If your business sells goods or services, you might have faced chargeback fees. Chargeback fees are a way to protect the consumer and make sure businesses operate with integrity.
When customers are dissatisfied with goods or services, they can request their money back from either you or their bank or card company. If the customer is able to contact you, you might be able to issue a refund and avoid a chargeback fee.
Of course, in the case of a refund you’re out the transaction amount. But if the customer doesn’t contact you and works through the bank instead, you end up losing a lot more than just the cost of the sale.
Fortunately, there are ways to prevent errors, encourage your customers to work with you directly, and minimize chargeback fees. In this article, we’ll explain how chargebacks work and what you can do to protect yourself.
What is a Chargeback Fee?
In short, a chargeback fee is a fee charged by your bank for handling a customer dispute.
If there is an issue with the goods or services you provide to your customers, those customers can dispute the charge for those goods or services with their banks or card companies. The customer’s bank will conduct an investigation and almost always credit the customer.
The funds disputed are pulled from the merchant’s account, or the acquiring bank account, and returned to the customer’s account, also known as the issuing account. In addition to losing the cost of that sale, the merchant is also assessed a chargeback fee. This fee covers the administrative costs associated with this process.
How Much is a Chargeback Fee?
Chargeback fees range from about $20-$50. The amount of the fee is determined by the payment processor (PayPal, Square, Shopify, etc.), the acquiring bank, and the type of product or service sold.
It also depends on your business’s reputation. The acquiring bank gauges a merchant’s risk and reliability based on the number of chargebacks issued against it. The more chargebacks you have against you, the higher the fee for subsequent disputes. However, there are a number of other costs associated with a chargeback.
Other Fees and Revenue Loss Associated with a Chargeback
First is the actual cost of the sale. If a customer disputes a $100 charge, that $100 is pulled from the acquiring account and returned to the customer’s account. Plus you lose the merchandise.
Then there is the transaction fee. When that transaction was made, you were likely charged 3.5-4% by the payment processor for processing the transaction.
Next are operational costs. This is the amount it costs to process an order such as labor, packing, shipping, and warehouse and inventory management. Operational costs typically amount to about 20% of merchant revenue and cannot be recouped.
Marketing and acquisition costs cannot be recouped either. This is the amount spent to get the purchase or sale in the first place. Most merchants spend about 30-40% of their revenue on marketing. So add this to the amount lost when a sale is reversed.
Finally there is the chargeback fee. When the issuing bank forces a reversal of a transaction, the acquiring account is charged a fee for this intervention. This fee ranges from about 15-40% of the transaction value.
When it’s all said and done, you’re looking at a loss of around 2-3 times the transaction amount. And this increases with the number of chargebacks filed against you.
For example, after a certain number of chargebacks, the acquiring bank could deem your business a high chargeback ratio client, or high-risk. To be considered high-risk, you’d have to have a chargebacks-to-transaction ratio of 1% or more. When this happens, the fee amount increases for subsequent chargeback investigations.
If your chargeback ratio continues to climb, the next step by the acquiring bank is to place your business into a chargeback monitoring program. This would subject you to periodic mitigation plan reviews. There would be a fee for this as well.
Other Penalties Associated with Multiple Chargebacks
Aside from fees and revenue loss, frequent chargebacks could result in some more severe consequences. If you are considered too much of a risk, your bank could terminate your merchant account.
Furthermore, all potential acquiring banks could blacklist your business. This would mean that you would no longer be able to accept credit cards. Depending on your business model, this could be a huge blow.
In the next sections we’ll cover chargeback scenarios and then how you can accordingly avoid a majority of these fees and penalties.
What Causes a Chargeback Fee?
There are a number of scenarios that can result in a chargeback. First is the instance of credit card fraud. If a consumer’s card information is used to make a purchase and he or she sees it on the statement and doesn’t recognize it, the consumer can file a claim with the bank to get those funds back to his or her account.
Next is what is called “friendly fraud.” This is where the consumer suspects fraud when he or she actually made the purchase. This happens often when the merchant name associated with the charge is different than what the consumer expected. And, sometimes consumers simply forget about purchases they make. Especially if there is an extended shipping time.
Sometimes, consumers are dissatisfied with their purchases. Maybe they paid for a service that wasn’t completed or a product isn’t as advertised. In these cases, you would hope that the consumer would contact you directly to work out a return and/or refund. But without a clear communication and refund policy, consumers may be forced to work through their bank which could cost you triple the transaction amount.
Believe it or not, sometimes the merchant is responsible for an error. Maybe the wrong purchase information is entered or the customer is charged more than once. Actually, 40% of all transaction disputes are chargebacks caused by merchant errors.
Fortunately, there are ways to prevent these errors and minimize the number of chargebacks against you.
How to Minimize Chargeback Fees
Chargebacks negatively affect your reputation, bottom line, and business model. That’s why it’s so important to be proactive. To prevent as many chargebacks as possible, follow these best practices.
Confirmation of Cardholder’s Identity
To prevent chargebacks caused by fraud, it’s important that you take as many security measures as you can. You want to be sure your customers are who they say they are.
