What Is a Chargeback Fee? Causes, Risks, & Prevention (2023)

Chargebacks are painful and expensive. Billions of dollars are lost in chargebacks by businesses every year, and in 2017, the average dollar in chargebacks cost merchants $2.40. That means for $500 in chargebacks, you could be paying up to $1,200 in fees!

Now expand that number over every chargeback and multiple years in business, and it’s easy to see why this is a big issue for many businesses.

Chargeback costs include:

  1. The immediate revenue of the lost sale.
  2. The possibility of forfeited merchandise.
  3. The non-refundable chargeback fee charged by your acquiring bank.

Your bank charges these fees due to the administrative costs of reversing the transaction. You also risk your business reputation and ability to accept credit card payments when incurring chargeback fees. If you rack up a high amount in a short period of time, credit card networks may temporarily block you or your bank may restrict certain financial procedures.

Chargebacks are a potentially crippling cost for merchants, and learning how to reduce and fight back against chargebacks is essential for any growing business.

What is a chargeback fee?

A chargeback occurs when a customer disputes a transaction with a merchant due to an error in service or an attempt at fraud, and a chargeback fee is what the bank charges the merchant for processing the claim.

Chargebacks were put into place to increase consumer confidence, but this comes at the expense of merchants like you. You bear the burden of fighting back and proving that a chargeback is either fraudulent or not merited. This means you have to have an efficient and thorough system set in place to fight back against chargebacks, otherwise, you will just continue to eat fees and damage your business.

And even if you succeed in proving that a chargeback is fraud (either criminal or friendly), you may recover the sale revenue you lost but you’ll still be on the hook for your bank’s administrative chargeback fees.

How much you’re actually charged depends on a few different parties, namely your bank and the processor involved. Their decisions are based on your service, product, past history, and industry.

As a loose idea, chargeback fees are normally between $20-$50 per case, but it’s not out of the ordinary for them to be higher than that range.

And when you add the cost of shipping, lost revenue, and merchandise into that equation, you’re looking at a pretty nasty combination.

Common causes of chargebacks

  • A product isn’t as described or the customer got confused.
  • The wrong product was shipped.
  • The product never arrived.
  • Accidental double billing or repeat transactions.
  • Defective merchandise.
  • Not recognizing the transaction name on a bank statement. This often occurs when a system is slow and delivers a transaction receipt much later than when it occurred.
  • Buyer’s remorse.
  • A customer didn’t understand what they were buying.
  • The wrong cardholder account was charged.
  • Erroneous recurring transaction (a customer had a subscription and asked a merchant to cancel it but it didn’t happen).
  • A transaction was conducted with a stolen card or in other instances of criminal fraud.
  • Partners with a shared account disagree about a purchase.

Risks of getting too many chargebacks

As mentioned, if you incur higher than the average number of chargebacks, this will affect your reputation and cause acquiring banks to monitor you and sometimes even put you into a chargeback monitoring program.

While there is no standard, if your number of chargebacks approaches 1% of total transactions, you will be at risk for more serious repercussions.

This “program” is essentially a recurring fee (penalty) that you are paying for being high risk, among other fees that include being charged to have your chargeback mitigation plan monitored. In other words, they charge you for having to check that you are developing systems to reduce the number of chargebacks you’re incurring.

If all else fails and you still are increasing the number of chargebacks your business is receiving, an acquiring bank may freeze your account or just charge super high processing fees for having to deal with you.

And if it all comes crashing down, you’ll be placed on a “terminated merchant list”, essentially damning any future of your business to work with an acquiring bank.

How to reduce chargebacks

So how do you fight chargebacks? Or better yet, since some are inevitable, how do you reduce the number of chargebacks you incur?

Your best bet is to tackle them before they become an issue. You want to stop them before they become chargebacks, essentially.

Here are a few ways to help mitigate the damage, and remember to track your numbers to see if you have tangible decreases or not! It’s always helpful to know which efforts are having the biggest impact, and if you make a chance and the impact is negligible, you can decide to readjust that strategy or scrap it altogether.

1. Deliver recognizable transactions

Make sure your POS delivers easily recognizable payment information.

If you run a restaurant called Smiling Elephant, your transaction should show up something like this on a statement:

SMILINGELEPHANT – $20.31

If a customer logs on to their account and sees something like, “394039 – $20.31”, then they have a higher chance of not recognizing it and filing a chargeback.

