Chargebacks are not cheap, and they impact your business more than just the fees themselves. To protect your revenue, it’s important to understand both the obvious and hidden costs of chargebacks.
A chargeback request occurs when customers dispute a transaction with their bank, leading to potential fees for the business. Understanding and preventing chargebacks is crucial for effective payment processing.
By knowing these costs, you can take steps to reduce financial losses and keep your business’s finances in good shape. Find out how to manage chargebacks effectively and minimize their impact on your bottom line.
What is a Chargeback Fee?
A chargeback fee is a charge that a business must pay when a customer disputes a transaction and asks their bank or credit card company for a refund. The card issuer plays a crucial role in the chargeback process by evaluating the validity of the dispute and determining whether a refund should be issued. This fee helps cover the costs of processing the dispute. In a 2023 study report by Ethoca, there were about 238 million chargebacks found in the global ecosystem, just think about how much chargeback fees were accumulated during that year.
In addition to returning the money for the transaction, the business has to pay this fee, which can vary depending on the payment processor and the transaction type. The fee is meant to discourage fraud and ensure businesses follow secure payment practices.
Direct Chargeback Costs
There are several fees that can significantly impact a business’s bottom line. Here are direct costs that are easily associated with chargebacks:
Funds are transferred from the merchant's account during chargebacks, involving interactions between the merchant, their acquiring bank, and the cardholder's issuing bank.
Chargeback Fees
When a chargeback occurs, merchants often face additional fees imposed by the payment processors. These chargeback fees can vary from $15 to $100, depending on the provider and the transaction volume, but are a direct financial hit to the business.
The issuing bank plays a crucial role in processing chargebacks, as it is responsible for initiating and facilitating the dispute, managing communication between the cardholder and the merchant's bank.
High Transaction Fees
Chargebacks often lead to increased transaction fees. Payment processors may classify merchants with high chargeback rates as high-risk, resulting in higher transaction fees to compensate for the increased risk. The issuing bank facilitates the chargeback process by acting on the customer's behalf to initiate and manage the chargeback, communicating within the processing network to address disputes regarding transactions.
Lost Merchandise
In cases of chargeback fraud or disputes, merchants not only lose the sale amount but also the product itself. This loss of merchandise, along with the inability to resell it, directly affects revenue.
The card issuer determines the validity of disputes by evaluating the evidence provided by both the customer and the merchant.
Reserve Accounts
Some payment processors may require businesses that are considered "high risk" to maintain reserve accounts. These are funds set aside to cover potential chargebacks, effectively tying up capital that could otherwise be used for business growth.
Operational Costs
Operational costs are usually expenses allocated to store inventory and market a product across channels.
Monitoring Program Penalties
Businesses with excessive chargebacks may be placed in chargeback monitoring programs by card networks. These programs can come with additional fees and penalties, further increasing costs per month.
Account Termination
In cases where businesses go through a hefty amount of chargebacks, they are at a risk of account termination. Your payment processor can deny your business to process credit and debit card purchases. Chargebacks can significantly impact debit card transactions, as they may lead to increased scrutiny and the need for stricter compliance with financial regulations.
Hidden Chargeback Costs
Besides the aforementioned fees, there are these not-so-known fees that businesses and merchants should also be wary of. These fees can pile up and bring a huge financial impact on the business. Payment disputes, often arising from chargebacks, emphasize the importance of adhering to credit card acceptance guidelines to minimize disputes and outline steps in the chargeback process to prevent or resolve them efficiently.
Manual Reviews
Handling chargebacks often requires manual intervention such as reviewing transactions and compiling evidence. This manual process can be time-consuming and costly, adding hidden expenses to the chargeback resolution process.
Customer Acquisition Costs
Every chargeback not only means a lost sale but also the loss of the marketing and sales efforts spent acquiring that customer. This lower ROI (return on investment) in customer acquisition and marketing campaigns can be a significant hidden cost.
Opportunity Costs
Excessive chargebacks divert resources and steer away from growth opportunities. Time, money, and efforts spent managing disputes could have been allocated in expanding the business, launching new products, or improving customer experiences.
Unproductive Labor
Staff time spent dealing with chargebacks, whether in customer service, finance, or fraud prevention, represents wasted labor that could be used for more productive tasks.
Frustrated Customers
When a chargeback occurs, it often leads to a negative customer experience, causing confusion or dissatisfaction, resulting in the loss of good customers.
Customers might dispute charges on their credit card statement by identifying unauthorized transactions, billing errors, or unresolved complaints and then contacting their card issuer to initiate a chargeback.
Brand Distrust
Too much fraudulent transactions resulting in chargebacks can damage a brand's reputation and tarnish customer trust. Negative experiences or perceptions can lead to decreased customer loyalty, resulting in long-term revenue loss.
Lowered Bank Authorization Rates
High chargeback rates can lead banks to lower their authorization rates for a merchant's transactions. This means more declined transactions, even for legitimate purchases, leading to lost sales and frustrated customers.
Preventative Ways to Reduce Chargeback Costs
Chargebacks are inevitable, but it doesn’t necessarily mean your business has to drown in it. Here are some helpful tips you can follow to decrease the impact that chargebacks have on your business.
Prevent Chargebacks
To cut costs, start by reducing the number of chargebacks you receive. Make an assessment to understand why you're getting chargebacks. Are criminals making unauthorized purchases? Or are customers unhappy with their orders?
Understanding the reasons behind disputes helps you fix the root problems. For example, if fraud is the issue, updating your inventory won't help. If customers are unhappy with product quality, fraud detection won't be useful.
Make sure to implement fraud prevention technology in your payment system to block suspicious activity. Provide transparency among your customers by making sure product descriptions are clear so they know what they're buying. Review your marketing campaigns and see if the claims and promises aren't hard to keep. Don't forget to use clear billing descriptors so that customers can easily recognize their purchases on statements.
Partnering with third-party service providers makes chargeback preventions easier; you get notified of any disputed charges for early interventions.
Resolve Chargeback Disputes
Resolving chargeback disputes helps lower costs for businesses by recovering lost revenue from false claims. Successfully challenging illegitimate chargebacks reduces their financial impact and deters customers from committing "friendly" fraud in the future. By keeping accurate transaction records and actively managing disputes, you can protect your business's revenue and minimize chargeback costs.
Blast Away Chargebacks with Chargeblast
Undergoing a chargeback process multiple time can get difficult to manage. Stay ahead of the curve and protect your business from financial risks and a tarnished reputation with Chargeblast. Get real-time notifications of disputes so you can quickly resolve customer issues and avoid chargebacks.
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