Everything You Need to Know About Chargeback Fees and How to Stop Paying Them

Chargeback Fees have become a tremendous burden to e-commerce merchants. As the number of credit and debit card disputes continue to shoot through the roof, understanding how to manage this significant business risk can determine your company's sustainability. 

A chargeback may debit or hold the disputed principal and create separate fees or handling costs. Fee amount, eligibility and return policy depend on the provider, product, region, agreement and case outcome; not every provider charges the same non-refundable fee on every case.

Review excessive chargebacks against the actual agreement and any assessment notice. Dispute fees, processing fees and network assessments are separate amounts; a disputed-payment ratio alone does not establish a universal surcharge or automatic account closure.

But why is that so, and what can you do about it? Are you entirely at the mercy of financial institutions and card networks? Or are there best practices you can employ to safeguard your e-commerce business from the burden of excessive chargeback fees?

To answer these questions, we shall first examine the history and rationale behind chargebacks and chargeback fees. A quick look at the chargeback meaning is a useful place to start.

Banks place Chargeback Fees on merchants as their administrative charges

The U.S. Fair Credit Billing Act amended the Truth in Lending Act in 1974. Regulation Z’s billing-error provisions implement protections for covered open-end consumer credit accounts. Those legal rights are separate from a provider’s merchant fee schedule and the private card-network dispute process.

The need for that instrument in commerce arose after consumers began to experience incorrect and unjust billings on their credit cards. The anxiety caused by possible theft of a person’s credit card and unauthorized usage, resulting in overwhelming bills, prompted the consumer protection agency to take action. Apart from theft, consumers also feared that fraudulent merchants could leverage digital commerce's loose procedures of those days to rip off their clients by inflating prices or billing them repeatedly for the same transaction. 

In response to these legitimate concerns, lawmakers in the U.S sat down, discussed, deliberated, and eventually enacted The Fair Credit Billing Act (FCBA) of 1974. FCBA aims to protect consumers from unfair billing practices and provide a mechanism for addressing billing errors in "open-end" credit accounts, such as credit card or charge card accounts.

That was how chargebacks came into being. 

So if a client has issues with a specific transaction, they can demand a chargeback from their bank, without your consent. It works to keep both parties accountable in principle. However, there are significant frictions with the administration of chargeback.

Chargebacks are prone to abuse

In a hypothetical $700 order dispute, an issuer reversal and any assessed fee can affect the merchant’s balance while the case is reviewed. Read the allegation and submit relevant records through the processor by its actual deadline. A provisional debit does not establish that the issuer has finally ruled that the customer is correct.

The process of reversing the chargeback is hugely complex; you could lose more money - and waste precious time trying to fight it. But that’s not all. The bank also imposes a predetermined fee on you for their involvement in mediating the customer dispute. So without warning, you’ve lost revenue, your merchandise and paid some penalty in the form of a chargeback fee.

Winning can restore disputed funds, but fee treatment varies. Stripe’s dispute-fee FAQ distinguishes the received fee from an additional countered fee and says the countered fee is returned on a win, with product/region exceptions. Square’s U.S. dispute guide says it does not charge a chargeback dispute-management fee. Compare your own terms; no single non-negotiable fee applies to every merchant or provider.

Consequently, several vendors prefer to let it go altogether - even when they know the chargeback is unsubstantial. They choose to forfeit the funds.

How much is a chargeback fee?

Use your provider’s current region/product schedule and contract to determine the fee. The article does not establish a universal $20–$50 range. Monitoring identification and assessments also depend on program-specific counts, ratios, regions and acquirer conditions; check the actual notice rather than inferring a fee or closure from a ratio alone.

Sadly, when these chargebacks keep recurring and you cross the established chargeback ratio, you will be made to pay higher chargeback fees. In some instances, you will also incur higher processing fees or have your merchant account suspended. And in extreme cases, you will be placed in the chargeback monitoring program - which is a whole different conversation on its own. 

To assess the real cost of chargebacks , separate disputed principal, direct fees, lost goods and handling costs in your calculation. A total-cost multiplier cannot be described as the chargeback fee itself. The article does not establish a universal two-to-three-times transaction fee, and loss of processing access depends on the applicable program and provider conditions.

Failing to reduce your chargeback-to-transaction ratio does not only result in higher chargeback fees. It could also result in the loss of your payment processing access.

What can you do to stop Chargeback Fees?

In the 2014 American vigilante action thriller film The Equalizer 1, Mr. McCall (played by Denzel Washington) knew the only way to stop the mob from continuing to terrorize the city and force teenage girls into prostitution was to “cut the head off the snake.” Refocusing that analogy to our discussion on chargeback fees, the only way to stop banks from taking your money is to stop, or at least, minimize your chargebacks.

Ask the processor or acquirer which response, alert and evidence services your account supports, and what the merchant must provide. Stripe’s response guidance describes a supported submission process with issuer decision-making. Provider assistance does not guarantee an outcome; the merchant still needs accurate records and timely action.

With that in mind, we advise that to reduce the incidents of chargebacks and disputes, you should take determinate chargeback management measures such as integrating reliable fraud detection mechanisms. And this doesn't have to be as extremely technical as it might sound. By simply using identity verification services like AVS and CVV in your checkout processes, you can limit the possibilities of false identities, which often result in unauthorized transactions chargeback.

Further, it is wise to provide customers with an accurate and descriptive representation of your products or services. That will go a long way to prevent genuine chargebacks due to the wrong product description. Also, do well to have carefully-drafted shipping information and refund policy. And it equally makes business sense to be responsive when customers contact you with queries or issues on their orders. Check your own cases for merchant errors and unresolved customer-service issues; no universal40% merchant-error share is established here.

If you have accurate insight and data, you can stop Chargeback Fees

In the final analysis, the rise and fall of e-commerce businesses hinge on insights and data.

Resolving an eligible complaint before a formal dispute can reduce risk, but a refund does not guarantee that no dispute or fee will follow. Check previous/pending refunds, follow the provider’s alert instructions and confirm resolution. Once a formal dispute exists, use the prescribed response process; avoid refunding the same principal twice.

Even if you lose the revenue, you would’ve saved some money by avoiding chargeback fees. And you also keep your chargeback ratio in check, which are two substantial gains for e-commerce vendors.

Automation can support eligible alerts and evidence preparation, subject to integration coverage and available records. Measure actual resolution, recovered principal, fees and handling time. No software intercepts every chargeback or replaces the issuer’s decision and the acquirer’s processing agreement.

That is definitely a smart way to ensure that a chargeback DOES NOT happen in the first place.

When you subscribe to Chargeflow and start using our automated chargebacks and disputes management tool, you will never have to put your fate in the hands of acquirers and card networks. Instead, our software will give you all the data and resources to secure your business from online shoplifters and avoid the loathsome chargeback fees. It’s a whole new world in doing business!

To conclude this article, we remind you of a simple truth: the idea that chargebacks are the cost of doing business is only reasonable when you don’t have the right tools to mitigate the risk. Now that you know you’re not helpless, would you instead continue to lose your revenue to chargeback fees or fight back with Chargeflow’s industry-first chargeback and disputes automation software? Sign up with our two-click process and rev up the engines of your business growth today. See you on the inside!