2. Offer refunds before the chargeback is filed

Some acquiring and issuing banks will notify a merchant when a customer is considering filing a chargeback either through an email or alert system. If you can contact and refund the customer before they actually file, then you save yourself from paying those fees.

3. Make sure you support EMV

EMV (chip) is kind of old news at this point, and if you don’t have them by now you will almost certainly lose all of your chargeback cases — even the ones that are obviously fraudulent.

Upgrading to EMV used to be a total pain. It meant you had to schedule downtime and pay a bunch of upfront expenses, but now that process is easier than ever with custom integrations and more varied POS compatibility.

If you haven’t upgraded to support chips yet, that should be your first step.

4. Establish a clear and simple return policy

Don’t make it difficult for a customer who is honestly and rightly disappointed to get a refund or return an item. If your process is slow and rigid, it is more likely for a customer to just opt out of your process and go to directly filing a chargeback.

5. Develop systems to catch and identify chargeback fraud

While some claims are legitimate, other chargebacks can be a customer trying to take advantage of your business. These are most common in new customers, extremely high ticket orders, multiple orders with the same card, international orders, etc. Using a POS, processor, and online gateway that work together to identify such cases is an important component of your fight against chargebacks.

Learn more about chargeback fraud and ways to prevent it.

6. Work with an MSP that provides chargeback assistance

Smart merchant services businesses have the best processors, gateways, systems, software, and chargeback assistance to keep you on track. You should try to find a MSP who has your best interests in mind and one whom you can rely on for establishing the aforementioned processes and defense mechanisms against chargeback fees.

Here’s our chargeback program overview, for example:

We deliver:

  • Consistent chargeback reports.
  • A dedicated team member who fights for your business every day.
  • Review of policy and practice effectiveness.
  • Complete handling of chargeback documentation.
  • Fraud prevention and security.
  • Educational resources.
  • Support and representation when disputing chargebacks.
  • Chargeback evaluation and advice.
  • Preparation of evidence.
  • Submission and follow-up.
  • Custom solution for your business.

Learn more about how we tackle chargebacks so you can focus on growing your business.

7. Consider chargeback insurance

For some businesses in high-chargeback industries such as clothing or digital content, it may be worth getting chargeback insurance for unexpected spikes in fees. We recommend exhausting all other methods first, though! And in order to get a decent rate/deductible, you’ll need to have good proof of fighting chargebacks anyway.

8. Have effective transaction verification systems in place

This includes Address Verification Systems, credit card codes (CVV), security questions, etc. These tools are typically associated with a PCI-compliant checkout process – particularly in eCommerce cases.

Address Verification System checks the house and zip code numbers on the transaction against what banks have to reduce fraud. Many companies conducting business online also require customers to sign back in again or verify their account before starting their session/making a purchase.

You should also deliver instant order confirmation emails. This way the customer can be reminded of what they purchased, when it should be delivered, and/or how to access their new product.

Most online gateways or POS systems will come with some of these systems already prepared for you, but they may require some tweaking to be more friendly. Whether it’s changing the design to display pertinent information such as transaction amount and expected delivery dates or being more restrictive on the credit card formatting rules, observe the most common exploitations or mistakes made by customers and adjust accordingly.

9. Have automatic flags for unusual transaction amounts

Set limits on the number of items and transaction values depending on your typical purchase order. If your top buyers only purchase $50 per checkout usually, set an alert for transactions above $500 and require a signature/additional verification before allowing them to finish their order.

And if one of these purchases is flagged, have an automatic email using Zapier or your POS fire — that way someone with your team can call immediately to hash out any specifics / ensure the order is legitimate.

10. Monitor credit card notification codes

All chargebacks come with a specific code attached.

Take a look at all of your chargeback codes and the transactions you think are fraudulent, and then see if there’s something that could have prevented that charge from happening without affecting the checkout experience for your customers.

Mitigating chargeback fees

Every day you don’t work on mitigating your chargeback fees, the more damage you are doing to your business. Chargeback fees are steadily rising year over year, and there’s no better time than now to start implementing these tips and best practices for reducing chargeback fees.

At Tidal, we like working with smart, passionate entrepreneurs and people who understand the value of partnership. We provide the best in merchant services and chargeback assistance to businesses who are looking to grow intelligently.

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