Small businesses face a fork in the road when dealing with chargebacks. Do you write them off as a cost of doing business? That means accepting unwarranted financial hits to preserve customer goodwill.

Or take the high road, addressing false chargebacks proactively to ensure long-term sustainability and fairness.

It's not always a simple decision, especially in these times of increasingly complex global trade. Small enterprises are navigating increased chargeback fraud risks, volatile currency markets, shifting regulatory policies, and looming economic downturns.

Unsure of the most prudent chargeback management course of action for your business? We've got you covered. This article is your sure guide for stopping financial stability erosion.

Why Are Chargebacks Bad for Businesses?

If you're curious why companies, especially small businesses, dread chargebacks, the answer is straightforward. Each chargeback has a ripple effect that extends far beyond the disputed transaction.

Here are seven ways chargeback affects small businesses:

1. Revenue loss. When a cardholder files a dispute, Federal law requires the business owner to reverse the transaction amount, which results in a loss of sales revenue and the cost of the product or service sold. In fact, this refund is done by the cardholder’s bank, with or without your consent.
2. Excessive fees. Every chargeback comes with non-negotiable chargeback fees, and most times, high processing fees that add up quickly and strain a small business owner’s balance sheet.
3. Reputation damage. Too many chargebacks damage the reputation of a small business, making it challenging to attract and retain customers.
4. Opportunity cost. Chargeback mediation is a complicated and time-consuming process that requires enormous resource allocation. For a small business owner, any time spent mediating disputes means forgoing crucial business deliverables. In the end, their chances of winning remain minuscule.
5. Administrative burden. Addressing chargebacks requires gathering evidence, communicating with banks or payment processors, and completing paperwork to support claims, which takes resources away from other crucial business operations.
6. Sustainability threat. Chargeback threatens business operations for small businesses, excessive chargebacks equal regulation issues and potential loss of processing privileges.
7. Inventory loss. Chargeback fraudsters don’t usually return purchased merchandise, which can resurface in secondary markets, undermining primary sales and creating market saturation.

But what does this mean in monetary terms? Let’s do the math:

Estimating Monthly Chargeback Costs for Small Businesses

If you're still accounting for chargebacks like a tax or churn, writing them off as a cost of goods sold (COGS), the following estimates will show why that’s a costly mistake. Let's assume you're a standard small business owner with the following characteristics:

• Monthly revenue: $50,000
• Average transaction value: $100
• Number of transactions: 500
• Chargeback rate: 0.5% (that is 2.5 chargebacks monthly)

Here's what your chargeback cost might look like:

• Direct cost: 2.5 chargebacks x $100/transaction = $250
• Chargeback fees: 2.5 chargebacks x $25/chargeback (on average) = $62.50
• Operational costs: Assuming 20% of revenue lost per chargeback, 2.5 chargebacks ($50,000 x 0.20 / 500 transactions) = $500
• Marketing costs: Assuming Customer Acquisition Cost (CAC) is 8% of revenue, lost marketing cost per chargeback is ~$80 (8% of $100), so 2.5 chargebacks x $80 = $200

Total Estimated Monthly Chargeback Cost: $250 (direct cost) + $62.50 (fees) + $500 (operational) + $200 (marketing) = ~$1,012.50.

This rough estimate does not include cost centers like human resource cost, brand damage, and sustainability threat. For businesses in higher-risk verticals (e.g., education, travel, or digital goods), the chargeback rate might be higher, which can double or triple chargeback costs.

Again, about 75-86% of chargebacks may involve friendly fraud, where customers dispute legitimate charges for personal gain. If you exceed card network chargeback thresholds, you'll face monthly fines of thousands of dollars. This escalates the cost further.

“The average chargeback value grew from $165 in 2023 to $169 in 2024. This number would grow as tariffs increase product prices.” – Ariel Chen, CEO and co-founder of Chargeflow

How Do Small Businesses Handle Chargebacks?

The three primary approaches small businesses use when handling chargebacks are in-house dispute resolution, outsourced dispute management, and automated chargeback management. Let's evaluate the pros and cons of each option objectively.

Option 1: In-house Chargeback Management

As the name implies, this chargeback management strategy involves a team managing disputes internally. They might achieve this by hiring a chargeback analyst. The business owner might also be handling the process: investigating customer disputes, gathering evidence, and submitting responses to banks or payment processors to contest chargebacks. The rationale? Budget constraints and the need for complete oversight.

