Merchants are becoming more aware of the true cost of chargebacks. E-commerce businesses and other retailers can find their profitability in serious peril if they let an unmanaged chargeback problem fester for too long. It can be challenging to put an accurate price on the labor and overhead expenses you lose out on with each chargeback, but one big part of the final cost is easy to quantify: the chargeback fees.
As if chargebacks weren’t bad enough on their own, every card network tacks additional fees on payment disputes as they work their way through the system. Let’s discuss what these fees are, how much they cost, and what merchants need to know about the financial damage chargeback fees can cause.
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:
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.
When a customer has a complaint, the merchant might give them a full or partial refund, usually in exchange for returning the product. The merchant can initiate a refund through their own system, crediting the customer for the exact purchase price without any extra fees or expenses.
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 dispute scenarios, 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.
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 reimburse the issuing bank.
As the chargeback process is playing out, employees at the banks, card network, and other payment service providers are busy making it all happen, securely moving funds from account to account and handling all the necessary communication and record-keeping. These activities all incur costs, which some of which are passed off to the merchant in the form of chargeback fees.
When a lengthy dispute reaches the arbitration stage, even more fees get charged, because at this point representatives from the card network have to get directly involved. Instead of falling entirely on the merchant, arbitration fees are levied against the losing party in the dispute. However, they can be very expensive, averaging about $500.
Each card network sets specific chargeback ratio thresholds that merchants must stay below to maintain compliance. For Visa, this ratio is 0.9%, while Mastercard sets its threshold at 1.5%. Exceeding these thresholds can lead to additional chargeback fees, fines, or even the termination of your merchant account.
Merchants with consistently high chargeback ratios may find themselves placed in a dispute monitoring program by their acquiring bank or payment processor. These programs, such as Visa's Dispute Monitoring Program (VDMP) or Mastercard's Excessive Chargeback Program (ECP), are designed to incentivize merchants to address and reduce chargeback rates.
Failure to lower chargeback ratios within the program's designated time frame can lead to even more severe consequences, including fines, account termination, and placement on the MATCH list.
When merchants are placed in a dispute monitoring program, they are often subjected to additional chargeback fees on top of the standard charges. These extra fees can be significant, ranging from $50 to $150 per chargeback, depending on the card network and the severity of the merchant's chargeback ratio.
These penalties are intended to incentivize merchants to quickly address the issues leading to disputes. The longer a merchant remains in the program without reducing their chargeback rate, the higher these fees may become, further impacting profitability.
Payment processors and acquiring banks often view merchants with high chargeback ratios as risky. As a result, they may impose higher transaction fees to offset the risk. This can significantly increase operational costs, further eroding profit margins.
In extreme cases, a payment processor or acquiring bank may decide to terminate a merchant account altogether. Without a merchant account, the business loses the ability to process card payments.
The Merchant Alert to Control High-Risk (MATCH) list, maintained by Mastercard, is a database of merchants who have had their accounts terminated due to excessive chargebacks or other violations. Being placed on this list can make it nearly impossible for a business to obtain a new merchant account with any mainstream processor. Merchants must instead seek out high-risk processors that charge significantly higher fees.
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.