E-commerce tips
Store Credit vs Refunds: A Comprehensive Comparison 2025
By
Emma
on
Jul 15 2025
Table of content
- 1. Store credit vs refunds: Key differences explained
- 2. Store credit benefits: Business perspective analysis
- 2.1. Revenue retention
- 2.2. Cash flow impact
- 2.3. Customer lifetime value
- 2.4. Cost analysis
- 2.5. Fraud prevention
- 2.6. Marketing opportunities
- 2.7. Seasonal considerations
- 2.8. Risk assessment
- 3. Store credit or cash refunds: Decision framework
- 3.1. Regulatory obligations
- 3.2. Buyer expectations
- 3.3. Operational execution
- 4. Store credit policy implementation: Best practices
- 5. Store credit vs refunds: Final recommendations
Return is an integral part of the shopping experience. Statistically speaking, 92% of customers are more likely to make a repeat purchase if the return process is convenient and straightforward. Regarding return policy, there are often two common options among store owners. They are the traditional refunds and the increasingly popular store credit.
So, the question is, how do store credit and refunds compare? And which is the better choice? In this article, we will explore and contrast the differences between issuing store credit vs refunds. We will also analyze the pros and cons for both sides. You will then learn how each policy affects revenue, customer trust, and repeat sales.
1. Store credit vs refunds: Key differences explained
1.1. What is store credit: Complete definition
Store credit is a powerful alternative to cash refunds that keeps revenue in your business while maintaining customer satisfaction. Rather than losing money through traditional refunds, you issue customers equivalent value that they can only spend in your store.
Store credit serves multiple strategic purposes beyond returns: customer retention, promotional campaigns, loyalty rewards, and resolving order issues like damaged items or delivery delays. You have complete flexibility in how you implement it, as account balances, gift cards, discount codes, or vouchers, with or without expiration dates.
The mechanism is straightforward: when a return or issue occurs, instead of processing a cash refund, you assign credit equal to the purchase value. Customers can then apply this credit at checkout for future purchases, but only within your store ecosystem.
1.2. What are refunds: How do refunds work?
Refunds refer to the process of giving money back to a customer after they have returned an item. In other words, it is the amount of the original payment that businesses reimburse the buyer for a returned product.
So, how do refunds work? Refunds start with a return request. The company will then inspect the returned item to see if it’s eligible for a refund and whether the refund is full or partial. If qualified, the seller provides the refund in cash or via the payment method agreed upon in the store’s return policy. The processing time, in most cases, is within 5-10 business days.
1.3. Cash refunds vs store credit: How do they differ?
Store credit and refunds are both common options in return workflows. However, the two differ vastly regarding aspects like flexibility, expiration, transferability, and usage restrictions.
Store credit is more flexible for the seller. Businesses can easily issue credit for various occasions, set expiration dates, and restrict usage. Additionally, the credit must be redeemed within the store so that one can retain revenue. However, it limits customer freedom, which can hurt customer satisfaction.
Refunds, on the other hand, are not that controlled. Because refunds go back to their original payment method, customers get more freedom. The recipient has the right to do anything with the money and spend that money anywhere, including with your competitors. On the flip side, you, as a merchant, lose the sale entirely.
Below is a comparison table for a clearer understanding.
Criteria | Store credit | Refund |
|---|---|---|
Usable outside the store | ❌ | ✔️ |
Can expire | Optional | ❌ |
Transferable | ❌ | ✔️ |
Promo restricted | ✔️ | ❌ |
Keeps revenue | ✔️ | ❌ |
Drives loyalty | ✔️ | ❌ |
Controlled by the store | ✔️ | ❌ |
2. Store credit benefits: Business perspective analysis
2.1. Revenue retention
In the case of a traditional refund, the money leaves your system completely. Customers get it back and can spend it anywhere. Store credit, on the other hand, is only usable in your store, and the value stays with you.
Store credit, on the other hand, is better for keeping sales value in your business. If the buyer uses the credit, the refunded value is converted into a new sale, often with additional spending. Otherwise, the unused credit remains in your system as breakage. It is a win for you either way.
2.2. Cash flow impact
Store credit is more sustainable in cash flow management. The cash is only transferred when the customer spends the balance supplied. Thus, merchants are relieved from the financial stress and have more flexibility for covering operational expenses. On the contrary, money is deducted from your account immediately upon giving a refund. It makes an instant, direct cash expenditure.
2.3. Customer lifetime value
Customer lifetime value (CLV) measures the total revenue one customer generates throughout their relationship with your business. CLV reflects how valuable a customer is to your business and is an important metric in long-term growth. Its key measurements of customer lifetime value are repeat purchases and increasing order value.
