14 direct and hidden costs of chargebacks

Morgan Ackley | Wednesday, February 1st, 2023 | 3 minutes

The cost of chargebacks includes more than chargebacks themselves. For example, businesses react to increased fraud by performing more manual reviews, which is time-consuming and expensive.

Over 80% of businesses have between three and five employees reviewing online orders as their primary job function, according to 2021 chargeback statistics. Add that effort to meeting an accelerated demand for e-commerce, and you’re spending more time and money than ever on fraud.

Unfortunately, that acceleration has increased fraud, disputes, and chargeback costs. So businesses must understand how the costs of chargebacks can affect them.


7 direct costs of chargebacks

1. Lost merchandise: Products obtained as the result of criminal fraud are 100% business losses.

2. Chargeback fees: Fees can range from $15 to $100 per order depending on the business’s chargeback rate. The higher the chargeback rate, the higher the fees.

3. Shipping costs: Orders with expedited shipping or higher ticket totals can lead to substantial shipping losses.

4. Credit card penalties: Penalties vary by card processor but generate flat-rate fines upwards of $100,000 per month.

5. High transaction fees: For a high-risk business, processors may increase processing fees or require the business to fund an escrow or reserve account to pay for future chargebacks.

6. Operational costs: These expenses include the costs to store inventory and market a product across channels.

7. Network termination: Businesses that experience excessive chargeback fraud risk termination from credit card networks. Network termination means businesses can’t accept payments from those card networks, costing them significant revenue.


7 hidden costs of chargebacks

1. Manual reviews: Typically, businesses react to increased fraud by performing more manual reviews, which is time-consuming and expensive.

2. Wasted labor: Chargeback representments, complaints, audits, and other fraud issues steal time from profitable activities.

3. Lowered bank authorization rates: When banks perceive a business account as high-risk, they tighten their fraud filters and decline more — or even all — orders, costing businesses revenue from legitimate purchases.

4. Opportunity costs: When a business exceeds chargeback limit thresholds, it often spends more time on chargebacks than tasks with higher returns.

5. Customer acquisition costs: With chargebacks, businesses also lower their returns on marketing campaigns and customer acquisition.

6. Brand loyalty: Customers may become impatient and choose a competitor if their order is declined or delayed.

7. Customer friction: Businesses that increase friction to reduce fraud risk frustrating good customers.


Fraud programs: The highest cost of chargebacks

The highest cost of chargebacks is one that grows over time. The more chargebacks a business receives, the higher its chargeback rate. Visa and Mastercard place businesses that exceed a defined chargeback threshold for a period of time in dispute and chargeback monitoring programs.

Visa’s monitoring programs include the Visa Dispute Monitoring Program (VDMP) and the Visa Fraud Monitoring Program (VFMP). Meanwhile, Mastercard’s monitoring programs are the Excessive Chargeback Program (ECP) and the Excessive Fraud Merchant (EFM) program.

In each program, businesses incur additional monthly fees and chargeback costs (sometimes thousands of dollars) until they get their chargeback rates under control. The higher the chargeback rate, the higher the fees and penalties.

The longer a business spends in a program, the harder it is to get out. Excessive chargebacks can eventually lead to the termination of a merchant account, possibly causing them to go out of business.


How to reduce the cost of chargebacks

Reducing chargebacks and the cost of chargebacks isn’t a once-a-month task. There are multiple ways to prevent and intercept chargebacks to reduce product losses and fees. First, businesses can decline suspicious or criminal activity.

The best way to reduce the cost of chargebacks is to take a proactive approach to criminal fraud. Implementing an AI-driven fraud prevention solution can prevent criminal fraud that leads to chargebacks can reduce costs significantly.

An AI-driven solution combines artificial intelligence and machine learning to analyze interactions and payment transactions online. AI and machine learning compare interactions to billions of other interactions in a global data network to establish identity trust in real time.

Businesses can automatically accept high-trust interactions and decline high-risk interactions. Automated decisions decrease chargebacks costs from wasted labor and manual reviews. In the end, good customers get frictionless, personalized experiences, and businesses can accept more good orders.

Then, businesses can reduce the cost of chargebacks by intercepting and deflecting disputes. For example, a dispute and chargeback management solution can notify businesses when customers initiate disputes. Knowing about a dispute when it happens means businesses can step in to refund purchases.

Refunding purchases quickly can promote brand loyalty and reduce time lost to the chargeback process. Plus, in cases of friendly fraud, businesses can quickly relay transaction details to reduce unnecessary dispute costs and help cardholders recognize transactions.

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AUTHOR

Morgan Ackley

Content Strategist

Morgan has worked in the tech industry for over 5 years. Her breadth of knowledge and curiosity about technology and all things fraud-related drive her to craft compelling, educational pieces for readers seeking answers.