Pros:

1. Control over the process. With more control over the process, you can switch chargeback dispute gears as needed. For example, you can decide to dispute specific dollar amounts or tailor your approach to the needs of your business and customers.
2. Flexibility in resource allocation. Since you can determine whether or not to pursue a case, in-house chargeback management can be more cost-effective in the long run than outsourcing chargeback management.
3. Direct communication with customers. In-house teams can directly communicate with customers, providing pathways to gathering additional information, addressing concerns, and resolving cases without involving external parties.
4. Domain expertise. Internal teams have an accurate understanding of the company’s products, services, and business operations, which can be beneficial in presenting a solid argument during chargeback disputes.

Cons:

1. Resource intensive. Compared to chargeback automation, in-house chargeback management is significantly resource intensive, requiring dedicated staff, time, and expertise to effectively handle and resolve disputes profitably.
2. Training requirements. Staff members involved in chargeback management must be well-trained to navigate the complexities of the continually changing chargeback rules, regulations, and dispute processes.
3. Limited scalability. Businesses experiencing rapid transaction growth must hire additional internal team members to meet associated workloads.
4. Notably lower win rates. Biases, subjective decisions, and limited data access often result in disappointingly lower dispute win rates for internal teams.

“The average industry win rate stands at only 12%. Meanwhile, Chargeflow delivers up to 80% chargeback win rate. Chargeback automation offers cost-efficient, scalable solutions during challenging economic periods.” – Ariel Chen, CEO and co-founder of Chargeflow

Option 2: Outsourced Chargeback Management Solution

Outsourced chargeback management is when a small business hires a third-party service provider to remediate and handle chargeback disputes. The rationale? Third-party chargeback companies claim specialized chargeback representment knowledge – thus, allowing your business to focus on other areas of operations.

Pros:

• ​​Better results than internal teams. Outsourcing chargebacks are more effective than handling them in-house, if and when said third party truly possesses high expertise. Some vendors also have access to industry best practices and technologies to manage the process efficiently.
• Relatively scalable. External chargeback management teams can handle many chargebacks simultaneously, making them a fairly decent option for businesses with high transaction volumes.
• Relative cost-effectiveness. Outsourcing chargeback management is more cost-effective than building full-fledged in-house solutions from the ground up. You don't have to invest in staff, technology, and training.
• Time-saving. With a third-party vendor handling your disputes, you free up time to focus on other areas of their operations, such as marketing and sales.
• Access to technology. Some external vendors also have technology tools that help through the dispute process, which may be cost-prohibitive for smaller businesses to implement independently.

Cons:

• Less control and process oversight. With third-party vendors making decisions on cases and strategies, you give up control over the operation of chargeback disputes. This can hurt your business.
• Inconsistent results: Many outsourced chargeback companies tout specialized skills, but what they usually do is hire low-skill, cheap labor staff to manage your cases. This double negative exposes your business to more risks and makes results unpredictable.
• Compliance risk. Potential legal and financial consequences accrue to you if the vendor has compliance issues. ‍
• Communication challenges. Different time zones or unique communication preferences of the external vendor may pose challenges in meeting time limits and effectively managing chargebacks.‍
• Cost intensive. The opportunity cost of hiring a specialist vendor that cannot grow with rising transaction volumes leads to a negative return on investment, draining your resources.‍
• Dependency on third-party performance. The effectiveness of outsourced chargeback management is contingent on the performance and reliability of the third-party service provider, and any shortcomings may impact the merchant's reputation.

Automated Chargeback Management Solution

An automated chargeback management solution is software that helps businesses automatically manage and respond to chargeback claims. The system automatically alerts you when a cardholder initiates a chargeback, categorizes chargeback reasons, and generates responses to challenge the chargeback. Chargeflow’s system even has in-built functionality to alert you of impending chargebacks so you can nip them in the bud.

It will also help you identify chargeback patterns and trends to help businesses prevent future disputes, saving you time and cost. Chargeback automation improves management procedures by automating duties, including chargeback alerts, tracking, and response templates.

🛑Note: While automated chargeback solutions offer superior benefits and more than 40% cost reduction, all chargeback automation frameworks are not built the same. Choosing the right product – one that fits your business model – makes the difference.

