Chargebacks are a significant issue for high-risk businesses.
A single chargeback can cost you time, money, and energy you don’t want to spend. Not to mention that it can often lead to frozen merchant bank accounts or closures—causing significant administrative burdens for your business.
Merchants must understand what chargeback fees are, what causes them, and the steps to minimize losses incurred.
This article will discuss all you need to know about chargeback fees, the different types of chargebacks, and how to prevent them from occurring in the first place.
What Are Chargeback Fees and How Do They Work?
A chargeback fee is a penalty or fee imposed by credit card companies on merchants who process transactions that are eventually deemed fraudulent.
According to a TransUnion report, an alarming 25% surge in online fraud attempts has been recorded across the US.
Chargeback fees are a significant issue for e-commerce businesses as they can significantly reduce profits and cause unnecessary headaches.
The chargeback process starts when a customer disputes a transaction with their credit card issuer, requesting a refund. This is known as a chargeback request.
Once this happens, the merchant loses any money earned from that sale and is assessed a chargeback fee.
Different Types of Chargebacks
Chargebacks come in several forms, including friendly fraud, true fraud, merchant errors, and authorization discrepancies.
- Friendly chargeback fraud occurs when customers reverse charges due to buyer’s remorse or misunderstanding about what they purchased.
- True fraud is when someone steals another person’s credit card information or uses false information while purchasing without authorization from either party.
- Merchant errors involve incorrect billing information or mistakes made during shipping orders.
- Authorization discrepancies occur when there is a difference between what was authorized by the issuing bank and what was charged by the merchant.
Types of Fees Included in a Chargeback
The chargeback cost is typically composed of the following: a transaction fee, an acquiring bank fee, marketing and acquisition fees, and business operating expenses.
Transaction Fees
This is the fee typically charged by the merchant’s payment processor for executing the transaction. These fees are not refundable. Pricing varies depending on the card network and the country in which it was issued.
Typically, transaction fees range from 0-5% of revenues.
Acquiring Bank Fee
This is a fee set by the credit card company that must be paid to them for each chargeback issued. These processing fees vary depending on the card used and can range from a few dollars to hundreds of dollars per transaction.
Business Operation Expenses
This is the cost associated with fulfilling and delivering the product or service to the customer—including packing, shipping, and other product delivery costs—and other miscellaneous expenses.
Marketing Costs
These are additional fees charged by the credit card company for customer acquisition and promotional campaigns. These costs—typically 30-40% of merchants’ revenue—vary depending on the type and amount of advertising used to obtain customers.
Types of Businesses More Likely to Be Affected By Chargeback Fees
Some types of businesses are more at risk of chargeback fees than others.
Non-traditional and high-risk merchants may be more prone to chargebacks, such as the following:
- Adult and dating
- Auto parts and accessories
- CBD
- Debt consolidation
- Direct marketing and eCommerce
- Gaming
- Legal services and law firms
- Membership and wellness
- Nutraceuticals
- Property management
- Subscription
- Timeshare
- Trials
How Much is a Chargeback Fee?
The chargeback fees vary depending on the type of card used to purchase and your agreement with the acquirer. It often ranges from $25-$1000 for each chargeback on top of the purchase amount.
High-risk businesses typically have even higher chargeback fees.
If companies add up all the hidden and indirect fees connected with chargebacks, they can often incur more than double the original transaction amount.
Can You Prevent Chargeback Fees?
Practicing simple strategies can quickly reduce the likelihood of costly chargeback fees for your business.
Establish Exchange and Return Policies
Return, exchange, and refund policies should be outlined clearly on your website to provide transparency for cardholders. This can help reduce the number of chargebacks due to buyer’s remorse, as customers know exactly what is expected of them when making a purchase.
Provide Quality Customer Service
People may dispute charges if they feel that their customer service experience was inadequate. Ensure customers receive the best possible experience and provide helpful information, support, and follow-ups when necessary.
Manage your customers’ expectations through clear and accurate product descriptions and delivery times. This can help reduce cases of friendly fraud due to misunderstandings about product quality or shipment delays.
Use Chargeback Fee Prevention Tools
Implementing chargeback fee prevention tools can help reduce your chances of being hit with expensive fees due to fraudulent card transactions or merchant errors.
Solutions such as 3D Secure authentication and tokenization can help keep customer data safe and secure.
Consider using fraud prevention tools such as 3D Secure and Verified by Visa to help reduce the chances of fraud occurring on their site.
Monitor Suspicious Activity
Businesses can reduce their exposure to chargebacks by monitoring suspicious activity on their sites. These include multiple purchases using different cards but with similar shipping addresses.
Proper documentation around transactions should also be kept to defend against false claims from customers.
Get Chargeback Management with Von Payments
Understanding how chargeback fees work, their impact on your business, and preventing them can be daunting. As a business owner, you must know the strategies and solutions available to protect your business from chargebacks.
Von Payments is a high-risk payment processor that offers streamlined chargeback management solutions to help you reduce the risk of fraudulent activity or accidental transactions.
Our merchant services include a chargeback monitoring program, providing instant alerts on suspicious activity, tracking chargeback dispute statuses, and making doing business quick and secure.
With Von Payments’ comprehensive merchant account services and reporting features, your business can reduce the time it takes to manage chargebacks while reducing losses due to fraud or other mistakes.
Save money on processing fees and enjoy secure payment processing for your high-risk business. Contact us today and discover how Von Payments can assist you in managing the hassle of chargebacks.