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The Digital Business Owner’s Guide To Refunds

The Digital Business Owner’s Guide To Refunds

No matter who you are or what kind of business you are in, as a business owner you will find yourself at some point with a customer requesting an online refund.

It’s not always easy to know what to do. Many digital businesses are small and could be severely impacted if too many refund requests are received. On the other hand, you do have legal obligations in some cases.

Arguably though, one of the most crucial elements affected by how you deal with refunds is the reputation of your business. Our digitally-connected world is small and it doesn’t take long for word to get around if customers are unhappy with a business.

Let’s explore a few things your digital business should consider when it comes to customer refunds:

As an online business, particularly if you sell to consumers who reside in different countries, your obligations under the law can become a bit tricky. You will need to observe the local law of the customer’s country with regard to refunds, though of course cross-border businesses make it difficult for countries to enforce those laws.

As a general rule, most countries have some kind of consumer protection laws with regard to goods that are faulty, though the time limit for customers to make a claim varies between them. You would need to look at the individual country; usually your legal obligations will fall somewhere under “repair, replace or refund.”

The EU requires a 2-year guarantee, free of charge on goods that are faulty, though repair or replace are the first options over giving a refund. Consumers also have a 14-day right to cancel or return any order without having to provide any justification.

The UK recently enacted a law requiring sellers to give a full refund if faulty goods are returned within 30 days. Consumers who purchase digital content are entitled to replacement, but not a refund if downloads don’t work, and the other interesting law change of note there is that if a download infects a computer with a virus, the provider could be liable to pay compensation.

Australia has some fairly stringent laws in place to protect consumers. Here are a few examples:

  • It is illegal to say “no refunds on sale items.” These items fall under the same consumer protection laws.
  • The seller is responsible for consumer protection on goods purchased from an offshore manufacturer. They can’t try and send the consumer to the manufacturer for compensation. In the example given here, the online seller was responsible for paying for damages caused by a faulty hairdryer, as well as refund of the product itself.
  • Secondhand goods fall under the same refund rights as new goods, but the age, price and condition at the time of sale are taken into account.

US law can have variations in each state. Federal law states that defective goods must be refunded, but individual states have different degrees of protection for consumers. Many of them leave it up to the seller’s refund policy, but some such as California are more strict. California law states that retailers are required to give a full refund up to 30 days after purchase if they haven’t posted a clear refund policy.

Have Clear Policies

One of the main things that can save you all kinds of hassles when it comes to refunds is to have your refund policy displayed clearly on your website. Your policy should be very transparent and easy for customers to understand.

You should also note that, no matter what you state on your policy, you are ALWAYS required to abide by consumer protection laws first. In most countries, this means it is illegal to put anything in your policy that can be construed as misleading a consumer about their rights. For example, laws covering England, Scotland and Wales find that the following points could mislead consumers:

  • Claiming that only store credit will be given
  • Stating that goods can only be exchanged
  • Stating no refunds will be given
  • Stating “sold as is”

Make your return policy easy to find on your website. It’s a known factor in the customer decision to make a purchase, yet 40% of online shoppers say they struggle to find return policies on retailer’s websites.

There are a number or reasons for why a customer may request a refund, but Ecommerce Guide has suggestions for minimizing them:

“You can keep refunds low by using better photos on your product pages, improving the accuracy of your descriptions, and making sure your products are well packaged and promptly dispatched. Try to make it easy for your customers to keep your product, by limiting the potential reasons they could request a refund.”

If you are a SaaS or another type of business selling digital products, ensure that your descriptions are accurate, just like any physical product seller should. Use screen shots where applicable and be clear on what the customer should expect to receive from you. Besides that, make sure they have a positive onboarding experience and that your customer service is top-notch.

Remember that returns are a fact of business and try not to take them personally. If you make the experience easy for the customer, they may be back.

Reputational Considerations

Your good reputation is one of your most valuable assets in business. Whenever a refund situation comes up, your reputation is potentially on the line. Whichever way you look at it, there is a customer who is dissatisfied with the product they got, even if it is simply an “I changed my mind” situation.

