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How Much Are Chargebacks Really Costing Merchants?

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Payment disputes, also known as chargebacks, are a painful reality of being a merchant who accepts credit cards. They are when the cardholder’s issuing bank reverses payment on a transaction that already occurred after the customer claimed they did not authorize the purchase or did not receive the goods or services they expected.

While merchants can argue (through their acquirer or payment service provider) with the issuer regarding the merit of a given chargeback, disputes always result in a chargeback fee that can range anywhere from $15 to $50

Chargeback fees among PSPs popular with BigCommerce users vary from $20 for AmazonPay to $20 for PayPal and $15 for Stripe. Usually, depending on the payment service provider used, these merchant chargeback fees are non-refundable even if the merchant wins the case and the sale is deemed legitimate.

If a merchant receives too many chargebacks as a share of total transactions, they can even lose their right to process credit card transactions. Merchants who are denied credit card processing rights by one acquirer or PSP are then placed into a terminated merchant file (TMF) and blacklisted from receiving similar services elsewhere.

However, beyond the immediate cost of chargeback fees, there are other direct and indirect costs that merchants must account for when dealing with chargebacks. 

Things like marketing acquisition costs, shipping costs, operational expenses and reputation damage all add up to a much higher impact than just lost cost of goods sold and tacked on chargeback fees.

Tallying Lost Customer Acquisition Costs

As an ecommerce retailer, you must invest a lot of effort into online customer acquisition. 

Generating the prospects and leads that lead to closed customers should cost between 7% – 8% for small businesses that earn less than $5 million in revenue, according to the U.S. Small Business Administration. This covers any marketing activity such as event marketing, social media campaigns and search engine optimization efforts. 

For larger enterprises, there is no clear rule of thumb, but there are published lists of average customer acquisitions costs per industry. CAC takes all marketing and sales costs, including salaries, and divides them by the numbers of leads acquired.

The name of the game is to have a gross lifetime margin for the customer well above the customer acquisition cost. That means the gross profit you make off a customer while they continue to be your client should exceed the cost of attracting them.

However, with a chargeback, all the effort applied to winning high-priority business is for naught. Not only do the sale earnings disappear and marketing metrics become convoluted, but all the business resources put into that particular sale are also considered wasted.

In addition, a chargeback dispute will lead to churn, as customer retention falls in the event of a chargeback. The lifetime sales value of a single client now disappears, as that consumer would have made more purchases if the dispute did not occur (50% of business derives from repeat sales). 

For sales teams who invest time and effort into customer acquisition, the losses from a chargeback are enormous. 

Shipping Costs Not Covered 

Delivery costs are an expected expense for most merchants. Even though logistics cut into earned revenues, shipping is a fundamental contributing factor to the rapid growth of ecommerce.

Free shipping has become a standard expectation with online purchases, with 66% of shoppers now demanding it on every purchase and 73% of survey respondents saying they are more likely to buy an item if it has no shipping costs at all. 

Most online retailers have adapted to such consumer demands because free shipping can result in a 20% increase in conversion rates.

The problem is that all those shipping costs become out-of-pocket expenses in the event of a chargeback. You become responsible for any paid delivery fees attributed to a product that added no revenue to your company. You will even have to cover return shipping if the chargeback happened because of incorrect delivery, a wrong item shipment or a product that did not meet specifics on quality.

Getting Nickeled and Dimed on Processing Fees

Every merchant knows about credit card fees. Financial institutions take a cut of any transaction as the price for service, as they facilitate all exchanges between a credit card, your digital or physical payment system, your merchant account and any banks. 

The typical processing fee ranges between 1.3% to 3.5%, but there can be additional assessment fees or individual charges taken by payment processors. It all adds up. 

Normally, a few percentage points would be a price worth paying for the much larger potential pool of potential customers who want to pay using their credit and debit cards (and basically anything besides cash). The problem arises once again with chargebacks.

If a customer repudiates a credit card charge, you have no recourse for the processing fees already paid. When you lose a dispute, you are out the standard processing expense and the sale that was meant to cover the expense. 

As a result, these small fees become a noticeable drain on your total revenues. 

This issue grows if you deal with a large volume of chargebacks. If you are deemed “high-risk” to a credit card company because of repeat disputes, they may charge higher fees to process your transactions, putting additional strain on your bottom line. 

Human Resource Drain

With every chargeback dispute, you must include the overall costs paid in the form of labor. Whether it is your own individual time or the work of several teams in large-scale enterprises, extensive human resource costs apply to each sales conversion. 

