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Why Do I Get Charged A Fee On Refunds?

Some merchants are very surprised that their processor charges them a fee to process a refund. Why penalize a merchant for providing good service?

Refund = Risk

First of all, it’s important to understand that the banks are not “penalizing” you for good customer service. The fees that you incur are not meant to discourage refunds but are rather the bank’s way of getting compensated for the risk they undertake.

Refund Risk | E-Commerce 4 IMWhile refunding a $25 purchase may not seem like it should be risky for a bank that handles millions of dollars in transactions, remember that you are not the only one to whom they’re extending credit. A bank is not simply a vault where your money is stored – a bank uses your money to make more money and is only as healthy as its ratio of incoming to outgoing cashflow – which is why a run on the banks can cause them to crash. It’s not because everyone does not have a right to his money or that the bank “lost” it, but because banks don’t keep all their assets liquid.

When merchants are paid, they not only increase their own wealth, but they give the bank more money to use. When they issues refunds, they decrease their own wealth and the amount of money the banks can use, in addition to presenting them with other risks.

Risky Scenarios

Every refund you give (especially as a high-risk merchant) increases the possibility of one of the following scenarios:

  • You don’t have enough money in your merchant account to cover the refund – so the bank has to give you a short-term loan.
  • Your business ends up having a high ratio of refunds to sales, which makes you a poor fiscal decision for the bank.
  • You close your account with a negative balance.
  • You go out of business completely and have to terminate your agreement early
  • The refunds are part of a larger fraud scam

This is part of what it means for your business to be high risk – the chances of the above scenarios taking place is greater than for other businesses. However, it’s all theoretical until you start issuing refunds. Then it becomes a real risk.

Avoid Banks That Overcompensate

Although banks do run real risk when you issue refunds and needs to mitigate the negative impact such actions have on their own financial well-being, some banks go too far.

When you issue a refund, the interchange fee charged by the credit card company gets refunded (whether you see this refund or not is a different question). Some banks return this fee to you and only charge a small fee of their own for their efforts in handing the transaction. But others pocket the entire interchange refund AND charge you a transaction fee. And some keep the interchange refund, charge you a transaction fee and then even charge you a processing fee on top of that!

Refund Risks | E-Commerce 4 IM

The Bottom Line on Bank Fees and Refunds

It all boils down to this. Does the bank take on real risk to enable you to give your customers refunds? Yes. Do they deserve to be compensated for this risk and for their trouble in processing it? Yes. But does the merchant deserve a fair deal in how these transactions are handled? Absolutely.

This is why it’s prudent to shop around when considering a processor. You should not only consider the obvious transaction fees but also seemingly small details such as refund fees that can make a big impact on your bottom line.

If you’re looking for a merchant account, especially if you’re high risk and have had to settle for unfair merchant fees in the past, give us a call to talk about your options. We’re always happy to help: (800) 570-1347.

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