Chargeback Fees and My Bottom Line
Table of Contents
- Where do chargeback fees come from?
- What are chargeback arbitration fees?
- What chargeback fees can be avoided?
- How to prevent chargeback fees
- What is a chargeback fee on my bank statement?
- Can you go to jail for chargebacks?
- Is a chargeback a refund?
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 come 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, once you factor in related costs such as customer service and acquisition, the typical chargeback will end up costing a merchant at least twice the amount of the transaction in dispute.
Although the costs and consequences of chargebacks are many, the most obvious one is chargeback fees. While the cost of an individual fee may be small, once they start adding up they can be very painful for merchants, especially smaller ones. Plus, chargeback fees still apply even if you fight and win the dispute. For this reason, it’s not sufficient to have a strategy for fighting (and beating) chargebacks alone. To protect your revenue from chargeback fees, it's crucial to make every effort to prevent chargebacks from happening in the first place.
Where do chargeback fees come from?
In many cases, a single chargeback can result in several fees on its own, especially if it's not handled correctly. In order to decide how much revenue to put toward chargeback prevention and how to best handle chargebacks to prevent unnecessary costs, merchants should be familiar with all the various fees that can result from the chargeback process.
Payment processors typically charge a transaction fee every time they make 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 are deducted from your merchant account automatically by your bank as soon as the chargeback is filed. Both your acquiring bank and payment processor have a hand in setting these fees.
The amount of the fee can vary depending on the provider, the type of business, and the merchant's history and risk assessment, but fees ranging anywhere from $15 - $45 are not unusual.
If the merchant accepts the chargeback, there will be no additional fees after that point. however, if instead the merchant ignores the chargeback or fails to respond to it by the deadline, they may be assessed an additional non-response fee in addition to having the chargeback automatically upheld. If the merchant does decide to represent the charge, some payment processors may charge an additional fee, although this is far from universal.
What are chargeback arbitration fees?
Taking a chargeback to the card network for arbitration can be very costly. For chargebacks involving high-value transactions (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 recommends merchants pursue arbitration only if they have all the right compelling evidence and have lost a high ticket transaction. In most cases, card networks will have similar standards to banks as far as what evidence they find compelling, so a chargeback that is upheld by the issuer will often be upheld by the card network as well. Thus, it's best to take a chargeback to arbitration only if you believe the issuer made a clear mistake in evaluating the evidence you presented.
In rare cases, you may wish to file for arbitration because you've discovered additional compelling evidence that you believe will tip the scales in your favor. However, depending on the card network, it may be possible to submit this new evidence to the issuer for consideration rather than going immediately to arbitration.
What chargeback fees can be avoided?
Some of the potential fees involved in the chargeback process can be avoided. We've already mentioned non-response fees, which can be avoided simply by responding to chargebacks before the deadline.
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. Since transaction fees aren't refunded when there's a chargeback, these increased fees can make chargeback even more painful.
Merchants who sign up for chargeback monitoring services may also 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. While these fees may be worth the cost for many merchants, they provide even more incentive to avoid chargebacks as much as possible.
How to prevent chargeback fees
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.
There are many ways to prevent chargebacks, and our blog is filled with articles that go into more detail on the subject. However, we'll outline some basic tips here as well.
To prevent fraudulent purchases that could lead to a chargeback, your retail operation needs to stop fraudsters from using credit cards that aren’t theirs. This means implementing best practices like:
- Using CVV verification for purchases where a card is present.
- Implementing Address Verification Services (AVS)
- Using additional security tools like 3-D Secure 2.0
For friendly fraud, you should always strive to make it harder for fraudsters to pull a fast one. Part of that task includes following best practices for your business, including:
- 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.
- Use easy-to-understand descriptors for purchases so that cardholders know where their charges are coming from.
- Clear policies for shipping, customer services, and refunds. This includes regular and reliable communication about the state of any customer service issue, including refunds that are being processed.
- Use a chargeback prevention alert system to stop chargebacks before they occur, and to give your business time to respond to customer service issues without involving the banks.
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 associated fees should know 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 shouldn't 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.