That effort is lost if a chargeback ensues. In its place, an additional process is created, the chargeback process, that requires additional labor on the part of staff.

Labor expenses can sneak into the true cost of a chargeback in other ways as well. Think of customer service reps, who stay busy dealing with chargeback inquiries and rebuttals. Regular service for priority customers can fall apart as support teams deal with chargeback issues rather than building relationships with clients or working on tasks that deliver better returns. 

It is an opportunity cost you must pay as “wasted labor” on customer disputes impedes your sales momentum. 

To help increase their win rate, some merchants have started to develop entire teams dedicated to fighting chargebacks. But chargeback resolution efforts require an investment in additional human resources, including hiring and training.  

For example, your chargebacks experts will need to know how to gather evidence, collect customer interaction data, put together arbitration files and submit paperwork to banks or credit card companies who need your data to eliminate instances of chargeback fraud

Be sure to track the total time spent by your workforce teams on chargeback issues, as that cost will also increase the true price of a chargeback. Sometimes it will be more cost-effective for you to eat the cost of low-value chargeback than spend the resources in fighting it.

Additional Operational Expenses

One way to improve your efficiency in handling chargebacks is to use a chargeback tool.  However, you must consider this software as a new, additional operational expense that you need to include in the cost of each chargeback.  

Dispute resolution tools typically don’t just require the payment of monthly fees. They also require integration with your other business systems to work properly. This dev time needs to be factored into the cost of dealing with the chargeback as well. 

 At some point, you may decide it is more cost-effective to outsource your entire chargeback operation than handle it with an internal or third-party designed tool.

Taking a Hit to Your Reputation

Last in terms of hidden costs, and perhaps most important, is the negative effect chargebacks have on your brand’s reputation. All merchants rely on numerous stakeholders and services to operate, and if those relationships break down and fall apart due to extended dispute claims, it can create a negative effect on the long-term profitability of your business.

Chargebacks operate as a direct threat to the relationship you have with your customers. Disputes pit you against your own clientele, and no matter which party the financial institution sides with regarding monetary compensation, the reputation damage is done. 

Chargebacks introduce an immense amount of friction to the consumer’s experience with your business, and that hurts brand loyalty. 

Banks and credit card companies also have a vested interest in limiting all chargebacks. As a result, if your average volume of chargebacks increases, it puts a strain on the relationships you have with your banking partners. 

Beyond the damage high chargeback rates will do to your relationship with your acquirer, it will also make it less likely that an issuer will authorize a transaction with your company. Banks don’t like working with merchants who have a chargeback problem.

Estimated Comprehensive Cost of a Chargeback 

In the table below, is an example of the breakdown of costs incurred by a merchant when a chargeback happens. Please note that according to a LexisNexis study for every $100 charged back merchants lose on average $240.

The true cost of a $100 chargeback.

  • Chargeback Fee: $25.

  • Processing Fee (3%): $3.

  • Product Costs (45%): $45

  • Chargeback Dispute Loss: $100.

  • Operational Costs (20%): $20.

  • Assumed Brand Damage Cost: $47.

  • Total: $240

A Solution to the Chargeback Problem

Since chargebacks have such extensive impacts on merchants, solutions that can deter fraud, increase merchant win rates and recover lost funds are a necessity for enterprises that deal with large transaction volumes.

To help merchants lower the cost and total volume of chargebacks, Justt developed an artificial intelligence-driven chargeback mitigation solution. Not only does our tech solution help decrease the total costs you spend on chargeback disputes, but it is also simple to integrate and helps increase your win rate. 

All collected data provides insights into areas of your business that contribute to customer disputes, helping you correct and prevent transactions likely to lead to chargebacks. It is an ideal tool to help support teams as you work to lower the overall cost that chargebacks place on your business. 

Want to learn more about how Justt can help reduce the true costs of chargebacks for you and your business? Contact us here for more information.

The Final Word

During the pandemic, Mastercard predicted 615 million chargebacks by 2021. That translates into a big financial burden for businesses.

Moreover, chargebacks are a rapidly growing problem that can put a serious dent in business profitability. This is especially true in a market where people are dealing with adverse conditions like a rising cost of living, which encourages criminal fraud and friendly fraud attempts. 

To manage your business well, stay on top of the true cost chargebacks to your organization and look for appropriate solutions before matters get out of hand. 

Your success is in your hands.

Ronen Shnidman avatar

Ronen Shnidman is the Head of Content at Justt, the chargeback mitigation pioneer. He has years of experience covering topics related to fraud in ecommerce.