2021 Chargeback Fees - The True Cost of Your Chargebacks

The True Cost of Chargebacks_Blog Image

Table of Contents

  1. What Is a Chargeback Fee?
  2. How Much Do Chargeback Fees Cost?
  3. Are Chargebacks the Same as Refunds?
  4. Why Do Merchants Get Chargeback Fees?
  5. Chargebacks Aren’t a Cost of Doing Business

There's a growing awareness among merchants of the true costs of chargebacks. Especially for those in e-commerce, chargebacks can pose a significant threat to a business's profitability if they're not managed properly. While many of the costs and consequences of chargebacks are difficult to get an accurate picture of, one of the more obvious financial impacts is that of chargeback fees.

Let's talk about what these fees are, how much they cost, and what merchants need to know about how these and other costs associated with chargebacks might be hurting their businesses.

What Is a Chargeback Fee?

A chargeback fee is an additional fee that a merchant is charged every time they receive a chargeback. This fee is charged by the merchant's acquirer and is intended to incentivize merchants to try to avoid chargebacks as much as possible.

How Much Do Chargeback Fees Cost?

Chargeback fees cost between $20 and $100, depending on the merchant's agreement with their acquirer. With various hidden costs factored in, however, companies often lose more than twice the transaction amount for each chargeback.

New call-to-action In addition to the transaction amount and the chargeback fee, chargebacks can also come with many expenses that merchants often don’t think about–or even know exist–until it’s too late:

  • Transaction fees – Every time a merchant processes a payment, their payment processor takes a cut. If that transaction results in a chargeback, that fee goes to waste.
  • Operational costs – There’s a lot that goes into processing an order, especially in e-commerce. There's picking, packing, and shipping it; managing the warehouse and inventory; arranging logistics and transportation; and countless other ways in which employee time is spent making sure customers get what they paid for. These costs typically amount to about 20% of merchant revenue–revenue that’s lost when a charge is reversed.
  • Marketing and acquisition costs – Most sales a merchant makes don't come for free. There's usually a lot of marketing and advertising dollars put into winning each customer's business, and many merchants pay full-time sales and marketing teams to do it around the clock. It's not uncommon for merchants to spend 30 to 40% of their revenue on marketing. Every time a hard-earned sale disappears due to a chargeback, the money spent to get that customer to make a purchase goes down the drain.

As an example, let’s see at what a chargeback on a $100 purchase might look like:

Transaction value $100
Transaction fee (4%) $4
Product costs (23%) $23
Marketing costs (35%) $35
Operational costs (20%) $20
Chargeback fee ($25) $25
TOTAL $207

In the end, the chargeback doesn’t just mean the loss of $100. In fact, once all the extra expenses and fees are added in, it easily equates to more than double the lost sale: over $200 lost on a $100 transaction.

And this is the norm.

If you, as the merchant, know you’ve met your obligations as the seller–you've provided the product, shipped it on time, and delivered on quality and customer care–you shouldn’t have to eat these expenses as a "cost of doing business." You have the right to fight back, defend your business and recover your financial losses.

Are Chargebacks the Same as Refunds?

Chargebacks aren't the same as refunds. A refund is provided by the merchant, whereas a chargeback is a forced reversal initiated by the issuing bank. Chargebacks also come with additional fees and consequences that refunds don't have.

When a customer has a problem, the merchant might give them a full or partial refund, often in exchange for returning the product. The merchant can initiate a refund through their own system, and won't be charged the kind of fee that comes with a chargeback.

When a customer disputes a charge with their bank and initiates a chargeback, the merchant is hit with these fees before they even know what's going on.

In many cases, the merchant would have been willing to refund the customer if they had been contacted, but the customer for whatever reason never attempted to do so.

Why Do Merchants Get Chargeback Fees?

Chargeback fees exist because managing the chargeback process costs time and money. Plus, charging a fee gives merchants a significant incentive to try to identify and fix the problems customers might be having that are leading to chargebacks.

Download your copy of An Introductory Guide to E-Commerce Fraud Prevention When an issuing bank handles a chargeback, they have to refund the cardholder's money out of their own funds. This is why the funds are pulled from your acquiring bank: to recoup the issuing bank.

In the meantime, employees at the banks, the card network, and elsewhere have gotten involved in managing this process, which costs money. Between managing a chargeback and handling money, customers, and potential issues with security, the bank passes off some of that cost to the merchant. Additionally, fees can be used to discourage chargebacks in lieu of refunds.

Chargebacks Aren’t a Cost of Doing Business

Despite what many merchants believe, chargebacks aren’t just a cost of doing business. They come with serious and significant financial costs–often more than twice the sale price–and they pose a threat to a merchant's reputation, their bottom line, and their business as a whole.

Fighting them–and better yet, preventing them–needs to be a high priority for all merchants, no matter what industry they’re in.

An important part of preventing and fighting chargebacks is understanding the causes behind them. What reason codes are coming back with each chargeback? What underlying problems do they point to in your sales, marketing, operations, or back offices? What can be done to prevent these issues from occurring in the first place?

To start understanding what’s causing your chargebacks and how you can begin to fight back, check out the Chargebacks 101 eGuide.

Thanks for following the Chargeback Gurus blog. Feel free to submit topic suggestions, questions or requests for advice to: win@chargebackgurus.com Get the guide, Chargebacks 101: Understanding Chargebacks & Their Root Causes