Types of Automated Chargeback Management Solutions

There are two main options you can choose from when it comes to chargeback automation. Let's evaluate these options, highlighting their respective pros and cons.

1. Fully automated chargeback solution

Fully automated chargeback management solution is an utterly hands-off system where you onboard a SaaS product (think Chargeflow, the world’s first fully automated chargeback solution) to handle all chargeback-related issues.

Pros:

• Optimum operational efficiency. The system automates time-consuming and manual chargeback tasks, such as notifications, tracking, and responses, helping you regain time to focus on building your business. You also have big data to streamline operations and plan revenue.
• Cost-effectiveness. Automating chargeback management processes reduces chargeback-associated costs like chargeback fees, lost revenue, and administrative expenses. And since you only pay for cases won and not by contract, you save money as well.
• Comprehensive risk mitigation. Chargeback automation gives you robust data to pinpoint loopholes, identify dispute trends and risk centers, and proactively manage cases to minimize the risk of future disputes.
• Enhanced return on investment. By generating the most formidable representation case, automated chargeback management solutions give you quick and accurate tools to increase your win rate, fend off criminals, and retain legitimate customers.
• Ease of doing business. By winning disputes on autopilot, you keep your brand reputation intact, have better relationships with your stakeholders, and plug sales cannibalization gaps.
• Control and oversight. If you’re using Chargeflow, you have absolute control over disputes – how they’re managed and the outcome. You can achieve this by simply clicking buttons on your dashboard.

Cons:

• Reliance on technology. Automated chargeback management solutions rely on technology. If you onboard the wrong solution, the outcome will be frequent missed chargebacks, inaccurate data, and poor performance.
• False positive. Depending on the solution you onboard, the system could flag legitimate transactions as chargebacks, unnecessarily initiating disputes. That can lead to increased workload and costs for businesses.

2. Hybrid solution

Small businesses using hybrid chargeback management complement third-party chargeback services with in-house efforts. They select transactions and chargebacks to dispute while relying on a full-service company for the actual disputes.

Pros:

• ​​Oversight and control. You could potentially reduce your costs by choosing specific cases to pursue without losing the advantages of technical know-how and maintaining greater oversight.
• Risk mitigation. Diversifying chargeback management methods helps prevent tunnel vision or a single process dependency risk.
• Strategic focus. With a hybrid approach, businesses can focus on their core competencies while leveraging external expertise for specialized tasks.

Cons:

• Implementation cost. You might need to onboard multiple programs, giving your team additional bills to pay.
• Training and requirements. Using the hybrid option means you have more tools or will need to work with more agencies, and managing and coordinating those with partner programs can be difficult.‍
• Unreliable results. Some chargeback specialist companies use offshore unskilled or semi-skilled labor, which often compromises efficiency and turn-around time and negatively impacts win rates.

Chargeback Management for Small Businesses: Choosing the Right Strategy

With eCommerce sales projected to hit $8 trillion by 2027 and AI-driven fraud rising, chargebacks are becoming a growing threat to small businesses navigating global trade. The stakes are high. A single chargeback can cost hundreds of dollars in direct losses, fees, and operational impact. Monthly estimates easily exceed $1000 for a typical small business.

Writing off chargebacks as a cost of doing business may preserve short-term customer goodwill but risks eroding financial stability, especially with rising fraud, regulatory shifts, and economic uncertainty. Proactively addressing false chargebacks safeguards revenue, reputation, and long-term sustainability.

Each chargeback option – in-house, outsourced, or automated – offers unique tradeoffs. In-house chargeback management provides control but demands significant resources and expertise while yielding lower win rates. Outsourced solutions promise efficiency and scalability but sacrifice oversight and offer unreliable results. That’s why small businesses like AptLife Media are choosing automated chargeback management. It delivers unmatched cost-effectiveness, scalability, and win rates – up to 80% compared to the industry's 12% average. It minimizes administrative burdens and fraud risks.

The global chargeback software market will grow by 3.5x by 2032. So choosing the right automated solution is critical to avoid technical pitfalls or false positives. If you want reliable results and total control over the chargeback process without the messy representment grind, Chargeflow delivers unmatched efficiency and profitability. Take action now. Contact Chargeflow success teams for more details.