With identity authentication software, you can match user information with data you already have. You might have a customer verify his or her billing address or answer security questions.
If you have a phone number on file for the user, you can text a passcode to verify the user’s identity. This is commonly referred to as two-factor authentication: the customer identifies him or herself and then confirms that identity by providing the code sent to the phone number he or she owns.
To use customer phone numbers for authentication, you should regularly verify customer phone numbers. You can use a phone validation tool to keep your database up to date and match phone numbers to names for identity confirmation.
You might have customers set up usernames and passwords to place orders on your website. This can help prevent fraud as well.
Finally, it’s a good idea to require CVC2/CVV2 codes when customers enter their card information. This helps to prevent someone using another person’s card information without having the actual card in his or her possession.
Clear Billing Details
To prevent disputes regarding overcharges, you can protect yourself by clearly explaining each charge. How much do customers pay for the product or service? How much for shipping? Are there any other fees involved? The customers should know exactly what they are getting for their money.
Then provide a receipt or confirmation email with the details. This ensures that the billing details are properly communicated. It also helps customers remember and recognize the charge on their statements.
Finally, you want to make sure that your business name shows up on the customers’ statements as something they will recognize. If the customer is billed by your personal name rather than your business name, the customer may not recognize it and suspect it is a fraudulent charge. So be consistent here.
Documented Shipping Policies
You don’t want to face chargeback fees for customers not receiving their orders. These errors are preventable. First, your customers need to enter their shipping address correctly when completing their orders. Validation error messages can help.
By autofilling, providing suggestions, and verifying information at the point of entry, validation error messages make the order process quicker for the customers and data more accurate for your use.
You can also validate addresses by using a USPS address verification tool. By ensuring your customers’ addresses are formatted in accordance with the USPS records, you provide customers with quicker, more accurate delivery. Furthermore, you avoid sending undeliverable mail and having it returned to you. Invalid addresses cost you money for shipping and extend the shipping time.
Therefore, invalid addresses increase your chances of being met with chargebacks. If your customers don’t receive their orders in the time they expect, they might worry that they paid for something they will never receive. Then they call their banks to get the charges reversed.
So it’s important to accurately quote a shipping timeframe and honor it by verifying addresses before sending.
If there is an issue with your product or service, you want the customer to contact you before the card issuer. Once you are made aware of the problem, you can take steps to resolve it. You therefore protect your reputation, preserve your relationship with the customer, and avoid chargeback fees.
To encourage the customer to contact you if there is an issue, you need to provide contact information and be in touch with the customer in a timely manner. This might require a good customer service team or process. Resolve the problem as quickly as possible to avoid getting the card issuer involved—that’s when the fees start rolling in.
You also want to encourage returns. That way you don’t lose the merchandise on top of the sale. At the end of the day, it’s better for you to issue a refund than to face a chargeback. It’s cheaper and better for your reputation. So provide clear, simple return instructions in case there are any errors or issues.
Disputing a Chargeback Fee
Despite the preventative measures above, you could still face chargebacks. There are some situations that will be out of your control. Technically, you can dispute chargeback fees, but it might not always be worth the trouble.
When Should You Dispute a Chargeback?
In the case of a chargeback, the merchant is guilty until proven innocent. The card-issuing bank credits the customer from its own funds then recoups those funds by pulling from your acquiring bank. It happens automatically, no questions asked.
So if you want to dispute a chargeback fee, you have to build your case with documentation and proof. And you have to do it as soon as possible; you’ll have limited time to respond during each stage of the process.
Chargebacks typically rule in favor of the customers, so you will likely lose most battles. So don’t waste resources fighting a chargeback you might not win. Instead, target your efforts on cases where you have clear evidence to support your case.
For example, if you issued the customer a refund and you were assessed a chargeback fee. This would result in the customer being refunded twice in a situation where you resolved the issue without the bank. This would be a situation you should dispute and would win provided you have documented proof.
Fraudulent chargebacks can, in most cases, be reversed. This would be another situation where a dispute might be worth your time and resources. According to the LexisNexis study on The True Cost of Fraud, each dollar of fraud costs the merchant $3.13 in revenue. And this cost grows each year.
However, unfortunately, bank fees are non-refundable. If you win a chargeback dispute, you are reimbursed the purchase amount but not the fees associated with the investigation. But it’s still better to get some of the money back and preserve your reputation.
Since the chargeback dispute process is time-consuming, choose your battles carefully. If the chargeback is due to a merchant error, accept it and let the chargeback stand.
Chargeback fees are quite a hassle, but most of them can be avoided by keeping up with your customer data. You want to make sure you verify customer information at the point of entry. Then you need to clean and update that data regularly for return customers.
Managing accurate data makes the customer experience quicker and easier. Plus you can use it to authenticate users and prevent fraud. Incomplete, incorrect, and outdated data can lead to a poor customer experience, potential fraud opportunities, and extended shipping times.
Two helpful tools are a phone validation tool and a USPS address verification tool. Both of these ensure that data is entered and stored correctly. You save a ton of time and money by avoiding preventable errors. To make sure your data stays accurate over time, check out our batch solutions too!