Store credit significantly outperforms cash refunds for CLV growth. When customers receive store credit, they maintain a financial connection to your brand, creating what psychologists call "loss aversion." Rather than lose their credit value, customers feel compelled to return and make another purchase.
Store credit also triggers powerful "perceived savings" psychology. Customers feel they're spending less money because they're using credit they already "own" rather than paying fresh cash. This mental accounting leads to higher conversion rates and larger order values when they return.
A study by ReturnGO points out that customers who receive store credit are more likely to return, and the order value is higher. 68% of customers purchase again after receiving store credit as a refund, and those customers spend at least $20 extra per order.
The bottom line: Store credit transforms one-time transactions into ongoing customer relationships while increasing the value of each interaction.
2.4. Cost analysis
Handling a return often comes with added expenses. Among the most common are processing fees and administrative costs. In the case of issuing refunds, potential fees include:
Transaction fees
Gateway charges
Non-refundable processing fees from providers
There’s also a risk of chargebacks, which arise when a customer contacts their bank to dispute a transaction instead of requesting a return directly from your store. If such behavior persists, it may affect your account status.
For store credit, the cost mainly involves internal handling. Retailers don’t pay transaction fees, and there's no money leaving the system. Store credit also helps reduce chargeback risks, since no cash is involved. In comparison with refunds, this method is cheaper to process.
2.5. Fraud prevention
A common problem in eCommerce, alongside fake claims and excessive returns, is return fraud. If you’ve been in retail long enough, you’ve probably dealt with at least one case where a customer abused the return policy to get money or goods. This could be from real customers or from bad intentions. The latter often targets stores with strong growth or visibility.
Implementing store credit systems addresses this risk better. Since no cash leaves your system, even if fraud happens, the value stays. You also have the ability to set rules for valid redemptions, thereby detecting and flagging suspicious activity based on behavior.
2.6. Marketing opportunities
The next advantage of store credit is its use in marketing. In many cases, issuing store credit as incentives can encourage customer engagement.
Loyalty programs: You can reward store credit alongside or instead of the traditional point-based systems. While both models are great incentives, store credit is more tangible. For example, "$10 in store credit" may seem clearer than "10 points".
Referral incentives: Offer store credit to customers who refer friends. This brings in new buyers.
Promotional campaigns: Store credit can be used in flash sales, apology credits, or win-back offers. It helps create urgency without cutting prices.
2.7. Seasonal considerations
Another important aspect when considering store credit vs refunds is seasonal timing. During high-volume seasons and holidays, namely Black Friday, Cyber Monday, and Christmas, return volume reaches its peak. In 2023 alone, businesses witnessed a high return rate of 17.6% in eCommerce. And of all the eCommerce returns during holidays, 16.5% were fraudulent.
Although it is inevitable to experience an increase in returns during these times, implementing a store credit policy can help reduce fraudulent or excessive return claims. Typically, the main motivation for return fraud is financial gain. Fraudsters aim to get cash back or products they can resell for profit. Among which, cash refunds are among the most commonly abused methods.
Now, store credit is only usable in your store. This limits its liquidity and partially tackles fraud related to cash refunds. There's also no way to initiate chargebacks. The only option left for fraudsters is to use the store credit to buy something and resell it. Oftentimes, this isn’t worth the effort.
Refunds, on the other hand, carry more risk. They open the door to cashback abuse. And even valid refunds can lead to chargebacks or lost revenue. It is reported that chargebacks and fraud spike after holidays, often exceeding normal levels, with the average chargeback value increasing by 20-30% in the post-holiday period.
2.8. Risk assessment
Store credit policies can help protect revenue and streamline returns. However, they may not fit every customer’s expectations. In contrast, cash refunds let customers get their money back and choose how to use it at the same time. In parallel, the trade-off is potential chargebacks or increased return abuse.
Offering both options may seem an ideal solution. Yet, it can complicate workflows and make return policies harder to manage. So, you should consider the trade-offs carefully and align your return setup with business goals, customer profiles, and operational capacity.
The following table provides an overview comparison between store credits and refunds from a business perspective.
