How Much Does Chargeback Cost?
Chargebacks are obviously not good for you, but how much does a chargeback cost?
Let’s find out in this article.
Perhaps every entrepreneur knows that chargebacks are bad for merchants and businesses in general, and preventing chargebacks is important. In fact, credit card chargeback leads to penalties and costly fees. Moreover, pretty often even chargeback prevention solutions involve refunding customers before a dispute is issued, even if customers do not return the product. So, how much does a chargeback cost? Let’s see.
What Is a Chargeback?
First of all, let’s quickly refresh our memory about what a chargeback is. A chargeback initiates a process where a customer contests a payment on their financial record. If successful, the issuing bank retrieves the disputed funds from the merchant's account and returns them to the customer's card. Though it looks like chargeback is a simple procedure, it actually seriously threatens your merchants (and, therefore, your ability to process online payments) and brings a lot of problems along the way. In particular, numerous chargeback requests cause the following issues:
- Financial losses
- Costly fines
- Damage to reputation
- Potential merchants closure
- Higher fees from payment processors
As you can see, dealing with customer disputes, especially if it is chargeback fraud, is important. But even if you use a reliable chargeback prevention solution like Germius, chargeback will still cost you money. So, how much does a chargeback cost a merchant? Let’s talk about that in the next paragraph.
Chargeback Cost
No matter if you have a chargeback protection system or not, disputes will still cost you money. The only difference is that with a chargeback prevention system, you will pay significantly less money than without one, as well as secure your merchants and safeguard your reputation. So, what are the chargeback costs? Take a look at the charts below.
As you can see, answering the question, “How much does chargeback cost?” is more complicated than you might think since the chargeback cost includes plenty of aspects, so let’s briefly take a look at all of them and estimate how much does chargeback cost to merchant.
Lost Revenue
Chargebacks directly deplete a business's cash flow. The disputed transaction, initially a source of income, becomes a financial outflow as the funds are retrieved from the merchant's account. This reduces the business's readily available resources and can negatively impact its ability to meet short-term financial obligations. Additionally, lost revenue from the sale diminishes the company's profitability, potentially hindering its growth and investment opportunities.
Lost Merchandise
Return item chargeback often results in a double loss for merchants. Not only are they forced to refund the disputed purchase, but they may also be left without the original merchandise. This eliminates the chance to recoup any value by reselling or repurposing the goods. In some instances, merchants might even incur additional retrieval fees to get their products back from customers. This situation creates a financial burden similar to paying a ransom to recover one's own property.
Wasted Marketing Expenses
Businesses invest heavily in attracting new customers through marketing campaigns, online advertising, and promotional offers. Each successful acquisition represents a return on investment (ROI) on those marketing efforts. However, chargebacks disrupt this cycle. When a customer disputes a purchase, the initial investment made to acquire them becomes essentially wasted. Eventually, it leads to higher overall customer acquisition cost (CAC) for the business. In simpler terms, chargebacks force businesses to spend more to acquire each paying customer.
Chargeback Fees
Whenever a customer disputes a purchase, merchants face a financial burden beyond just the refunded amount. Banks assess chargeback fees to recoup their expenses when handling the dispute process. These fees cover the time and resources involved in gathering documentation and communicating with the issuing bank on the merchant's behalf. In particular, chargeback fees typically range from $20 to $100 per incident, and merchants with high dispute volumes can see these costs accumulate rapidly, eroding their profit margins.
Hidden Fees
While the refunded amount is a significant consequence of chargebacks, merchants face additional financial setbacks. Unlike the disputed purchase price, interchange fees, which are transaction processing costs levied by banks, are not returned in a chargeback. This means merchants lose not only the sale revenue but also the fees associated with facilitating that specific credit card transaction.
Furthermore, the resources invested in order fulfillment become unrecoverable expenses. Shipping costs, packaging materials, and logistics expenses associated with getting the product to the customer are entirely lost in a chargeback scenario. These hidden costs can significantly erode profit margins, especially for businesses with high volumes of online transactions.
How to Prevent Chargeback and Cut Costs
One of the sure ways to cut the costs associated with chargebacks is, obviously, chargeback prevention. At the same time, businesses struggle with that since they do not know the working means of preventing chargeback. Thus, let’s take a brief look at the simple tips and tricks for preventing disputes and chargeback fraud.
-
Installing a chargeback prevention system.
Getting a high-quality chargeback protection system like Germius is, without any doubt, one of the fastest and most affordable ways to prevent disputes and save a lot of money. Our AI-fraud system quickly prevents disputes before they reach the merchant, therefore, protecting your funds, merchants, and your company’s reputation. -
Making clear cancellation, refund, and return policies.
Pay special attention to your refund, return, and order cancellation policies, and make sure the policies are clear and easy to understand, as well as that you provide your customers with this info berfore they make a purchase on your website. That will help you reduce the number of chargebacks and friendly fraud cases. -
Keep in touch with your customers.
A lot of customers request chargebacks if, after the initial payment, they have zero communication with the store. Therefore, you must ensure your customers receive an order confirmation email or text message as well as get regular updates about their order status and shipping. -
Delay billing.
Another great way to prevent chargebacks is delaying billing. Don’t charge your customers immediately, instead, block the required amount on your customer’s card and charge it only after the delivery has been confirmed by the customer.
-
Provide the best customer experience.
Make your customers feel safe and comfy on your website by providing them with easy-to-find contact info, 24/7/365 and easy-to-reach customer support service, as well as a generally friendly environment. These little details will make your website trustworthy, and your customers will be less likely to open a dispute even if they are not satisfied with your product or service. -
Implement fraud protection systems.
Fraudulent chargebacks are a whole other story, but in any case, you still have to prevent those. To achieve this goal, implement an up-to-date payment fraud prevention system like Germius, and the number of chargeback fraud cases on your website will quickly drop. -
Cancel recurring transactions properly.
To ensure a smooth experience, it's advisable to process recurring transaction cancellations swiftly. Provide the customer with written confirmation of the cancellation, including the specific date it will take effect. If the customer prepaid for a subscription or membership with a set term, politely explain any cancellation limitations that may apply. In such cases, you can offer alternative payment options to cover the remaining period of their membership, if applicable.
As you can see, preventing chargebacks is a big deal, but if you have a reliable CRM that has your back, you will easily reduce the number of disputes and all the costs associated with them.
Wrapping Up
Does a chargeback cost the company a lot of money? The answer to this question is pretty obvious — yes. But you, as an entrepreneur, can significantly cut the chargeback cost by means of a dispute prevention system like Germius. In any case, it is impossible to prevent all chargebacks and avoid all the associated fees and financial losses, but up-to-date alerts will surely help you reduce the chargeback costs.
