Chargeback Fees Explained

A chargeback fee is a changeable amount a bank charges for each dispute. The seller always pays for it regardless of its origin: merchant errors, criminal or friendly fraud. This should not be underestimated because it can significantly impact your business revenue. So, how can sellers manage this fee? In this article, we will outline the chargeback fees implications. We will also explain how they can be avoided with chargeback prevention.

Chargeback Fee: What Is It?

Firstly, it’s essential to understand the definition of a chargeback. So, it’s a dispute for reimbursement of a specific amount previously deducted from the cardholder’s account. If a claim is valid, there’s not much a merchant can do. The best option is to accept it. However, if an illegitimate claim is in place, sellers can try to recover their money through representment and prove it was a valid transaction.

In both cases, the merchant must pay the bank a fee to cover the associated dispute costs. That is what we call a chargeback fee. The amount of it depends on the bank. Unfortunately, business owners are not always aware of chargeback fees when starting their enterprise and do not understand their actual costs.

Friendly Fraud Concerns

With eCommerce at the center of transactions, friendly fraud has become more recurrent. According to the Paypers, over 60% of U.S. and 44% of British shoppers have filed chargebacks in the past 12 months. Friendly fraud accounts for up to two-thirds of all credit card fraud, costing the industry over $132 billion annually.

Friendly fraud happens when a non-valid dispute about a transaction between a client and a merchant is started. It’s harder to prevent because either a misunderstanding or malicious intent can cause it. However, merchants can fight them through representment if they have the evidence to prove that a legitimate transaction had occurred. The only issue here is that a fee will always be charged, which is terrible news for the merchant’s income.

Criminal Fraud Concerns

Criminal fraud chargebacks occur when a customer initiates a chargeback as a result of fraudulent activity committed by a criminal. In this scenario, the criminal may have gained unauthorized access to the customer’s payment information or engaged in fraudulent transactions using stolen credentials. The customer, unaware of the fraudulent activity, disputes the charges with their credit card issuer or bank.

Criminal fraud makes up over 80% of chargebacks and can have significant implications for businesses, as they not only result in financial losses but also pose challenges in terms of proving the legitimacy of the transaction. The burden of proof often falls on the business to demonstrate that the transaction was valid and authorized. If fraud is discovered, the merchant needs to refund the sale, must pay a chargeback fee, and can be cut off from their payment processor if substantial or frequent fraud occurs.

Merchant Error Concerns

Merchant error chargebacks occur when customers initiate chargebacks due to errors or mistakes made by the merchant during a transaction. These errors can range from incorrect billing amounts, duplicate charges, shipment issues, product or service quality concerns, or other issues resulting from the merchant’s actions or oversights. Merchant errors can have the following Implications for businesses:

• Financial Losses – Not only do businesses lose revenue from the disputed transaction, but they may also incur additional fees or penalties imposed by payment processors.
• Reputation Damage – Repeated instances of merchant error chargebacks can harm a business’s reputation. Customers may lose trust in the merchant’s ability to provide reliable products or services.
• Compliance and Legal Consequences – In some cases, merchant error chargebacks may result in compliance and legal implications. If the errors violate consumer protection laws, regulatory requirements, or breach contractual agreements, businesses may face fines, penalties, or legal actions from regulatory authorities or affected customers.

Types of Chargeback Fees

Chargeback fees are expenses incurred by businesses in response to chargeback disputes initiated by customers. These fees are typically imposed by payment processors or acquiring banks to cover the costs associated with managing and resolving chargebacks. The following are common chargeback fees that businesses may encounter:

• Transaction Fees – Transaction fees are charges imposed on businesses for each transaction, including those resulting from the initial sale and the chargeback. These fees are a standard part of payment processing and are typically calculated as a percentage of the transaction value or a fixed amount per transaction. 
• Operational Costs – Operational costs refer to the expenses incurred by businesses in managing and resolving chargebacks this could include shipping fees, labor costs, admin tasks, and chargeback resolution services.
• Acquisition Costs – Acquisition costs refer to all the expenses that a business incurred in achieving the initial sale. Common acquisition costs include Google and Facebook Ads, guest posts, events, website design, and referral fees.
• Administrative Costs – Administrative costs are incurred in handling the administrative aspects of chargeback disputes. These costs encompass tasks such as gathering evidence, preparing documentation, and communicating with payment processors or acquiring banks. Administrative costs can include the time and effort spent on dispute resolution, the involvement of customer service teams, and any legal or professional services.
• Chargeback Rate Thresholds – Chargeback rate thresholds are specific limits set by payment processors or acquiring banks to monitor the chargeback ratio of a business. These thresholds define the acceptable level of chargebacks in relation to the total number of transactions processed. If a business exceeds the chargeback rate threshold, it may face additional fees or penalties, such as higher transaction fees, increased reserves, or even account termination.

How Chargeback Fees Work

To understand where the chargeback fees come from, we need to outline the steps of how a chargeback happens:

1. Cardholders complain to the issuing bank about a charge in their account that they believe is not valid;
2. The bank refunds the customer with its own money;
3. The acquiring bank pays the issuing bank for the credit handed to the customer.
4. The buyer will have to cover the dispute processing at the expense of the fee paid by the seller. Other than that, penalties payment can also be demanded by credit card networks.

How Much is a Chargeback Fee Cost?

