When it comes to refunds in business, especially in e-commerce, the two most talked about methods are Rolling Reserve and Chargeback. Both methods are designed to protect the interests of customers and businesses, but they work differently and have their own advantages and disadvantages. In this article, we'll look at what the differences are between Rolling Reserve and Chargeback, and which of these methods may be more appropriate depending on the situation.
What is Rolling Reserve?
Rolling Reserve is a financial mechanism where a certain percentage of each transaction is temporarily held in a special account. These funds remain in the reserve for a certain period of time (usually 90 to 180 days) to cover possible risks such as chargebacks or refunds. After this period, the money is returned to the seller if there are no problems.
Benefits of Rolling Reserve:
Financial stability: Provides a reserve fund to cover potential risks.
Risk Reduction: Protects businesses from unexpected financial losses due to chargebacks or chargebacks.
Increased trust: Banks and payment processors are more likely to cooperate with businesses using Rolling Reserve, considering them more trustworthy.
Disadvantages of Rolling Reserve:
Limited access to funds: Temporary unavailability of some funds can make it difficult to manage cash flow.
Additional Costs: There may be commission or administrative costs associated with using Rolling Reserve.
What is Chargeback?
Chargeback is a procedure whereby a customer can dispute a transaction and request a refund through their bank or payment system. If the customer proves that the transaction was improper or that the product/service did not meet the stated terms, the funds are automatically returned to their account and the merchant loses money.
Benefits of Chargeback:
Consumer Protection: Customers are protected from fraudulent or poor quality transactions.
Business incentive: Sellers strive to provide quality services and products to avoid chargebacks.
Fast procedure: Funds can be returned to the customer fairly quickly, which helps maintain trust.
Disadvantages of Chargeback:
Risk of financial loss: Businesses can lose funds and goods, especially if the chargeback is disputed unreasonably.
High fees: Chargebacks can be subject to high penalties and fees.
Reputational damage: Multiple chargebacks can damage a company's reputation in the eyes of banks and payment processors.
Which method to choose?
The choice between Rolling Reserve and Chargeback depends on the nature of the business and the level of risk it faces.
Rolling Reserve is best suited for high-risk businesses or where long-term protection against potential chargebacks is required. It allows you to set aside funds in advance in case of problems, which reduces the strain on your core cash flow.
Chargeback is more convenient for consumer protection and quick resolution of disputes. However, it carries higher risks for merchants as it can lead to unexpected losses.
Both Rolling Reserve and Chargeback play an important role in protecting the interests of both customers and businesses. The choice between the two depends on many factors, including risk level, financial capacity and type of business. It's important to carefully weigh the pros and cons of each method to make the best decision for your company. In some cases, it may be possible to use both strategies simultaneously for maximum protection and stability.