Criteria | Store credit | Refunds |
|---|---|---|
Cash flow | No cash outflow until redemption is recorded | Immediate cash outflow |
Customer lifetime value | Motivate repeat purchases to spend store credit | No guarantee of revisits |
Marketing opportunities | Can act as incentives for loyalty, referrals, and promos | Restrictive |
Peak season handling | Easier to manage thanks to the ability to automate and the existence of supporting tools | Trickier |
Customer perception | It can feel restrictive at first, but it benefits future purchases | Receive instant benefit |
3. Store credit or cash refunds: Decision framework
We have now explored the pros and cons of refunds and store credit in depth. The remaining question is how to determine which method fits best in each situation. This section provides you with a practical decision-making framework you can refer to.
3.1. Regulatory obligations
Store credit is not always recognized as a valid substitute. In some countries and regions, there are strict laws around how returns and refunds must be handled. The requirements can vary between jurisdictions. For instance, businesses operating in the EU are obligated to issue traditional cash refunds for defective goods or within cooling-off periods.
The following are regions with strict laws for refunds:
EU countries (Germany, France, Italy, Spain, Netherlands, etc.)
Australia
Canada
The United Kingdom
The United States (state-specific)
3.2. Buyer expectations
It’s also important that you factor in buyer behavior and expectations. Even though store credit is indeed more beneficial from a business perspective, some markets are very sensitive to refund terms. Lack of alignment with customer expectations can affect not just the return process but also the initial purchase decision.
A prime example is the US or Western European markets. In such regions, many customers expect a cash refund by default. If unnoticed, they may hesitate to buy or avoid returning altogether due to a lack of trust.
The solution here is to offer multiple options. You can combine store credit with cash refunds. Your return policy should also clearly state when each method applies so customers know what to expect from the beginning.
3.3. Operational execution
Lastly, think about how you manage and implement each method. Store credit and refunds work very differently. Traditional refunds, in most cases, are processed through payment gateways and integrated directly into your order system. It’s simple but rigid. Furthermore, there are gateway fees and potential chargebacks.
Store credit, on the other hand, is often issued manually or through apps and tracked separately from standard transactions. And in the case of advanced control, you’ll likely need premium plugins or third-party tools to automate workflows, set conditions, or manage balances at scale. Such tools charge around $5–$29 monthly on average.
For businesses, store credit is generally a more beneficial model. It’s great for revenue retention, repeat purchase encouragement, and cash flow improvement. However, there are specific cases where traditional cash refunds are more appropriate. For example:
Legal requirements demand cash reimbursement.
The customer specifically asks for it.
You can also consider providing multiple options. This is often the best approach when you want flexibility and the customer base expects clear choices and fair treatment.
4. Store credit policy implementation: Best practices
A successful store credit system should be easily managed and transparent. Here are some actionable tips and best practices:
Clearly define the workflow for issuing store credit and make it visible to both your team and customers
Include the store credit option in your return policy and set conditions for when it applies
Automate credit issuance where possible to reduce manual errors and delays
Tag store credit transactions in your system so they can be tracked separately for reporting and accounting purposes
Store credit is a proven post-purchase tool to boost retention and lifetime value. But some fail to align store credit with customer expectations or operational realities, though. A common mistake is applying store credit in the same way across all cases.
You should think of store credit as a flexible return option. Adapt it to your product category, customer type, and business model. Feel free to set expiry rules, usage limits, or segment eligibility.
If you are using Shopify, we recommend the store credit tool Koin. This all-in-one plugin allows for issuing Shopify store credits in the format of partial or full refunds. In addition to that are options for setting expiry dates, usage rules, and tracking balances per customer. Beyond the basics, the Shopify store credit tool also helps with automating workflows, personalizing credit policies, and monitoring performance with built-in analytics.
5. Store credit vs refunds: Final recommendations
That wraps up our guide on store credit vs refunds. In summary, refunds and store credit both excel at handling post-purchase returns. Store credit is issued and managed digitally. Meanwhile, refunds involve direct cash back to the original payment method.
When weighing store credit vs refunds for your business, think about your long-term goals. Do you want to retain revenue or maximize customer satisfaction? In business operations, store credit is often preferred. It helps keep money within your store and drives repeat purchases. However, it’s essential that you assess potential risks thoroughly. Consider customer dissatisfaction or liability from unredeemed credit before implementing and adhering to local consumer protection laws.
Find our article helpful? Feel free to visit us at getkoin.io for more useful Shopify tips and valuable insights.
-About Author
Emma C.
As the Chief Marketing Officer at KOIN app, I’m here to build a robust ecosystem by collaping with Shopify apps. Together, we can create seamless integrations that add more value to our shared customers.
KOIN helps merchants retain customers, increase repeat purchases, and drive loyalty by offering cashback and store credit rewards.
📩 Let’s connect! emma@getkoin.io