According to LexisNexis, every dollar ends up in a $2.36 additional fee and other related purchase costs. A chargeback fee is usually not less than $20 and can reach $100. Therefore, it can eliminate your profit and mean an increase in costs.

If your company faces many disputes, it will have even higher chargeback fees, damaging revenue even more. The fee may be determined by a series of factors, such as chargeback history and the type of products or services. For example, if you use Shopify, the regular chargeback fee is $15, but with PayPal, it will be $20.

The chargeback fee allows the acquiring bank to pay for its allocated time and resources. But the fee is not a fixed cost and can be different for each bank. Besides that, the chargeback fee amount will also be affected by the business’s risk level. If the risk is significant, the fee can also be higher. This means sellers need to be cautious about their chargeback ratio.

In addition, most banks will not likely want to work with you if you’re a high-risk seller. Those who accept working with such a merchant will have to impose a higher fee for extra safety. Furthermore, if the risk is too high from a card network’s perspective, sellers may have to enroll in a chargeback monitoring program, such as the Visa Dispute Monitoring Plan (VDMP). You can pay up to $50 for each chargeback in this program and, in some cases, an additional $25000 monthly review fee.

Preventing Chargeback Fees

Sellers must focus on finding solutions to reduce disputes first. In fact, according to IS, 44% of merchants are ready to put their efforts into fraud detection improvement.  For that, some actions can be taken, such as:

Choosing Tools Wisely

Preventing fraud is vital to reducing disputes. Sellers can implement 3-D Secure technology and tools like geolocation, card security codes, and address verification services. In fact, according to FIS, 82% of merchants use 3-D Secure for a better customer experience.

Setting Alerts

The best way to handle chargebacks is before they become disputes. Chargeback alerts play a big part here because they can let you know whenever a client wants to dispute a transaction. The problem is solved with no additional charges if the client gets a refund in advance.

Avoiding Merchant Errors

Focus on business best practices to reduce your chargeback fees. This means simple refund policies, excellent customer service, clear billing descriptors, accurate product descriptions, etc.

Return/Exchange Policies

A merchant should ensure straightforward shipping, cancellation, and return policies. Transparency is critical when dealing with customer satisfaction. Go into detail about every option they have if they want to return the item bought. It should be easy to access the policies through the seller’s website. This way, clients will not find solving their issues hard and will not need to ask for a chargeback.

Customer Service

High-quality customer service is more than shipping and returns policies. In fact, it has to be available to clients during the whole buying process. Besides, cardholders should have easy access to the merchant’s contacts on the website. Customer service must be efficient and promptly get back to anyone needing assistance. Do not hesitate to credit the amount of a valid refund request to avoid disputes and fees.

Chargeback Fee Prevention Tools

Numerous chargeback fees can be avoided with the right tool on the seller’s side. So, in what tools should sellers invest? We can divide them into pre- and post-transaction chargeback prevention and source detection tools.

Pre-transaction tools help detect and prevent fraud. In this case, we have two categories:

• Chargeback alerts, such as Verifi Cardholder Dispute Resolution Network (CDRN) and Ethoca Alerts – a service provided by companies that work with issuing banks to offer early notifications of impending chargebacks to merchants and give them a chance to prevent the chargeback;
• Network Inquiries, like Verify Order Insight and Consumer Clarity by Ethoca – a service that enables Visa merchants to respond to cardholder inquiries around unrecognized transactions and other potential disputes by providing relevant supplemental merchant information.

Post-transaction acts on existing disputes to manage potential chargebacks and stop them from increasing the chargeback ratio. Here, we outlined such tools:

• Address Verification Service (AVS) – a tool that enables merchants to detect suspicious credit card transactions and prevent fraud;
• CVV codes – providing your CVV number to an online seller proves that you do have a physical credit or debit card and helps to keep you safe while reducing the possibility of fraud;
• Visa Account Updater – a service that facilitates and encourages customer satisfaction, retention, and loyalty by exchanging updated account information between participating merchants and Visa card issuers;
• 3-D Secure 2.0 (3DS2) – an authentication solution designed to protect customers when they shop online using credit or debit cards;
• Blacklists – a list of any publisher or source whose behavior matches known fraud patterns are reported as mobile fraud and gets blocked when possible;
• Velocity checks – a tool to monitor the number of times that certain transaction data elements occur within certain intervals and look for anomalies or similarities to detect fraud behavior.

Can Chargeback Fees be Disputed?

No, because they exist to cover banks’ costs in a dispute between a cardholder and a company. When a chargeback is filed, sellers will have to cover a fee. Even if the chargeback is reversed, fees still must be paid because the bank has already processed the costs. It means that even when merchants fight through representment and win the case, they will recover the money from the sales, not the amount paid for the fees. However, if you can avoid a dispute by refunding the client before the dispute takes place, you will have no associated fees.

Reduce Chargeback Fees with Chargebaсkhit

Apart from many other downsides of the chargeback process, sellers also need to worry about chargeback fees affecting their revenue stream. Therefore, preventing fraud and chargebacks in general is on top of the list to reduce disputes, automatically decreasing merchants’ expenses. With fewer disputes, fewer and lower fees must be covered. Chargebackhit provides a chargeback prevention service to lower the risk of chargebacks against your company. Our Prevent tool will help you deal with possible disputes before they turn into chargebacks, using accurate transaction data and protecting your business from revenue loss.