The True Cost of Transaction Disputes: Chargeback Fees
Merchants who accept credit cards as a method of payment have accepted chargebacks as part of the cost of doing business. However, as many merchants are discovering, the chargeback is not only an expensive transaction, it is putting merchants and their business in jeopardy.
What is a chargeback?
Put simply, a chargeback is a debit to a merchant’s bank account that can occur as a result of customer fraud – both criminal and friendly – or merchant error. In most cases, the merchant is unaware of the chargeback until the debit appears on their bank statement or they notice an unexpected drop in their bank balance. Instigated at either the issuing bank’s request or the customer’s, a merchant typically receives no notice of the reversal of a transaction and is left with the loss of both revenue and products.
Chargebacks are cataloged by the credit card networks based on the claim of the customer. These categories can vary from ‘Item not received’ to ‘No cardholder authorization’. One of the most common types of chargebacks filed is classified as ‘Not as described’.
The ‘Not as described’ chargeback can cover several scenarios claimed by a customer. Items delivered that are different than what was described on a merchant’s website or during a verbal interaction would be considered ‘not as described’. Similarly, items delivered damaged or incomplete may be classified as ‘not as described’ for chargeback purposes.
What is a chargeback fee?
The chargeback fee is a fee assessed by the acquiring bank for each chargeback. Originally intended to cover the administrative costs of processing a chargeback, many merchants have begun to feel as though the chargeback fee is simply another way for banks to make money. While the fee may seem nominal (individual chargeback fees can vary from $20 – $50), merchants who experience a high number of chargebacks may find that they are quickly losing a significant amount of money.
Chargeback fees are determined by several variables: the type of products or services offered by the merchant, the specifics of the merchant agreement and the fee schedule of the acquiring bank. In addition, merchants are evaluated for their chargeback risk-level and high-risk merchants are subject to a higher per-chargeback fee.
What is the most effective way of handling chargebacks?
Merchants who simply accept the chargeback as the cost of doing business are putting themselves at risk for increasing loss of revenue, as well as putting their ability to accept credit cards in jeopardy. The solution to handling chargebacks is to develop an approach that is both defensive and offensive.
By disputing incorrectly filed chargebacks, merchants establish their reputation as a company that is both legitimate and honest. Banks, pre-disposed to siding with consumers, will begin to recognize the properly handled business practices that result in a successful chargeback dispute and will be less inclined to grant future chargebacks without substantial proof.
Unfortunately, however, even after a successful dispute, the chargeback fee is non-refundable. The most effective means of avoiding the chargeback fee is by avoiding a chargeback altogether.
Is it possible to avoid chargebacks?
The majority of chargebacks can be avoided simply by adhering to best practices for business.
- Eliminating merchant errors is an effective way of preventing chargebacks.
- Preventing affiliate fraud through a systematic review of affiliates and their business practices reduces the resulting chargebacks.
- Utilizing an alert system to notify merchants of a pending chargeback is an effective prevention technique, allowing a merchant to issue a refund and avoid the additional expense of the chargeback fee.
Far from being a simple bank withdrawal, the merchant affected by chargebacks and the subsequent chargeback fee can suffer long-term financial setbacks.
By establishing and adhering to best business standards in regards to credit card processing, merchants can prevent a majority of the chargebacks that they may be assessed, thereby reducing costs, risks, and liabilities.