Chargeback Fees: What Do Chargebacks Cost?

Are chargebacks just an unavoidable inconvenience of doing business online? Plenty of ecommerce merchants may think so, but what they may not realize is that chargebacks are costing them far more than just the cost of the product itself or the chargeback fee they’re assessed.

In fact, chargebacks cost online businesses around US$125 billion, with every $100 lost in chargebacks translating to $240 in actual losses. Stripe reports that the digital goods and money transfer industries are the most vulnerable to online fraud, with combined losses expected to reach $60 billion by 2025.

Here are just a few of the fees a business incurs each time they’re hit with a chargeback and how these expenses can permanently affect a business’s ability to maintain their good reputation and grow their business.

Credit Card Processing Fees

Credit card processors charge businesses a fee for each transaction processed, and this fee generally includes the wholesale cost of the transaction plus the processor’s rate markup. If the transaction results in a chargeback — even if the business isn’t at fault — the business will be out these processing fees.

Acquiring Bank Fees

When a merchant receives a chargeback on a transaction, the acquiring bank assesses a chargeback fee — often ranging from $20-$100 — to cover the costs the acquirer incurs during the chargeback process. And the higher the risk, the higher the fees.

Even if a merchant fights and wins a chargeback dispute and recovers the lost revenue, the acquiring bank won’t refund these chargeback fees.

Expenses Associated With Elevated Chargeback Ratios

When it comes to chargeback rates, banks are watching. Acquiring banks keep track of which merchants have high chargeback ratios, and those businesses may find themselves subject to additional fees for each chargeback. Should chargeback ratios continue to rise, online merchants could find themselves put into chargeback monitoring programs by acquiring banks — resulting in even more fees. While some businesses may be offered a grace period upon being enrolled, most high-risk businesses will be assessed the fees immediately upon entering the program.

Businesses unable to lower their chargeback rates may face rising processing fees or even have their business accounts terminated. If the business crosses a 1% threshold chargeback rate, it will likely be subject to a chargeback monitoring program. 

What Is a Chargeback Monitoring Program, and How Does It Work?

Payment processors measure chargeback rates by tracking raw numbers and what’s called a chargeback ratio — the number of chargebacks in a single month divided by the total number of transactions in the same month. Processors set limits, or thresholds, that determine how they will respond to high chargeback rates, including chargeback monitoring programs with high fees and consequences.

How Visa monitors chargebacks

Visa has a monitoring program with an early warning system to identify merchants with an excessively high number of chargeback disputes. The Visa Dispute Monitoring Program (VDMP) reviews a previous month’s processing activity and identifies businesses that exceed the program thresholds. 

Visa officially has two levels of thresholds, standard and high risk/excessive, which are determined by the ratio of chargebacks to total transactions calculated at the end of each month. It also has a lower early-warning threshold to alert businesses if they’re in danger of entering the program. Here are the thresholds:

• Early Warning: a dispute ratio of 0.65% and a minimum of 75 chargebacks
• Standard: a dispute ratio of 0.9% and a minimum of 100 chargebacks
• Excessive: a dispute ratio of 1.8% and a minimum of 1,000 chargebacks

A notification of Early Warning is the business’s chance to implement a chargeback management strategy. If the business’s rate increases to the Standard level, it will be placed in the VDMP. Businesses then have four months to reduce their chargeback rate before a hefty fee structure kicks in.

How Do Merchants Get Out of Chargeback Monitoring Programs?

The key to removing a merchant from a monitoring program is consistently maintaining a low chargeback rate.

With Visa’s program, that means staying below 0.9% for three consecutive months — as a start. Merchants are then subject to an additional three months of tracking. Crossing the 0.9% threshold during that tracking period will land businesses back at square one in the program. This can mark the point of no return, and Visa may eventually sever its relationship with the business.

Businesses can also apply for a different “high-risk” business account, such as Mastercard’s MATCH (Member Alert to Control High-Risk Businesses) list, formerly known as the Terminated Business File.

How MATCH works

News of a poor relationship with one payment processor travels fast throughout the industry, making it difficult to work with others. The MATCH list maintained by Mastercard Worldwide is also used by Visa Inc. processors and other networks to screen potential businesses before allowing them to open an account.

MATCH functions as a quasi-blacklist with an average tenure of five years. With consumers’ growing dependence on ecommerce, those five years can be too long for most online businesses.

Operational Expenses

Beyond the fees that a merchant is assessed following a chargeback, merchants also find themselves paying out the operational costs that are associated with a transaction. Some of these costs include:

• The value of the goods lost
• The manpower time associated with processing and shipping an order
• The costs involved with storing and managing inventory
• The shipping costs incurred on each order
• Software solutions to help identify and prevent fraud

Those costs add up — often accounting for up to 20% of business revenue that ends up being returned when a customer files a chargeback.

Marketing Costs

Good customers don’t come easily or cheaply. Many ecommerce merchants invest significant amounts of money into marketing and advertising — sometimes up to 40% of their revenue. And that can be money wasted when transactions result in chargebacks and negative social media attention.

Tips for Minimizing Chargeback Fees

The best way for merchants to minimize chargeback fees is to prevent chargebacks from happening in the first place. One strategy is upping the customer experience game. 

Customer disputes, or “friendly fraud,” can happen when customers make honest mistakes and file a dispute for any number of reasons, such as not recognizing the company’s name on their statement or forgetting about a recurring charge, such as a subscription. 

Rather than contacting the business, consumers contest the charge directly with their card issuer. While this type of fraud is not necessarily malicious, it has become all too common, increasing by 41% every two years.

These best practices can help businesses avoid some of the most common customer experience causes of chargebacks and friendly fraud.

• Carefully communicate the business name that customers can expect to see on their statements.
• Make it easy for customers to contact customer service 24/7/365 with questions or concerns.
• Make return and refund policies clear and easy to find.
• Make sure customers who have signed up for recurring orders are notified well in advance of those charges hitting their credit cards.

There are also strategies online merchants can use to deter chargebacks from less “friendly” fraudsters — for instance, those who order a product with the dishonest intention of receiving a refund on the order and keeping the product.

• Require CVC2 (Mastercard), CVV2 (Visa), or CID (American Express) numbers for each transaction.
• Limit declined transactions by locking a user out after a predetermined number of incorrect entries.
• Require signatures at delivery for high-value orders.

Even businesses that do everything right will occasionally find themselves the victim of fraud and chargebacks. The sad reality is that ecommerce fraud is a thriving industry that’s constantly evolving, and new schemes for fraudulent chargebacks appear daily. 

Rather than dedicate valuable management time to 24/7 fraud detection and prevention, online businesses are better served by partnering with a pro with the industry intelligence and proven expertise to help reduce chargebacks — and the fees that come with them.

Rely on a comprehensive chargeback and fraud protection and management solution

Even the most effective fraud prevention solution may leave a merchant subject to chargebacks. A comprehensive chargeback protection and management solution is the antidote. 

ClearSale partners with enterprise chargeback management service provider ChargebackOps to offer full-scale chargeback management:

• Total Chargeback Protection allows businesses to recoup a portion of losses due to fraudulent transactions.
• Chargeback Guarantee reimburses the transaction amount plus the chargeback amount for any unauthorized transaction that’s approved.
• End-to-End Chargeback Management delivers comprehensive chargeback mitigation and resolution services, including team training, data audits and timely responses to issuers.

Merchants need to be able to protect their revenue against costly chargebacks while preventing costly false declines — and they don’t have a moment to lose. At ClearSale, we have the proven experience to help online businesses avoid the inconvenience of business-damaging chargebacks.

 Contact us today to learn how easy it is to get started.