Chargeback fees and how to avoid them legally

TL;DR: Chargeback fees are administrative fees banks place on merchants for every dispute incurred. Chargeback fees range between $20 to $100 per claim and can spike much higher in some instances. To avoid these fees, you must prevent chargebacks by improving your customer service, using anti-fraud tools to prevent unauthorized transactions, and automating your disputes to mediate cases timely, while recovering lost revenue when online shoplifters try to beat the system.

If you’ve ever dealt with credit or debit card chargebacks in your eCommerce business, then you know that every time cardholders hit you with a dispute, you’ll lose money. 

The sales value. Merchandise cost. Shipping cost – each chargeback you receive attracts a significant financial burden for your business.

Then add chargeback fees into the mix, and you have a dire situation requiring urgent attention!

Although chargeback fees don’t always seem like such a big deal at first blush, these fees often grow beyond the cost of the initial transaction, becoming a heavy revenue drain for businesses. That’s especially true when you get lots of disputes. 

If you’re unsure how much money chargebacks cost your business, this article will give you all the details. We’ll uncover the apparent and hidden costs of chargebacks and how you can stop paying chargeback fees legally.

Let’s jump right in!

What is a Chargeback Fee?

A chargeback fee is an administrative fee that banks or payment processors assess when a customer disputes a charge and requests a refund. These fees are typically a percentage of the disputed amount, and banks or processors use them to cover processing the chargeback expenses. 

Chargeback fees vary by merchant, bank, and payment processor but generally range from $20 to $100 per chargeback. In addition to the standard chargeback fees, merchants may also be responsible for ancillary dispute costs, such as evidence-gathering costs or additional fees to process the chargeback.

What is the Origin of Chargeback Fees?

Like the chargeback concept itself, chargeback fees origin dates back to the early days of credit card processing and the resulting transaction issues, such as fraud and unauthorized transactions.

To address these disputes, the major credit card networks (i.e., Visa, Mastercard, AmEx, and Discover) developed chargeback processes that allowed consumers to dispute charges and request refunds.

And as part of these chargeback processes, banks mandated fees that merchants must pay when cardholders initiate a chargeback. These fees cover the costs associated with processing chargebacks: the cost of investigating the dispute and refunding the customer. 

Today, the chargeback process and resultant fees have become a standard part of the credit card payment system. Aside from acquirers, card processors often place some fees also. Sometimes even the card networks will charge vendors for chargebacks. 

Chargeback fees are now a regular expense for merchants who accept credit card payments. They are a vital consideration for businesses regarding financial risk mitigation, as these fees are often non-negotiable even when merchants successfully reverse the chargeback.

How Much Do Chargebacks Cost Your Business?

Although the precise chargeback fee you pay depends on the acquirer you’re dealing with, most banks place a chargeback fee of $20 to $100 on each dispute as we noted earlier. 

However, when the merchant enters the “high risk” category, the fees become astronomical. Excessive chargeback penalties can range from $5000 to $25,000.

Having said that, below are some specific cost centres to help you understand how much money chargebacks are draining from your business. 

1. Overhead costs. eCommerce transactions involve several distinct deliverables, such as pick-up, packaging, warehousing, and shipping. These activities also involve costs. And when a scammer relieves you of the transaction revenue with a false chargeback, these overhead costs also affect your balance sheet.
2. Marketing and customer acquisition costs. Chances are that the customer didn’t chance on your website to make a purchase – you probably invested lots of money in developing leads, acquiring the buyer, and eventually making the sale. Whether you use a full-time sales and marketing team or freelancers for those services, the fact remains that you might spend between 30 and 40 percent of your sales budget on marketing. And if the sale is eventually charged back, you lose the resources spent convincing the buyer to purchase from you. 
3. Order processing fees. Merchants pay an order processing fee to the  payment processor for each transaction processed. The interchange fee, which is, on average, 1.5% to 4% of the transaction value, goes to the issuing bank –and if you lose the transaction due to a chargeback, that money becomes a waste.
4. Inventory. Inventory management expenses often represent about 20% of an average merchant’s losses due to chargebacks. 

Note: There are also instances when the cardholder will contact the merchant for a refund and also file a chargeback with their issuer. That results in a double refund chargeback. The merchant suffers two losses: the chargeback cost (plus fees) and the refund cost. 

If you’re still writing off chargebacks as a cost of doing business, you should rethink that – research shows that merchants lose at least $3 for every $1 charged back. 

That brings us to the next point.

How to Avoid Chargeback Fees

If you want to stop leaving your hard-earned money on the table due to chargeback fees, you should start by crafting commensurate strategies to avoid disputes.

The first step is to ensure your customer service and business practices are up to par. Be available and responsive to your prospects, make sure buyers know your service terms, and make your return processes clear. Also, don’t make it difficult for buyers to understand your billing descriptor. And if you sell subscription services, consider alerting subscribers before billing cycles.

The second step is to have industry-standard security protocols on your website to ensure you can pierce the corporate veil of buyers’ identity before processing orders. And blacklist scammers accordingly.

And then, you should equally leverage a chargeback automation tool like Chargeflow to ensure you can collect as much information as possible on each order to:

• Foretell high risk transactions that might end up in dispute and reject those;
• Pre-empt revenue losses when scammers force their way with fraudulent chargebacks;
• De-risk subscription services and increase your working capital;
• Generate the most compelling evidence for all chargeback types without lifting a finger.

It’s not rocket science. If you can tell when a chargeback can happen, you can avoid the dispute: No chargeback means no chargeback fee.

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This article was contributed by Tom-Chris Emewulu, Chargeflow’s Digital Evangelist. With 7+ years of digital marketing experience, he crafts compelling, data-driven SEO articles that put brands on page 1 of Google search. Forbes, DW, Business Insider, Businessss2Community, and many other publications have featured his works. You can find him on Social Media via @tomchrisemewulu.