Chargebacks are a growing concern among merchants. With more people relying on credit and debit cards, more customers have the opportunity to seek a chargeback. Basically, the card holder will ask their issuing bank to reverse a specific charge, due to fraud or dissatisfaction. And all too often, the bank is willing to do so, leaving the merchant to pick up the tab. So how much might merchants get dinged? In this article, we’ll cover the true costs of chargebacks.
Often, the chargeback is for the entire charge. If someone spent $50 on your online website, they may push to get all $50 back. In some cases, banks will issue a partial chargeback (we’ll cover this later).
The reversed charge, however, isn’t the only cost associated with chargebacks. Issuing banks may also hit you with a chargeback fee, which typically costs between $20 and $100. Even if a chargeback is for a seemingly small amount, say $10, when the bank hits you with the fees, the costs can quickly explode.
Keep in mind, fees may vary from bank to bank and even charge to charge. As you accumulate more chargebacks, banks may opt to increase the fees they charge you.
On top of that, costs can add up outside of the chargebacks themselves. Some payment processors will increase your processing fees if you accumulate too many charges. Or they may make you keep more money in escrow. Some payment processors may simply decline to work with you as well.
You may also have to pay for lost inventory costs as well as the labor put into processing orders, marketing, and combating the chargebacks themselves. Fortunately, with the latter, you can use a chargeback management platform to reduce time and money spent on fighting chargebacks while potentially improving outcomes.
We’re going to take a look at how much chargebacks cost. But first, it may help to grasp the big picture here and to understand the broad data regarding chargebacks.
Chargebacks Are Costing Merchants Billions in Total
Research has found that the average chargeback ratio across all industries is .60 percent. This means that for every two hundred or so transactions you can expect at least one chargeback.
It’s estimated that businesses lose between $30 to $40 billion per year due to chargebacks. And by considering the full “butterfly” effect of chargebacks, they may generate an economic cost in excess of $150 billion. To put that into perspective, department store Macy’s and popular clothing brand H&M pulled in roughly $25 billion and $20 billion in revenue respectively.
True Chargebacks Costs Start With the Cost of the Order
As we’ve already learned, chargebacks cost companies billions of dollars per year. You might think that chargebacks won’t hit you too hard. Maybe you’re a small company with a loyal customer base, and chargebacks haven’t been an issue so far. Or maybe you suffer the occasional chargeback, but it’s not really a big deal, just a bit of lost revenue.
Problem is, chargebacks can quickly add up, and if you don’t try to prevent and mitigate chargebacks, they could quickly emerge as a major threat.
First, a chargeback could cost you the entire revenue of a sale, including the price of the goods and shipping costs. If a customer requests a chargeback and their bank approves it, you may lose all of the revenue charged during the sale. Whether that sale was $10, $100, or $100,000, it doesn’t matter, you may be on the hook.
That said, you may not always be charged the full amount. In some cases, a customer may request and receive a partial chargeback. Let’s say a customer orders four sweaters at $50 a piece. Only three arrive, so the customer asks for a chargeback for $50 (plus any shipping or other related costs refunded).
You’ll Often Lose Inventory and Time Vested as Well
Already, chargebacks can obviously cost your business quite a bit. Losing 100 percent of the revenue from a sale is a painful financial pinch. Businesses often have to also suck up the labor and inventory costs associated with a chargeback.
Let’s say someone orders a pair of shoes for $100 (all fees included) and let’s assume these shoes cost you, the merchant $50. You ship the shoes and then a few weeks later, you get hit with a chargeback. You’re immediately at risk of losing $100 but the losses don’t stop there.
You may also lose the $50 you spent acquiring those shoes. If the shoes were lost or stolen, you may never see them again. If the customer received the goods but then defrauded you by securing a chargeback, they not only got their refund but they stole your inventory.
On top of all of the above, you’ll also lose the money spent on labor for shipping and other costs. You may lose money spent on packaging, as well as processing, and whatever else.
Consider that many ads today are “Pay Per Click” (PPC). If the customer above found your shoes via an ad, you may have paid say $7 for their click and ultimate purchase. When you suffer a chargeback, you also have to eat those wasted marketing costs.
And Then, There Are the Dreaded Chargeback Fees
As you can see, chargeback costs add up quickly. It starts with all the revenue from the sale, but then you tack on inventory, marketing, and other costs. A lost hundred dollar sale can cost a lot more than a hundred. And the costs keep coming. Even after losing all of the above, you’ll also have to pay a chargeback fee.
In fact, even if you win the chargeback dispute, you still have to pay the chargeback fee. In other words, even if the customer is ultimately denied the chargeback, you, the merchant, still have to pay a chargeback fee.
Let’s say a customer asks for a $10 chargeback. Using a chargeback management platform, you successfully dispute the charge and the issuing bank sides with you. The customer’s $10 chargeback is denied.
But then, you get hit with a $20 dollar chargeback fee. In this case the fee actually cost more than the disputed amount ($10). To be clear, if you had lost the dispute, you’d have been charged $30 ($20 chargeback fee + $10 returned to customer). It’s still better to win the representment process, but it’s best to avoid chargebacks in the first place.
Further, $20 is the lowest fee you’ll typically see for a chargeback. Fees can range up to $100, depending on your agreement with your acquiring bank. In other words, that $10 chargeback could end up costing you $110 once fees are added on. Likewise, a $50 dollar chargeback could cost you between $70 to $150, plus lost inventory and other wasted resources (including labor.)
Sounds horrible, right? But we’re not even done yet.
A High Chargeback Ratio Can Cost Even More in the Long Run
In this article, we focused on the costs of individual chargebacks. However, individual chargebacks tell only part of the story. Unfortunately, as you’re dinged with chargebacks, your chargeback ratio will increase. Above certain thresholds, you may be hit with higher fees and other costs.
With Visa, for example, if you have a chargeback ratio between .9 percent and 1.8 percent, you’ll be placed in their Dispute Monitory Program. With Mastercard, if you experience a chargeback ratio of 1 to 1.5 percent, you’ll be designated a chargeback monitored merchant. Exceed 1.5 percent and you’ll be classified as an excessive chargeback merchant.
Fees increase if you enter these programs. For example, with the Visa Dispute Monitory Program, your fee per chargeback will increase to $50. You may also have to pay up to $25,000 in review fees at the end of the enforcement period.
The merchant and the acquiring bank will also have to present a plan to the payment processor to reduce chargebacks. This takes time on your end, and your acquiring bank as well. And all the while, fees and penalties may continue to pile up.
So what’s the true cost of chargebacks? A lot more than many business owners think.
Besides paying fees, your business may lose inventory, labor hours, associated operating and marketing costs, and the revenue from the sale itself.
Fortunately, by using chargeback management platforms and services, you may reduce the number of chargebacks you’re hit with. You might also successfully dispute more chargebacks. And with a top-notch dispute management platform, you can also reduce the time and labor spent contesting individual chargebacks. You can also track deadlines and other factors more easily.
Don’t let chargebacks sink your company. Instead, protect your business and ambitions with a thoughtful approach and the right tools.