Refund Rates Over 15% Can Ruin Your Payment Processing
Jul 3, 2020 10-MINUTE READ
When was the last time you paid attention to your refund rates?
For many high-risk merchants, the focus when it comes to payment processing is chargebacks. You might believe that a low chargeback ratio alone protects your merchant account status. But when was the last time you checked your refund rate?
High refunds and returns are as damaging to payment processing. And yet many merchants don’t pay attention to them.
Low chargebacks will not excuse high refund-to-sale counts or refund-to-sale amount ratios with acquirers. With at least $369 billion lost to refunds every year, merchants cannot afford to bury their heads in the sand. Better refund and return ratios lead to better relationships with your payment provider. They’ll also help your bottom line too.
This blog will dive into why refund rates are so important, and how to keep them within acceptable levels for payment providers.
Why refund rates are a big deal
Just as you do with chargeback ratios, you should be keeping your eyes on refund rates. A refund rate is calculated by the number of items refunded divided by the number of items purchased.
A good range is somewhere between 7% and 15%. However, e-commerce and online merchants are much more at risk. Research from Invesp shows that “30% of all online products are returned compared to 8.89% in brick and mortar stores.”
While refunds and returns both contribute to your refund rate, they differ in nature. A return refers to a lost sale. However, since the product is returned, it can be sold again.
A refund refers to the loss of both the product and the sale. Which is particularly damaging for revenues, profits, and margins.
With that in mind, many merchants pay attention to their refund rate with their own profitability in mind. But it’s crucial to understand that merchant account providers monitor this rate too. Why? Risk.
Risk affects the bottom line
A high refund rate indicates an elevated risk to acquirers. Good products and services shouldn’t incur a high number of returns or refunds. Thus, they may decide to suspend or terminate your merchant account or e-check/ACH processing based on elevated risk levels.
Say you’re already operating in a high-risk vertical such as nutraceuticals. Compounding your risk profile with high returns is never a wise move.
Acquiring banks and payment service providers will look at two key metrics when assessing risk with regard to returns. One is refund-to-sale count, and the other is the refund-to-sale amount. Refund-to-sale count refers to the ratio of refunds to the number of sales. For example, if you returned one in every 20 sales, your refunds-to-sale count ratio would be 5%.
However, your refund-to-amount ratio refers to the monetary value of the sales. For instance, if you refunded one dollar for every ten dollars of sales made, your refund-to-sales amount ratio would be 10%.
In many cases, payment providers will not return payment processing fees associated with a return or refund. Rather, most will add a fee for a return or refund as the process presents the same administration costs as processing a normal payment. If not more.
Thus high refund rates hurt your bottom line. Not to mention put payment providers on edge. Which could result in probationary measures or a suspension of payment processing. Those suspensions are not always temporary either.
The causes behind high refund rates
When assessing your own refund rates, it’s important to remember the obvious rule, the lower the better. Refund rates vary with the industry and the time of year. For instance, electronics make up just under half of all frequently returned online product categories. Thus, acceptable refund rates are going to be higher in this industry.
Again, the holiday season will always increase refunds and returns. Remember, five million packages are returned to retailers in the first week of January alone. In terms of a so-called “magic number,” below 7% is considered acceptable. But many leading e-commerce platforms believe below 5% is a good aim. The best performers have less than 1%.
So why do refund rates creep up beyond the buyer’s remorse phenomenon seen every January?
A problem that plagues online retail is customers buying more items than they want. According to Barclaycard research, 30% of shoppers deliberately over-purchase and subsequently return unwanted items. While 19% admitted to ordering multiple versions of the same item so they could make their mind up once they’re delivered. This problem is often driven by overly-lenient returns policies.
Products and services are not as described
Almost a third of refunds occur because the products or services were not found to be as represented or described. This is a common theme for business coaches and influencers who operate lucrative affiliate programs for their high-ticket online courses or other offers. Affiliates over-sell the online course or program, leading to increasing refund requests.
Buyer refund fraud
Unfortunately, refund fraud is increasingly common. This occurs whereby a customer orders an item and requests a refund because it didn’t arrive, even though it did. Another version of this fraud is to return the item in its original packaging expecting to be refunded before the product arrives back into stock. This is a scam that recently cost Amazon €330,000. Customers bought iPhones, took the items out, filled the box with soil to the exact same weight, and returned them for a full refund. Taking advantage of the fact that Amazon didn’t check their returns.
The most common reason for returns and refunds is defective products. In some cases, this is as a result of damage caused in transit. But in most instances, this is a result of poorly-made or low-quality products not meeting customer expectations.
Has the global coronavirus pandemic increased your refund rate? That’s not the only trend you need to watch out for as a result of COVID-19. Read our guide to learn how coronavirus is affecting merchant accounts for high-risk merchants.
Steps merchants can take to lower refund rates
If you’re a merchant struggling with high refund rates, there are several steps you can take to reduce them.
Review partnerships and product descriptions
Overpromising and under-delivering is a one-way ticket to a return or a refund. Therefore, revisit your product and service descriptions on your website.
Do they accurately reflect what customers can expect from their purchases? It’s significant to note that 88% of shoppers characterize detailed product content as being extremely important to their purchase decision. Thus review all marketing language, product descriptions, and affiliate partnerships. Make sure those selling your product are not setting expectations too high.
Review order fulfillment partners and suppliers
Are items taking too long to arrive with customers, resulting in refund requests? Are returns disappearing, losing you inventory value?
Your order fulfillment partner is crucial to your success. Especially in the online retail market. Make sure you work with a third-party logistics supplier that can provide trackable and signed-for deliveries. This move will reduce instances of attempted refund fraud.
Expand and improve customer support
This is a critical move if you want to keep your refunds from transforming into chargebacks. But it’s also wise so that a customer can receive prompt answers to queries on shipping, your service, or your products.
In many instances, potential refunds and returns can be avoided by explaining something the customer missed. For example, if you operate a SaaS platform, integrating live chat support can help a consumer to find the feature they’re looking for. Rather than becoming frustrated and issuing a refund request.
Diversifying your payment processing
If you run all your payments through one channel, every refund will hurt you. Diversify your payment processing and operate additional e-check and merchant accounts (maybe even in another jurisdiction). This lessens the impact of risk.
By spreading payments across multiple merchant accounts, ACH processing, and MOTO, for example, you lower your exposure to refunds. This is achieved by spreading your refunds out amongst several different payment channels. This way one channel won’t become too affected.
Shelve high-refund product or services
It’s also worth investigating how your refunds relate to your product or service offering. If there is a particular product or service that attracts refunds, why not shelve it?
By taking it off your website, you can then carry out research as to why it was so problematic. You can use that knowledge to make the necessary tweaks or take the decision to discard them altogether.
Ban serial refund claimants
Sometimes so much time is focused on bringing in sales that you don’t analyze refunds or returns. It’s your choice who you do business with, and serial refund claimants do nothing but hurt your bottom line.
Thus, make sure to assess refund data and block or ban serial offenders. If there seems to a quite a few, it could be a sign that you need to revisit your returns or refund policy.
Don’t ignore high refund rates – take action
Many merchants wrongly assume that good chargeback ratios will keep them in the clear with payment providers. But acquiring partners assess businesses on risk, not just chargebacks. And high refund rates indicate high risk.
Thus, it’s wise to take action as soon as you notice refund rates creep up. By following the above advice, you can better uncover the reasons behind your refunds and take corrective action.
As the world continues to navigate through uncertain times, refund rates are on the rise. With the expert help of DirectPayNet, you can keep refund and return rates below those of your industry competitors. Expanding your payment processing capabilities as a result.