How Much are Chargebacks Costing Your Business?
“How much do chargebacks cost?” That’s one of the most common questions we get here at Chargebacks911. The answer can be more complicated than you probably expect, though.
Many factors determine the number of monthly chargeback issuances a business will face. The same applies to the costs associated with them.
In this article, we’ll examine the costs commonly associated with chargebacks. We’ll also examine some surprising stats about the cost of chargebacks, and also provide some useful tools and information to help you reduce the impact of chargebacks on your business.
First, let’s start with the basics.
- A Step-By-Step Guide to the Chargeback Process in 2022
- Provisional Credits: Here’s Everything You Need to Know.
- 3 Types of Payment Reversals: What’s the Difference?
- Chargeback Life Cycle: The 2022 Dispute Process Guide
- A Step-by-Step Guide to the 2022 Chargeback Scheme
- What is a Credit Card Chargeback? When Should I File One?
Sources of Chargeback Costs
Obviously, when you get hit by a chargeback, you lose the revenue generated by that sale. However, the costs associated with chargebacks extend far beyond sales revenue. They include:
A cardholder who files a chargeback has little incentive to return the item in question.
Any costs associated with materials and processes i.e. hosting, processing, interchange, shipping, stocking, etc.
Whatever you spent to promote the item. This can include social media ads, print ads, and more.
The bank assesses a fee to cover their costs. This fee is non-refundable, even if you fight the chargeback.
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What do all these chargeback costs translate to in terms of real dollars? It depends on the type of business you have, what you sell, how much it costs you to operate, and which banks and processors you use. However, internal data from Chargebacks911 suggests that, by 2023, the average chargeback will cost $191, based on a $90 average disputed transaction.
Adding Up the Cost of Chargebacks
These chargeback costs add up quickly, and they impact everyone throughout the payments ecosystem. Merchants take the majority of the hit, but banks also lose billions every year due to disputes.
In order to provide the most accurate impression we can, we’ll flesh this section out with more numbers based on Chargebacks911 internal data.
Global chargeback volume reached 615 million in 2021, according to data from Mastercard. So, if we do some basic math:
That’s right: $117.46 billion by next year. If we break this up between banks and merchants, we can project that merchants will suffer nearly $79 billion of those losses.
Also, keep in mind that the number of chargebacks filed is actually lower than the number of potential disputes. Due to alerts and issuer write offs for low-value transactions, only 76% of disputes actually progress to the chargeback stage.
Why are Chargeback Costs Rising?
We’re looking at a 10.4% increase in chargeback losses between 2021 and 2023. But why?
Again, there is no single answer. There are multiple forces contributing to the rise in chargebacks.
Fraud is an obvious factor. Wider access to cardholder data, coupled with the difficulty involved in verifying card-not-present buyers, has resulted in widespread issues with online fraud. The ease with which cardholders may file disputes, labor and supply chain shortages, and shipping delays are all to blame as well.
But, what these figures all fail to convey is the effect friendly fraud has on the cost of chargebacks.
But, now that we understand the numbers a bit better, let’s talk about how chargeback costs are affecting your business specifically. Try using this ROI calculator to get a general idea of what chargebacks are costing you in an average month:
What are Chargebacks REALLY Costing You?
Annual Revenue Lost:
+ Chargeback Fees:
+ Admin Fees:
+ Cost of Goods & Shipping:
Total Annual Chargeback Cost:
What About the Invisible Chargeback Costs?
Here’s another startling fact: did you know that it takes 12 positive customer experiences to make up for one negative experience with your brand?
Have you heard that the average American tells 15 people when they’ve had a poor customer service experience?
These are just two examples of invisible chargeback costs. These figures are even more difficult to quantify. In most cases, there’s no way to really draw a strong connection between these problems and their consequences. As a result, most merchants won’t even realize these issues exist.
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5 Quick Tips to Reduce Chargeback Costs
Did you know that there are several basic practices you can adopt that might help prevent disputes and lower your chargeback costs?
It’s true. Limiting the amount of hidden drains you have built into your systems and practices is a wise best practice. From optimizing customer service to boosting fraud prevention, here are five simple ideas that can help you reduce the cost of chargebacks:
Be a Customer Service Pro
Avoiding merchant error is perhaps the hardest task you might face regarding chargebacks. But, ultimately, it can be the most rewarding. You can avoid many chargebacks by making it easier for customers to reach out to you. This means providing prompt, helpful responses to all phone, email, and social media inquiries, and making sure your contact information is easily visible.
Up-Front Policies Win
You don’t want any of your policies or practices to be viewed as an unpleasant surprise by customers. Be clear and up front with all policies, especially those related to fees or charges customers are likely to encounter. Tax, shipping and handling, and return policies should be clearly listed and recognizable to your customers.
Pay Attention to the Details
Your billing descriptors and other pertinent merchant information should be clearly identifiable to your customers. Many chargebacks are filed simply because merchants failed to include these identifying details, as cardholders are unable to recognize transactions and might suspect they’re fraudulent.
Fight Friendly Fraud
As we mentioned above, friendly fraud is one of the most common causes for chargebacks. It's also the trickiest, by far. You have to pay close attention to chargeback reason codes, keep excellent records, and respond quickly to false chargeback claims. This will allow you to fight back when appropriate through the representment process.
Know When to Ask for Help
Sometimes the difference between a high chargeback ratio and soaring chargeback costs is knowing when you need help. Chargeback management companies exist for this very reason, and it’s crucial for you to understand when in-house management is insufficient to your business’s needs.
If it seems like it's getting harder to manage chargeback costs every year… that’s because it is.
When it comes to the true cost of chargebacks, prevention proves to be the best medicine. You can limit the hidden charges and aftereffects with careful practices and clever planning. Or, you can reach out to the experts and let them handle it for you.
With over a decade as a leader in the payments industry, Chargebacks911 is uniquely placed to help your business navigate the cost of chargebacks and save you time and revenue. Give us a call and learn how much you can save today.