Refund vs chargeback: Why it pays to know the difference

The pandemic ecommerce boom was the first to drive returns through the roof at such an impressive scale. And the problem has only become more pronounced since. In the USA, an estimated $890 billion of merchandise was returned in 2024 – which was 16.9% of total sales.

One side effect of the ecommerce and returns spike is that refund requests and chargebacks are on the rise. Our Fraud Trends Report 2025 found that 56% of merchants saw an increase in fraudulent chargebacks in the past year, while 54% saw an increase in refund abuse.

Friendly fraud, refund abuse and fraudulent chargebacks are all different concepts, but the terms sometimes overlap or get confused online. But how can you tackle problems you don’t fully understand? Let’s clear up the confusion.

Refunds vs chargebacks: Why the confusion?

First-off, friendly fraud is all fraud or abuse instigated by a known customer, rather than a professional fraudster who's hiding their identity. So, when instigated by a known customer, both a fraudulent chargeback request and a case of refund abuse is friendly fraud.

There are some similarities between chargebacks and refund abuse, as they both involve the customer receiving the funds that they previously paid for an item.

Many customers don’t understand the difference between getting a standard refund from a merchant and getting money back from the bank via a chargeback, with 81% of customers admitting to filing a chargeback out of convenience.

When do refunds become a problem?

Refund abuse, sometimes called returns abuse, occurs when a customer uses the returns policy of a merchant so much that it becomes unprofitable. Returns are a financial strain for many retailers, costing them on average nearly 60% of the item's original sales price. Customers may also abuse refunds by faking returns, returning forgeries, or reselling merchandise.

Every business experiences refund abuse differently. Some industries can expect more genuine refunds than others, making the threshold for what counts as refund abuse difficult to determine.

Food delivery services may experience refund abuse in the form of claims that are difficult to disprove, such as the food being cold. In the fashion industry, merchants can encounter "wardrobing", when customers return clothes after wearing them, often damaged, dirty or unfit for resale.

What is a fraudulent chargeback?

A fraudulent chargeback occurs when a customer requests a chargeback from their card issuing bank while misrepresenting the truth – for example, on whether they received the item they purchased or whether they approached the merchant with any issues. Eager to please the customer, the issuer bank might grant that chargeback, which takes a toll on the merchant's bottom line.

Put simply, a fraudulent chargeback abuses the chargeback process put in place by cardholders to protect consumers. At scale, the cost of chargebacks can be massive for a merchant, and they also damage their relationship with card schemes.

This can occur by mistake. Some well-intentioned customers misunderstand merchant return policies or wrongly assume that a chargeback is simply a different way of getting their money back (similar to a regular return). Others can intentionally abuse the chargeback system to get something for free – this can be opportunistic or premeditated.

The name "friendly fraud" comes from the fact the perpetrator is a known and trusted customer rather than a fraudster.

A note on terminology: Sometimes, fraudulent chargebacks are called "friendly fraud". Though keep in mind this term is confusing in the industry. Friendly fraud is an umbrella term, used to refer to all first-party fraud. However, there was a time when first-party fraud was almost exclusively false chargeback claims, so some fraud managers got into the habit of associating the term with fraudulent chargebacks in particular. For clarity, we use "chargeback fraud" or "fraudulent chargebacks" to refer to cardholder filing false disputes.

The main difference: Who is the customer talking to?

Whether the card issuing bank is involved or not is the main difference between chargeback abuse and refund abuse. If it goes through the bank, that's a chargeback. If the customer is speaking directly to the merchant, that's a refund.

Chargebacks involve the forced retrieval of funds from the merchant by the issuing bank, which are then given back to the customer.

In fact, chargebacks cost the merchant much more than just the price of the lost item, as the item is never recovered and neither is the money. What's more, banks are going to charge all manner of chargeback and processing fees.

How do you manage refunds vs chargebacks?

Refund abuse and friendly chargeback fraud require different approaches. One of our Data Scientists at Ravelin, Tom Linney, summarizes the ideal strategy for managing refund abuse: You want to block fraudsters, keep genuine customers, and reform bad behavior.

How to manage refund abuse

To discourage customers from committing refund abuse, sometimes a simple warning email can be effective. Making sure your Terms and Conditions are clear and available to customers to read can help sort out any miscommunication.

To tackle more serious refund abuse, Ravelin can help in two ways:

• Identify serial returners and their linked accounts through network analysis. This enables you to set limits on the number of refunds per customer, or prevent certain customers from requesting a refund for a period of time.
• Consider Ravelin's Refund Abuse solution, which is trained on your specific data and abuse landscape, helping monitor, identify and prevent refund and returns abuse. Refund abuse doesn't have to be a problem, there are ways to mitigate it. You don't have to accept it as the cost of doing business.

How to manage friendly chargeback fraud

Friendly fraud chargebacks can result in bank-imposed restrictions and fines, in addition to costing twice the price of the product/service each.

If a merchant’s chargeback-to-transaction ratio gets too high, it even risks having accounts disabled – which means you won't be able to accept cards of a certain type any more, effectively discouraging countless customers from shopping with you. Managing chargeback disputes is labor intensive, admin-heavy and often takes months.

It’s harder to recognize chargeback fraud at the point of transaction, so prevention is key. Merchants need to have robust fraud detection in place to pick this activity up. It’s also important to have clear a return policy and prompt customer service to discourage customers from filing chargebacks and help build stronger dispute cases.

But, as easier refunds open the door to refund abuse, you have to strike a difficult balance between preventing chargeback fraud and keeping a lid on serial refunding. As Tom Linney explains:

“Friendly chargebacks normally arise when refunds are not easily available to the customer, so merchants make it easy for customers to return orders. However, this can encourage genuine customers to abuse the system or fraudulent customers to break it.”

You don’t have to accept refund abuse as a cost of doing business

While refund abuse and chargeback fraud can be confusing and daunting issues, getting the definitions clear is the first step toward managing them effectively.

Want help getting yours under control? Get in touch with our team to discuss our online fraud and abuse prevention solutions.