Chargeback Fees & My Bottom Line
One of the most important things to remember about chargebacks is that whenever you’re hit with one, there’s far more than just the original transaction amount at stake.
While the cardholder will only get their purchase price returned to them in the event of an upheld chargeback, the banks and other companies involved in processing that transaction will make sure that the time and labor they spent on the chargeback is recompensed. What does that mean for merchants?
Lots and lots of fees coming along for the ride any time the chargeback process starts rolling.
The true cost of a chargeback can vary depending on how many phases of the chargeback process it goes through, which banks and payment processors are involved, and who is ultimately found to be at fault. On average, though, the typical chargeback will end up costing a merchant at least twice the amount of the transaction in dispute.
On top of all the other negative aspects of chargebacks, the fees they accrue can be very painful for merchants, especially smaller ones. For this reason, it’s not sufficient to have a viable strategy for fighting (and beating) chargebacks. To protect your revenues from chargeback fees, win or lose, it is crucial to make every prevent chargebacks from happening in the first place.
Where Do Chargeback Fees Come From?
How can one little chargeback rack up so many fees? It actually starts before the chargeback can even be filed. Payment processors typically charge a transaction fee every time they take a payment, which is often about 2.5 - 3% of the transaction amount. This is the price you pay for the convenience of being able to accept credit card payments, but when a transaction results in a chargeback, you’re out the amount of the transaction fee with nothing to show for it.
Next, there are the fees that automatically and immediately get deducted from your merchant account as soon as the chargeback is filed. Both your acquiring bank and payment processor have a hand in setting these fees. They can vary by provider, business type, and other circumstances, but anywhere from $15 - $45 would not be unusual.
If the chargeback is not contested, there won’t be any more fees, but some payment processors are known to charge an additional fee for representment as well.
Taking a chargeback to the card networks for arbitration can be very costly. For merchants with high dollar items (more than $500.00), it might be worth it, but make sure you know what you’re getting into.
Mastercard charges a $150 filing fee and a $250 administration fee for arbitration. The losing party will ultimately be held responsible, but you have to put the fee up to initiate the arbitration process. If you have to resubmit a case due to filing errors, you’ll have to pay the filing fee a second time. There’s also an additional $150 withdrawal fee if you initiate arbitration but decide not to pursue the case further, and you’ll still have to cover the initial fees. Guess what happens if you break one of Mastercard’s arbitration rules while the case is open? You get charged a $100 technical fee for each violation, win or lose.
If you lose in arbitration, you can make one more appeal to Mastercard—if you pay another $500 fee.
Visa’s rules are less set in stone than Mastercard’s when it comes to arbitration fees. While they used to split liability in some cases, Visa charges a $500 arbitration fee and the losing party will be responsible for paying this fee. Chargeback Gurus recommend merchants to go for arbitration if they have all the right compelling evidence and have lost a high ticket transaction.
Some fees are avoidable. Merchants who are forced to sign up with so-called “high risk” payment processors often have to pay increased transaction fees, which is why it is extremely important to keep your chargeback ratio below 1%. If your ratio is too high, the reputable, reasonably-priced payment processors may not be willing to do business with you.
Merchants who sign up for chargeback monitoring services may find themselves racking up significant fees, as these service providers typically charge a fee for every alert they send to the merchant, regardless of whether the merchant finds it actionable or not.
Avoiding Chargeback Fees the Smart Way
Obviously, the best way to avoid chargeback fees is to avoid chargebacks altogether. Easier said than done, but every merchant should be doing their best to keep their chargeback ratio as low as possible.
Fortunately, the best practices for avoiding chargebacks make plenty of good business sense on their own:
- Be honest in your marketing so that customers don’t feel misled when they purchase your products.
- Provide excellent, attentive customer service so you can be responsive to customer issues before they turn into chargebacks.
- Use up-to-date ecommerce software and fraud prevention tools to stop fraudsters from using stolen cards to make purchases at your store.
There’s no good reason for any merchant to resist implementing any of these common sense practices! Of course, even the most scrupulous merchants can still get hit with chargebacks—some industries are more prone to fraud and abuse than others, and fraud prevention tools, while effective, are not foolproof.
Merchants who are truly struggling with a high volume of chargebacks and their attendant fees should be aware that chargeback firms with sufficient knowledge and experience can help them implement preventative measures, tailored to their business, that can dramatically reduce the impact of chargeback fees.
Chargebacks simply cannot just be accepted as an unavoidable part of doing business. Merchants who make no effort to avoid them may quickly find themselves overwhelmed with lost revenue, expensive fees, and a dangerously rising chargeback ratio. It isn’t enough to fight all chargebacks after the fact; merchants begin to suffer harm from chargebacks as soon as they are filed.
An intelligent and field-tested chargeback prevention strategy is the best defense merchants have against fees and every other peril of chargebacks. Merchants who don’t have an anti-chargeback strategy should make it their top priority to develop and implement one right away.