending refund payment is posted after you’ve been awarded a chargeback, you should promptly notify your bank to avoid double-dipping^[3], which is against card network rules.

Common Complications With Chargebacks and Refunds

While chargebacks and refunds are both meant to help you resolve payment issues, the processes can often be more complicated than they seem. Common challenges involve:

• Strict timeframes for filing—Failing to act within the allotted period can result in a denial of the dispute, leaving you with no recourse.
• Unclear filing processes—Without clear guidance, you may struggle with complex forms, communication channels, and requirements, leading to confusion and mistakes.
• Evidence gathering—Payment disputes and refund requests often require evidence like receipts or proof of non-delivery. This evidence can be lost or hard to retrieve, especially for older transactions or third-party purchases.
• No guarantee of a positive outcome—Even with the right documentation, there's no guarantee of a refund or provisional credit. Merchants may contest your dispute successfully or deny refund requests, leaving you without your funds.

Using virtual card providers like Privacy to generate virtual cards for online payments helps you minimize the risk of unauthorized charges and shop online with peace of mind. Privacy offers bank-level security and advanced spending controls, helping you avoid the inconveniences of filing chargebacks and refunds at the root.

Eliminate Chargeback and Refund Stress With Privacy Virtual Cards

Privacy is a BBB-accredited virtual card provider trusted by over 250,000 users. You can link your bank account or debit card to Privacy and generate virtual cards (with 16-digit card numbers, unique CVV, and expiration dates) that function like regular cards at checkout.

By using virtual card numbers instead of the actual payment card numbers, Privacy adds an extra layer of protection against potential fraud.

There are three types of cards you can generate with Privacy:

1. Single-Use Cards—Designed for a single transaction, these cards close shortly after use. You can use them for purchases on unfamiliar websites.
2. Merchant-Locked Cards—These cards “tie” to the first vendor you use them with, making them ideal for recurring payments like subscriptions. Any attempt to use them with other merchants will be declined.
3. Category-Locked Cards—These are cards “locked” to specific spending categories, like retail or fitness. Transactions done with merchants outside the category are automatically declined. You can use these cards to budget and plan expenses.

Privacy lets you set custom spending limits to help you avoid billing errors like hidden fees or duplicate charges. Any transactions above the limit you set will be declined. 

You can also pause or close your virtual card anytime to avoid accidental charges, as Privacy will block all charges on a paused or closed card. Additionally, if you experience issues with your payments, you can dispute them, and Privacy will investigate and file a chargeback against the merchant if you have valid grounds.

Additional Convenience Features of Privacy

Privacy offers multiple features to make your virtual card use and management more convenient, as detailed in the table below:

How To Get Started With Privacy

Joining Privacy is straightforward—just follow these steps:

1. Register with Privacy
2. Fill out your KYC information to verify your identity 
3. Connect your Privacy account to a funding source (debit card or bank account)
4. Submit the request

Privacy offers four plans, each catering to different customer needs:

References

^[1]Federal Trade Commission. https://consumer.ftc.gov/articles/what-do-if-youre-billed-things-you-never-got-or-you-get-unordered-products, sourced January 17, 2025

^[2]Mastercard.

https://www.mastercardservices.com/en/industries/financial-institutions/insights/chronicles-new-normal-managing-disputes

Sourced January 17, 2025

^[3]EG Attorneys. https://www.egattorneys.com/chargeback-fraud, sourced January 18, 2025

‍