What to Know About the Dreaded Chargeback Fee

One of the biggest upsides to being a cash-only establishment is the reduced risk of the chargeback fee. However, if you think your business can get by with only taking cash, you’re likely to lose out on a lot of sales. Pew Research found only 1 in 5 customers will use cash on a transaction over $25. So why do some businesses try to avoid accepting credit cards? It’s often due to concerns with credit card processing fees, most notably chargeback fees. The benefits of accepting credit cards are too great for your business not to. In this article, we’ll answer what is a chargeback fee, how they work, and what you can do to minimize them.

What is a Chargeback Fee?

You might not be familiar with chargeback fees when you start your business. But you certainly get familiar with them as your retail store or business makes sales. A chargeback fee is a fee that acquiring banks charge to merchants to penalize them for processing a transition that is illegitimate.

A chargeback on a credit card occurs when a customer (cardholder) disputes a credit card charge and wants to void the sales transaction. In this case, the customer asks their bank for a refund and the funds go back into the account their card is attached to.

Chargebacks were first created as a way to protect consumers. The system works a bit more in the customer’s favor, as the merchant is guilty until proven innocent. When a cardholder disputes a charge, the issuing bank assumes they are being truthful. They often issue a temporary credit for the transaction amount. It is then up to the merchant to prove whether the transaction was legitimate.

There are several reasons a customer may dispute a transaction. For example, their credit card might have been stolen and used to make unauthorized purchases. In other cases, a merchant might have charged the customer twice for an item by accident. These are good reasons for a customer to make a dispute. However, sometimes there are fraud red flags in these cases.

Friendly fraud concerns

Unfortunately, chargebacks sometimes occur because of something known as “friendly fraud.” This can happen if the customer forgot they made the purchase or didn’t recognize your business’s name on their statement. It might also happen because they’re unaware of your return policy, or don’t like the product or service they received. Most notably, this occurs with subscription model businesses that utilize negative option billing. Customers agree to a subscription and then conveniently forget when the charge comes across their bank account.

You can avoid “friendly fraud” chargebacks and their associated fees with a good chargeback strategy. Later we’ll go over the measures you can take to protect against chargebacks.

How it works

Wondering how a chargeback fee takes place in real-time? Let’s look at the process:

1. A Cardholder requests a chargeback on a transaction from their card-issuing bank.
2. The issuing bank returns the amount to the customer’s card and retrieves the funds from your merchant account.
3. Your payment processor notifies you of the chargeback. You must research and resolve it.
4. You investigate the chargeback and submit any applicable evidence if the charge was legitimate.

Depending on what you find when you look into the issue, you could get the purchase amount returned to your account. Unfortunately, you might still get charged a chargeback fee because of the research involved in the case.

How Much is a Chargeback Fee?

The fee for chargebacks varies based on the payment processor you work with. You can expect to pay anywhere from $25 to $50 per chargeback, on top of the purchase amount. If you are considered a high-risk business, your fee can be even higher.

As a business, you have what is known as a “chargeback ratio.” This figure accounts for all of your processed transactions in relation to your chargebacks. If the ratio is too high, it can be grounds for your processor to terminate your merchant account. When this takes place you will have to seek out a high risk merchant account and may even experience higher rates due to your chargeback ratio. Once your ratio reaches a reasonable percentage, you will be able to receive more favorable rates through your processor.

Preventing Chargeback Fees

The possibility of incurring a chargeback fee is a worthy concern as a business owner. In fact, the rate of friendly fraud is growing with a projection to hit $130 billion by the year 2023.

Luckily you can lower your chances of experiencing chargeback fees by incorporating a few tactics into your business practices. Three tactics that have worked for merchants in reducing chargeback fees are explained below.

Return/Exchange policies

Make sure your business’s shipping and return policies are as transparent as possible. When making a sale, use this as an opportunity to inform them of what their options are in case they decide to return it. Post your return policy clearly at each POS terminal. If you have a website, make sure your shipping and return policies are visible on applicable web pages.

Customer service

Often overlooked, but extremely valuable in the fight against chargeback fees is having great customer service. This goes beyond having fair and reasonable return and exchange policies. With the right training, your customer service team can help mitigate the risk of chargebacks occurring.

When a customer reaches out to customer service, your staff should have an understanding of what the problem is. Their goal should be to resolve the problem on their first contact. Let’s say the customer calls to notify you they never received their package. Your next step should be to contact the courier and determine if the package was indeed lost. If this is the case, your customer service rep can issue a credit to the customer for the purchase amount including shipping. This solves the problem before the issue is taken up with the bank. The key here is prevention rather than damage control.

Chargeback fee prevention tools

Your payment processor may offer tools to assist in chargeback protection, which will in turn prevent chargeback fees. They may have a solution that will report chargebacks in real-time, set up analytics to identify trends, and allow you to respond and monitor disputes on one platform. Contact them to learn more about what chargeback management tools they may offer.

Can Chargeback Fees be Disputed?

As a merchant, you can absolutely dispute a chargeback fee. However, it should be noted that you have a limited amount of time to respond to or dispute chargebacks during the resolution process. Keep in mind the merchant is the last person to be notified when a chargeback occurs, so respond promptly.

You need also consider that not every processor is created equal. This means there may be different outcomes from your disputes, even if you win them. Check with your processor directly to confirm what this means for your business.

Chargeback Fees Shouldn’t Ruin Your Business

There isn’t a merchant out there who enjoys getting chargeback fees. If you were at fault for the chargeback, take the opportunity to learn from your mistake. That could mean changing the name that appears on bank statements, making changes to your return policy, or training your customer service representatives.

There are many benefits for your business to accept credit cards. Chargeback fees are just part of what comes with the territory. But that doesn’t mean you can’t improve or change your policies, procedures, and processes to lower the costs associated with chargeback fees.