Chargeback Fees

Merchant Chargeback Fees: Direct Charges & Hidden Costs, Explained

Every time you get hit with a chargeback, it translates to money disappearing from your pocket. You lose the revenue from the original sale, as well as the cost of any merchandise already shipped. However, there are also chargeback fees to consider.

These fees seem like a minor annoyance at first. They can rack up quickly, though, potentially outstripping the cost of the initial sale several times over.

In this post, we’ll explain chargeback fees in depth. We’ll look at the various direct and hidden costs that result from chargebacks. We’ll even cover a few ways in which merchants can avoid these fees through dispute prevention.

What is a Chargeback Fee?

Chargeback Fee

[noun]/* chahrj • bak • fē /

A chargeback fee is a variable amount charged by a bank for each dispute. The fee is paid by the merchant, and helps cover the bank’s costs involved in settling a chargeback.

Chargebacks can be the result of criminal fraud, or may be caused by a merchant error. The customer has the legal right to request a chargeback under these circumstances. However, they should talk to the merchant before filing a claim.

Each chargeback filed costs the bank time and resources. Issuers and acquirers both have to pay processing costs, while acquirers must also pay chargeback fees to the card network. To offset these costs, the acquiring bank charges the merchant an administration fee. In most cases, the fee applies even if the chargeback is eventually reversed.

Where Do Chargeback Fees Come From?

Obviously, the chargeback fee is closely tied to the chargeback process. As we explained above, the fees are assessed by institutions to cover their costs. Here’s a general idea of how the system works:

The cardholder discovers a charge on their monthly credit card statement. They contact the issuing bank, which initiates a chargeback. The issuer uses its own money to refund the customer, then retrieves the transaction amount from the acquiring bank.

Here is where the fees start rolling in. The merchant’s acquirer will almost always levy a chargeback fee to cover the various costs involved with processing the chargeback.

In addition to the acquirer, the credit card processor can also levy fines. In some cases, even the card networks will charge a merchant for a chargeback. These chargeback fees can add up in a hurry.

How Much is a Chargeback Fee?

Charges from an acquiring bank normally range between $20 and $100 per claim. They can go much higher, though, especially if the business is considered “high-risk.”

Exact amounts depend on the acquirer, which bases its calculations on a range of factors. This can include the merchant’s chargeback history, the products or services involved in the transaction, the type of industry, etc.

The price tag is not necessarily the same for each chargeback, either. The banks have leeway to impose higher fees at their discretion. So, a merchant with one dispute may be charged a certain rate, but a merchant with 100 chargebacks per month may pay a higher per-chargeback fee.

To illustrate this point, here are a few of the most prominent brands in the payment processing space, along with the nominal chargeback fee they assess (if any):

Chargeback Fees for “High-Risk” Merchants

Of course, the fees quoted above are for standard chargebacks. Things can get much more expensive for merchants in the high-risk space.

Many acquirers and processors will not work with high-risk merchants. Those that do typically impose higher fees to offset the greater risk of chargebacks.

The credit card networks also get in on the act regarding elevated chargeback risk. They set certain limits for a business’ chargeback ratio, as well as for the total number of chargebacks received. If the merchant exceeds those limits, they may end up in a chargeback monitoring program.

This is extremely bad news. Unlike banks and processors, who charge per chargeback, monitoring program fines typically include a flat rate that can cost thousands of dollars each month.

These costs are usually set up in tiers, based on the merchant’s situation. For example, merchants with more than 100 transactions per month, and with a Visa chargeback ratio of 0.9% or higher, are subject to the Visa Dispute Monitoring Plan (VDMP). The fee structure looks like this:

Number of Months spent in VDMP

Prices increase for merchants labeled high-risk by Visa, or those with over 1,000 chargebacks per month and a 1.8% chargeback ratio:

Learn more about VDMP fees

The Mastercard Excessive Chargeback Merchant program, or ECM, is very similar. The longer the merchant remains in a monitoring program without substantial improvement, the more likely the card network will simply revoke card processing privileges altogether.

Learn more about Mastercard ECM fees

It’s important to note that the thresholds imposed by the card network are a baseline. Your processor or acquirer may not be so forgiving. They may close your account as a risk-aversion measure before the card network ever gets involved.

What About Indirect Chargeback Fees?

So far, we’ve been talking about direct costs that merchants must pay. However, the cost of a chargeback goes far beyond the nominal fee.

Each transaction involves a range of expenses: cost of goods shipped, order fulfillment, shipping and handling, taxes, processor and gateway fees. You also can’t forget the time and labor invested in making all this happen. In the event of a chargeback, though, all that money goes down the drain. In most cases, the cardholder won’t even return the merchandise.

You have the right to fight invalid disputes, but that involves even more costs. And, even if you win, you will only get back a portion of your investment. Studies show that, for every dollar lost to chargebacks, merchants will ultimately lose an additional $2.60 due to chargeback fees and hidden costs. The cost of these hidden chargeback fees trends upward year-over-year.

Learn more about hidden chargeback costs

Can Merchants Lower Their Chargeback Fees?

Like it or not, chargeback fees are part of the payments system. The only way to reduce them is by preventing chargebacks.

Stop Losing to Chargeback Fees

The tactics outlined above are a step in the right direction. Successful chargeback fraud prevention can be a complicated, time-consuming, and resource-heavy endeavor. Compared to the heavy costs incurred by chargebacks, engaging the right chargeback management team is a bargain.

The experts at Chargebacks911® will create a customized solution tailored to your business. We can take chargebacks completely off your plate AND boost your ROI, all backed by the only performance-based ROI guarantee in the industry.

Stop getting hit with avoidable chargeback fees. Contact Chargebacks911 today.