The first thing is that you should always be prompt to meet your legal obligations. If there has been some kind of mistake or fault on the part of your business, acknowledge it, apologize and make amends.

You could choose to dig your heels in if you have a situation where you feel a customer is trying to take advantage or is in the wrong, or you could assess the situation as part of the bigger picture. Will it make much of a difference to your bottom line simply to refund that customer with a smile? Is arguing about it more hassle than it’s really worth? Sometimes the best thing for your reputation and the use of your time is just to deal with it and move on.

We recommend having an easy, automated refund or return process so that the whole situation is streamlined for you and your customers.

Credit Notes

In some areas, you are required to issue a credit note when you refund a customer. This is simply a form or letter which gets sent to they purchaser and informs them that a refund has been made to their account. Businesses may require these for accounting purposes too, such as to offset a balance somewhere else. Credit notes are a feature that Quaderno has automated with Stripe, Braintree, and PayPal refunds.


Chargebacks are a thorn in the side of digital businesses and something every owner should be aware of. Chargebacks are of concern to any business that accepts credit card payments.

Digital business owners using payment gateways such as Stripe or Paypal have reported many difficulties with getting chargebacks reversed that were for legitimate charges in the first place.

What is a chargeback?

A chargeback occurs when the customer has contacted their bank and raised a dispute over a charge on their credit card bill. As Transparent points out, any of around 87 different reason codes could be given for the chargeback, but the most common reason is really that the customer hasn’t gone anywhere disputing with the merchant directly.

Chargebacks can become costly to merchants because they involve not only a potential refund for the amount of the transaction, but fees paid back to the payment provider. There’s also time involved if you want to resolve the dispute.

Merchant rights and responsibilities

When a bank receives a chargeback request from their customer, they will initiate an investigation. If you can produce proof such as a signed credit card slip, that usually resolves the dispute quickly, however as a digital business, you usually don’t have any such thing. This is the problem online owners face - they often find themselves without much say because checkout was made using credit card details online and the customer could say those details were stolen.

You are able to accept or dispute a chargeback claim, but remember the customer’s bank is interested in pleasing their customer, not you. If the bank finds for the customer, you will be charged.

If you receive a chargeback notice:

  • It can be sent up to 6 months after the sale.
  • You have 10 days to respond and around 45 days to present any paperwork.
  • The issuing bank has 45 days to request more information if needed.

As a digital business, you could present evidence such as shipping documentation or any other proof a product or service was provided.

Avoiding Chargebacks

Here are a few tips that can help to avoid chargebacks:

  • Enable security features for credit card payments, such as requiring correct ZIP or area code to be included.
  • Use a description for credit card statements that customers will recognize.
  • For physical goods, keep communicating and give accurate delivery times.
  • Keep accurate data such as any shipping tracking information.
  • Stay in touch with your customers! Sometimes they are going to their bank because they can’t get a response out of you.

How To Handle The Customer

Many customers almost expect to have a bad experience requesting a refund, especially if they’re already unhappy about the product or service. One of the quickest ways to diffuse this kind of situation is to handle the customer with empathy and understanding. As Marie Forleo states, when you treat dissatisfied customers with respect and care, they may give you great insights into your product or marketing and how you can make them better.

Thank the customer and listen to what they have to say without getting defensive. It is possible to turn their negative impression into a positive experience by providing good service, taking their feedback on-board and making any refunds as quickly as possible. You never know, you may be able to bring them back to your business or turn them into an advocate just by handling the situation well! So it's worth factoring this into your digital customer experience strategy.

Final Thoughts

Refunds are an unfortunate fact of being in business, but things don’t need to get ugly. Be clear on your legal obligations and seek qualified advice if necessary, especially when it comes to creating your refund policy.

As a digital business, observe consumer laws that apply to the country you are doing business in, and always consider your reputation. Sometimes it will be less hassle and better for you overall to simply make that refund and move on.

Put clear policies in place and always seek to provide good service. These should serve your business well so that refunds don’t become a big deal.

Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.