The 14 Direct & Hidden Costs of Chargebacks

Chargebacks aren’t just fees and lost sales – they impose hidden costs on your business through manual review labor, low authorization rates, and more. The rapid push to eCommerce and digital transformation has only accelerated this year, and with that growth inevitably comes more fraud and disputes. In order to scale and avoid losses, businesses must understand chargeback costs and how to prevent them.

One major chargeback cost familiar to many businesses comes from Excessive Chargeback Programs. Businesses that exceed a defined chargeback threshold for a period of time are placed in a monitoring program, incurring additional monthly fees (sometimes thousands of dollars) until their chargeback rate is under control. The higher the chargeback rate, the higher the fees and penalties. Excessive chargebacks can eventually lead to termination of a merchant account, possibly causing them to go out of business.

But, other chargeback costs aren’t always so obvious. In fact, there are 14 direct and hidden costs associated with chargebacks.

 

Direct Costs of Chargebacks

Direct costs involve clear fees and financial losses that can be quantified.

  • Lost merchandise. Products fraudulently obtained are 100% losses.
  • Chargeback fees. Depending on the chargeback rate, fees can range from $15 to $100 per order.
  • Shipping costs. Orders with expedited shipping and/or higher ticket totals can result in substantial shipping losses.
  • Potential credit card penalties. Penalties vary by card processor but generate flat rate fines from $10 – $100k per month.
  • High transaction fees. For a high-risk merchant, processors may increase processing fees or require the merchant to fund an escrow or reserve account to pay for future chargebacks.
  • Network termination. Potential termination from the credit card network.
  • Operational costs. Including warehouse costs, customer service costs, marketing costs, etc.

 

Hidden Costs of Chargebacks

Hidden costs can include less obvious fees, or losses that are difficult to quantify and affect multiple departments.

  • Manual reviews. Companies typically react to increased fraud by performing more manual reviews, which leads to increased time and operational expenses.
  • Wasted labor. Representments, complaints, audits, and other fraud issues — typically resolved by higher cost employees — steal time from profitable activities.
  • Growth/Opportunity loss. When a business exceeds chargeback limit thresholds, it often spends more time focusing on chargebacks than on tasks with a higher return.
  • Lowered bank authorization rates. When banks perceive a merchant account as high risk, they will tighten their fraud filters and decline more orders — or even all orders. Merchants can lose revenue from legitimate purchases.
  • Customer acquisition costs. The cost that goes into winning business that is ultimately declined.
  • Brand loyalty. Customers may become impatient and choose a competitor if their order is declined or delayed by manual review.
  • Customer friction. Companies typically increase friction to reduce potential fraud.

 

Preventing Chargeback Fees and Costs

Fighting chargebacks isn’t a once-a-month task or a discrete event that takes place at a single point in time. There are multiple prevention and interception “catch points” where a merchant can take action to reduce chargebacks, product losses, and fees.

  1. Stop bad transactions before they’ve been approved.
  2. Intercept bad transactions before the issuing bank applies it as a chargeback.
  3. Win chargeback disputes in representment by accessing expertise and robust transaction data.

Businesses can combat chargeback costs by implementing sophisticated artificial intelligence that is built upon a robust global data network. By establishing identity trust in real time, this kind of fraud prevention technology can detect both emerging and existing fraud—stopping these transactions before an unnecessary expense occurs.

To dig a little deeper, download the full ebook to learn the steps you can take to stop each of these chargeback-related costs.”

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