Chargeback Fees Explained (plus How Merchants Can Avoid Them)
What is a chargeback fee? They are an unfortunate part of every retailer’s life. An occasional credit card chargeback is bad enough, but the overall number of customer disputes has skyrocketed in recent years. Today, chargebacks represent a real and growing financial threat to merchants, costing them both merchandise and revenue.
One of the worst aspects of receiving chargebacks is the non-refundable chargeback fees merchants must pay for every chargeback they receive. These fees are levied by acquiring banks, who often gauge merchants’ risk and reliability on the number of chargebacks issued against them. Receiving multiple chargebacks on a regular basis can lead to even greater challenges down the road.
Chargeback Fees: Non-Refundable and Non-Negotiable
Chargebacks were originally designed as a consumer protection device, and while not ideal, they still serve that purpose well enough. The way the system works, however, each new customer dispute starts with the merchant essentially being “guilty until proven innocent.” In other words, the bank generally assumes the cardholder is telling the truth, unless and until the merchant can prove otherwise.
Many merchants don’t even bother trying, even if they know the charge is meritless. Getting a chargeback reversed is a complicated and time-consuming process, with little chance of success. Because merchants are initially presumed to be guilty, chargeback fees and reimbursements are deducted from their account automatically—no questions asked.
- Chargeback Fees
Chargeback fees are monetary charges levied by acquiring banks to cover the administrative costs of each chargeback a merchant receives.
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These chargeback fees are meant to cover administrative costs associated with the chargeback process. This makes sense from the bank’s perspective, but for the merchant, it just means additional lost revenue. Even if the merchant disputes the chargeback, wins the case, and recovers the cost of the transaction, the bank fees remain non-refundable.
The damage is done, regardless of whether the merchant disputes the customer’s claim or not. So, is it any wonder why so many merchants dismiss chargebacks and chargeback fees as another “cost of doing business”?
Chargebacks cost more than most merchants realize
If left unchecked, chargeback costs can impact your bottom line.
The amount of a chargeback fee can vary, depending on the circumstances. The acquiring bank has a voice in determining the amount, as does the processer. The type of goods or services a merchant offers can also affect the price tag. Plus, there are other factors that may come into play. On average, the fees fall somewhere between $20 and $50, although merchants who earn the label of “high risk” can expect to pay even more per chargeback.
Those numbers may not seem particularly daunting at first glance, but they can escalate very quickly. In fact, according to the 2019 LexisNexis True Cost of Fraud study, each dollar of fraud costs the merchant $3.13 in revenue. That means a $100 chargeback results in more than $313 in losses once fees are added in. That’s a 6% increase over the previous year…and the numbers continue to grow.
Beyond Chargeback Fees: Monitoring Programs and More
While chargeback fees from the bank are bad enough, there are additional fees that can arise indirectly from chargebacks. As mentioned earlier, acquiring banks keep track of businesses with high chargeback numbers (or ones that are branded “high-risk” for some other reason). These merchants are often shuttled into a chargeback monitoring program.
Chargeback monitoring requires paying another fee; in this case, the fee is ongoing. Certain merchants might receive a grace period before fees kick in. However, acquirers usually expect high-risk merchants to begin payment as soon as they enter the program.
Businesses in a chargeback monitoring program are also subject to periodic “mitigation plan” reviews. These involve yet another merchant fee. And, the more chargebacks filed against a merchant, the more the fees pile up.
Despite the difficulties, merchants should dispute all fraudulent chargebacks, and attempt to recover revenue, merchandise, and shipping costs. This has long-term effects, as well, since chargebacks are black marks on a merchant’s reputation which can indirectly lead to multiple other costs as time goes by.
In fact, failure to reduce chargeback rates could result in higher processing fees or a frozen merchant account. In worst-case scenarios, merchants can even lose processing privileges altogether, which can cripple a business.
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Preventing Chargeback Fees
Chargeback fees and monitoring programs are meant to provide incentives for merchants to reduce chargeback occurrences. Both involve non-refundable expenditures on the part of the merchant. The best way to fight back is to try and prevent chargebacks before they happen and before the bank withdraws any fees.
There are two particular strategies that can be of help here. First, a merchant can try eliminating chargeback triggers through best practices. Beyond that, merchants can sign up to be alerted before issuers file impending chargebacks.
Businesses can mitigate the risk of chargebacks simply by establishing and updating protocols, and strictly following business best practices. For example, using the Address Verification System (AVS) and consistently collecting CVC2/CVV2 verification codes should be standard procedure on every order.
This can be an effective prevention against card-not-present fraud. Other preventative best practices might include:
- Clear, detailed product/service descriptions
- A comprehensive, easy-to-understand refund policy
- Self-explanatory billing descriptors
- Easily referenced company contact info
- Well-defined shipping expectations
- Highly responsive customer service
Errors and oversights still happen, of course, despite a merchant’s best intentions. In fact, chargebacks caused by merchant error account for up to 40% of all transaction disputes.
That’s why merchant’s “best practices” should also include a comprehensive merchant policy assessment, like the 106-point Merchant Compliance Review provided by Chargebacks911®. This exclusive analysis identifies and helps eliminate potential triggers. In the end, this allows merchants to avoid chargebacks and related fees.
Obviously, not receiving chargebacks at all is the goal. But, as long as the system exists, it’s possible that cardholders will dispute transactions. This is especially true in response to criminal fraud. With a chargeback alert program, however, participating issuers can give merchants advance warning before filing a chargeback.
The merchant, in turn, has a chance to refund the cardholder before the actual chargeback issuance. This is not ideal, as the merchant still loses funds and/or merchandise. However, there will be no chargeback fees assessed, and no change to the merchant’s chargeback ratio.
The benefits in terms of both revenue and reputation are significant. These only apply, though, if the alert provider has working relationships with the majority of banks. Chargebacks911 offers the broadest chargeback alerts network on the market, partnering with more issuing banks than any other service provider.
Chargeback Fees…Just One More Unnecessary Expense
Too many merchants assume that chargebacks are inevitable. When they ask "what is a chargeback fee?" they assume it's a cost of doing business. The vast majority of chargebacks, however, are preventable.
It’s possible to stop this loss source with expert chargeback help. Fraudulent chargebacks—if correctly disputed—can be reversed. Contact Chargebacks911 today to learn more about our comprehensive chargeback management services.