How your refund policy affects your bottom line

Running an e-commerce business isn’t just about getting products out the door. What happens after a sale is just as important, especially when it comes to handling returns and refunds. If your refund policy is vague or hard to follow, you could end up losing money, damaging your reputation and spending more time dealing with unhappy customers.

Returns are a major challenge for UK online retailers, with over 20% of non-food purchases sent back each year. Serial returners alone account for a staggering £6.6 billion in annual returned goods, with younger shoppers, especially Gen Z, more likely to over-order with the intention of returning items.

While refunds can never be eradicated completely, for smaller UK businesses, where every sale matters, a clear and fair refund policy can make a real difference. It helps build trust with shoppers, keeps things running smoothly behind the scenes, and protects your bottom line in the long run.

Before you even write your refund policy, it’s important to understand your legal obligations. In the UK, online shoppers have strong rights under the Consumer Contracts Regulations. These rules say that customers must be given:

These rights apply even if there’s nothing wrong with the product. There are some exceptions – for example, personalised items or hygiene products that have been unsealed – but most products bought online are covered. If you don’t follow these rules, you could face complaints, legal action, or damage to your reputation.

So while you can set your own returns policy beyond what the law requires, it must never offer less than the legal minimum.

A good refund policy doesn’t need to be long or packed with legal terms. The clearer and more straightforward it is, the better. The goal is to set expectations early, avoid misunderstandings and use clear language, making it easier for customers to understand what to do if they want to return something, and increasing consumer confidence.

At a minimum, your policy should explain:

It’s also helpful to explain whether you offer alternatives to refunds, such as exchanges or store credit, and what the process is for items that arrive damaged or faulty.

The best refund policies are not only written clearly but also visible in all the right places. Avoid hiding yours in a footer or a lengthy terms and conditions page. Instead, link to it from:

This visibility gives shoppers more confidence to buy, especially if they’re trying your brand for the first time. It also reduces the chance of disputes or complaints later on – customers are far more understanding if they know the terms before placing their order.

It’s worth reviewing your policy regularly to make sure it still reflects your current products, fulfilment processes, and customer service approach. As your business grows, so will the expectations around how returns are handled, so what works for a small shop may need adjusting over time.

Lastly, remember that tone matters. A refund policy doesn’t need to sound cold or robotic. A friendly, honest tone that shows you care about getting it right for the customer will go a long way to building trust, even if the answer isn’t always what they want to hear.

If your policy is unclear, or if customers have a hard time getting a refund, they may go straight to their bank or card provider to raise a dispute, known as a chargeback. Failing to follow card network rules, like those from Visa or Mastercard, can lead to chargebacks, even if you believe the customer is in the wrong. This includes not issuing refunds promptly, using vague billing descriptors, or failing to clearly display terms and conditions at checkout.

Cardholders can raise disputes for things like unrecognised charges or claims that they didn’t agree to the transaction. If you miss evidence deadlines or don’t comply with specific processes, you may automatically lose the chargeback, regardless of the facts.

When this happens, you don’t just lose the sale. You’re also hit with extra fees from your payment service provider (PSP), which can range from £15 to £35 per case. If too many chargebacks are raised, your PSP could even freeze your account or stop working with you.

Requiring customers to accept your refund policy at checkout is good practice as it helps ensure transparency, sets expectations, and can support your case in disputes. However, it won’t protect you if the policy is unfair, unclear, or contradicts consumer law, and relying on passive acceptance without clear visibility can undermine its validity. Just be mindful that adding extra steps at checkout can create friction, potentially leading to drop-offs if not handled carefully.

However, even when customers follow your returns process, there’s often still a cost involved. Many PSPs keep a small fee even when you issue a full refund. Over time, especially if your return rate is high, these costs add up.

This is why a fair, well-managed refund process is about more than just good customer service – it’s about protecting your profit.

Buy Now, Pay Later (BNPL)options such as Klarna or PayPal Pay in 3 are now a common feature at checkout. They’re especially popular with younger shoppers and can help boost conversion rates and increase basket sizes. But offering BNPL also means dealing with more complexity when it comes to returns and refunds.

Unlike card or digital wallet payments, BNPL involves a third party. If a customer wants to return an item, the retailer still needs to approve and issue the refund, but the repayment plan itself is handled by the BNPL company. This split responsibility can lead to delays, especially if the two sides aren’t in sync. In some cases, customers may continue receiving payment reminders or even be charged while waiting for a refund to go through.

Many customers are unaware that a BNPL refund may take longer or involve several steps. This often leads to confusion, more queries for your customer service team, and greater frustration for the shopper. If not handled well, it can result in disputes with both you and the BNPL provider, and potentially lead to chargebacks, negative reviews or complaints.

New UK regulations will soon require BNPL providers to share responsibility with retailers for issuing refunds. If a customer doesn’t get their money back as expected, they may be able to claim directly from the BNPL lender. While this offers added consumer protection, it raises the stakes for retailers, who will need to manage BNPL refunds with extra care.

To avoid problems, clearly explain in your refund policy and confirmation emails how BNPL refunds work, including any expected timeframes. Make sure your team knows how to handle these refunds and stays in close contact with your BNPL provider. A joined-up process reduces the risk of delays, keeps customers informed, and helps protect your business from unnecessary disputes.

Of course, the best way to reduce refunds is to stop them from happening in the first place. One of the biggest causes of returns is customers receiving something that doesn’t match what they expected.

To reduce this risk, having well-crafted and detailed product pages is key:

The more information you give, the less chance there is of disappointment.

Sometimes, a return request can be avoided with a quick response from your support team. If a customer is missing a part or isn’t sure how to use something, solving the issue directly can stop them from sending it back. A helpful, friendly response shows that you care, and often keeps the customer coming back. Outcomes will be more positive if employees are trained appropriately on the refund, which will help with any regulatory queries.

A strong refund policy isn’t just a legal requirement – it’s a smart business move. It can increase trust, improve the customer experience, reduce chargebacks and avoid refund-related costs. Just as importantly, it helps you set clear expectations with your customers and gives your team the tools to handle returns smoothly.

Take the time to check that your policy is clear, visible and in line with UK law. Ensure any collection or use of personal data (e.g., bank or card info) complies with privacy regulations like UK GDPR. Then look at how your product pages, BNPL handling, and support processes can help cut down on preventable refunds. It all adds up to a better experience for your customers and a healthier bottom line for your business.

It’s good practice to keep clear and detailed records of all refund disputes. This includes the customer’s name and order details, the reason for the refund request, your response, and any evidence or communication exchanged. Having a clear timeline of events helps protect your business if the issue escalates to Trading Standards, a payment provider, or small claims court.

Store this information securely in a system that allows you to easily search by order number or customer name. Keep records for at least six years, and make sure your refund policy is clear, fair, and visible on your website. Being organised not only supports smooth dispute resolution but also shows that you're acting fairly and transparently.