How Refunds Effect Your Processing Costs
Credit card processing refund fees are an often overlooked cost of doing business. When a customer returns a product or demands a refund, business owners may wonder about the processing cost of refunding a card transaction. In particular, owners want to know if the original processing fees are returned and whether issuing a refund will trigger any extra charges from their processor. In this article, we will go over what to expect from your processors refund policy, including whether they refund transaction fees back to you, if you might incur additional transaction fees for refunded sales, and how policies vary by provider. We’ll also look at how these practices have changed over time and compare popular processors (Square, Stripe, Fiserv, PayPal) and their refund fee policies.
Do Processors Refund Transaction Fees After a Refund?
In many cases, payment processors do not refund the original processing fees when you issue a refund to a customer. When a business processes a credit card sale, they pay a processing fee of often around 2–3% of the amount, plus a fixed charge. If that sale is later refunded, the processor usually keeps the fee that was charged on the original transaction, meaning the seller does not get that fee back. In other words, you as the business still pay the processing cost for the original sale, even though you returned the money to the customer. This results in a small loss on each refunded transaction. Unfortunately, it can be difficult to decipher in your merchant account statement if processing fees were also returned with a refunded sale.
The Legality of Non-Refunded Transaction Fees
It’s important to note that there is no law or requirement forcing processors to return fees on refunds, it’s left to each processor’s policy. Some processors (under certain pricing models such as Interchange-plus) often do return fees to merchants on refunded transactions, but many others do not. Today, the industry standard among many providers is that the fees from the original charge are non-refundable for the merchant when a refund is processed. For example, PayPal’s policy explicitly states that if you refund a transaction (fully or partially), “there are no fees to make the refund, but the fees you originally paid as the seller will not be returned to you.” Stripe and Square have similar policies where the payment processing fees from the original transaction are not returned when you issue a refund.
What this means for small businesses is that refunded sales still incur the processing cost. If you charged a customer $100 and paid, say, $3 in fees, refunding the $100 means the customer gets back the full amount, but you’re out the $3 fee. Over time, if you process many refunds, these unrecovered fees can add up and eat into your margins.
Businesses May Incur Additional Fees for Refunds
Aside from losing the original processing fee, you might wonder if there are additional processing fees for issuing the refund itself. Generally, most processors do not charge a separate “refund fee” on top of keeping the original fees. In PayPal’s case (and many others), the company specifies that “there are no fees to make the refund” beyond not returning the initial fee. So if you refund a customer, you typically won’t pay an extra transaction fee for the refund processing; you just won’t get the original fee back.
However, there are some exceptions and variations. Certain merchant account providers or “tiered” pricing plans may charge an the for processing fee again for a refund, meaning that you will experience the processing fee twice: once for the original transaction and again for the refund. Other processors may only charge an additional flat fee for refunds. For instance, Stripe notes that for businesses on an interchange-plus plan (network cost-plus pricing), a fixed fee might be applied for the refund transaction (to cover the cost of interacting with card networks for the refund). Starting in 2023, Stripe began charging such a fee for all refunds on those custom-priced plans. This could be something like a few cents per refund, depending on the contract.
Generally speaking, the cost of refunding a credit card purchase is mainly that you forfeit the fees from the original transaction. You typically will not see a new charge for the act of refunding (unlike chargebacks, which often carry a separate fee). Always review your merchant statement, though, as some processors might slip in an explicit “refund fee.”
Why Refund Fee Policies Vary by Processor
Refund fee policies can vary by processor due to differences in pricing models, cost structures, and business decisions. Each payment processor has to cover certain non-refundable costs when a transaction is reversed, and they choose whether to absorb those costs or pass them to the merchant. Here are a few key reasons policies differ:
Card Network Rules and Costs
A large portion of processing cost comes from fees set by banks and card networks (Visa, MasterCard, etc.). The card networks determine interchange fees and assessments, and they set rules about refunds. In many cases, banks and card networks keep the interchange fees even if a transaction is refunded. For example, if you refund a $100 Visa transaction, Visa and the issuing bank often keep the interchange portion of that fee and do not return it to the processor. This means the processor is out that money. Some processors in the past might have covered that loss for the merchant, but as costs increased, many stopped refunding fees to merchants because they don’t get refunded by the networks.
Processor Pricing Models
Traditional merchant account providers (like those using tiered or interchange-plus pricing) sometimes did pass through interchange credits on refunds. If interchange fees were rebated by the network, a merchant on an interchange-plus plan would see a credit on their statement for that amount. By contrast, providers with flat-rate (bundled) pricing often kept any refund credits hidden – the merchant simply paid the flat percentage on the sale and got nothing back on a refund. This created a discrepancy where some merchants on certain plans got fees refunded and others did not. Today, with networks largely not returning interchange, even interchange-plus plans result in no credit (because there’s nothing to credit back), making policies more uniformly “no refunds of fees.”
Competition and Business Decisions
Some processors have used refund fee policies as a competitive differentiator. For example, for a long time, Square would refund processing fees to the merchant when a refund was issued, which was a merchant-friendly policy that set them apart from others. This was essentially Square choosing to absorb the cost to keep merchants happy. Similarly, some smaller or specialized processors still promise to return fees on refunds as a selling point. On the other hand, many major processors have decided that keeping the fees is necessary to align with their own costs or revenue model. PayPal justified its change in policy by saying it was “in line with industry practice” and aligned with the costs of its payments partner.
Evolution of “Industry Standard Practices”
Over time, what is considered the norm has shifted. A few years ago, it wasn’t “standard” for all processors to keep the fees. PayPal, for instance, used to return fees and only changed course in 2019 after seeing others do the same. Now, with big players like PayPal, Stripe, and Square all keeping the original fees on refunds, it has become an industry-wide standard. Newer or smaller providers may feel pressure to follow this standard to maintain profitability, unless they market themselves on more merchant-friendly terms.
Bottom Line
For U.S. small business owners, it’s crucial to understand that refunds come at a cost. In almost all cases today, when you issue a credit card refund to a customer, you will be out the original processing fees for that transaction. This has become standard across the payments industry. While you typically won’t pay an additional fee to execute the refund, the loss of the processing fee effectively means you refunded more money than you originally received net of fees.