14 Direct and Hidden Costs of Chargebacks

Chargebacks are expensive. And unfortunately, the cost of chargebacks includes more than chargebacks themselves.

It’s important to understand the true price of chargebacks so you know just how much revenue is at risk. Learn more about the direct and hidden costs of chargebacks — and find out how to minimize financial losses as much as possible.

7 Direct Costs of Chargebacks

What are the most obvious and easy-to-recognize costs associated with 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 chargeback.

3. High transaction fees

If your business is classified as “high-risk,” your processor might increase processing fees — meaning you’ll have to pay more for each transaction you process.

4. Reserve accounts

High-risk businesses are often required to maintain a reserve account. This means your processor could withhold thousands of dollars each month in a separate, off-limits account.

5. Monitoring program penalties

If your chargeback activity breaches set thresholds, you could be enrolled in a monitoring program. Associated penalties vary by card brand and processor, but fines can be thousands of dollars per month.

6. Operational costs

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

7. Account termination

Businesses that experience excessive chargebacks risk account termination. Your payment processor can revoke your ability to process credit and debit card purchases.

7 Hidden Costs of Chargebacks

In addition to the obvious financial losses caused by chargebacks, there are other expenses that aren’t as well known.

1. Manual reviews

Some businesses react to increased fraud by performing more manual reviews, which is time-consuming and expensive.

2. Wasted labor

Chargeback responses, complaints, audits, and other fraud issues steal time from profitable activities.

3. Lowered bank authorization rates

If issuing banks perceive your business as high-risk, they might tighten their fraud filters and decline more — or even all — orders, costing you revenue from legitimate customers.

4. Opportunity costs

If chargeback activity becomes excessive, you may be tempted to spend more time on management than tasks with higher returns.

5. Customer acquisition costs

If transactions turn into chargebacks, you’ll have a lower return on investment (ROI) for your marketing campaigns and customer acquisition.

6. Customer friction

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

7. Brand loyalty

Customers may become impatient and choose a competitor if their order is declined.

How to Reduce the Cost of Chargebacks

There are several things you can do to reduce the impact that chargebacks have on your bottom line.

Prevent chargebacks

The first step to reducing costs is to reduce the number of chargebacks you receive. And there are tools and techniques that can help.

Start by checking your reason codes. Why are you getting chargebacks? Are criminals making unauthorized purchases? Or are customers unsatisfied with their orders?

It is crucial to understand why disputes are happening so you can solve problems at their source. For example, if fraudsters are stealing from you, updating your inventory won’t change much. On the other hand, if customers are complaining about the quality of your merchandise, fraud detection technology won’t be helpful!

Once you know what the underlying issues are, you can implement the most appropriate solutions. For example, you may do some or all of the following:

• Add fraud prevention technology to your payment stack. That way, you can detect and block suspicious activity.
• Make sure your product descriptions are clear and easy to understand. Help customers know exactly what they’ll be getting.
• Review your marketing campaigns. Don’t promise something you can’t deliver.
• Write clear billing descriptors. Help customers remember and understand their purchases when they see charges on their credit or debit card statement.

Fight chargebacks

Not all chargebacks are valid. The majority are actually “friendly” fraud — customers using the chargeback process incorrectly.

For example, a customer might claim a purchase was unauthorized. But in reality, that same card number has been used at your business a dozen times before.

When these illegitimate chargebacks happen, fight back. Challenge the false claims and recover revenue that’s rightfully yours.

Ask for a review

Once you have your chargeback situation under control, try to get people to notice. If your processor enforced penalties when chargebacks increased — like higher processing fees or a reserve account — see if you can get that action reversed.