Understanding Chargeback Fees and Costs: A Merchant’s Guide

As an eCommerce merchant, chargebacks are part of the business – lost revenue, additional fees, and sometimes even strained relationships. Understanding these costs can help you to manage and reduce them effectively. 

In our recent post, we delved into the broader impact of chargebacks, from operational to indirect costs. Here, we focus on chargeback fees: what they are, why they’re applied, and how to proactively manage them to protect your profit margins. With this strategic approach, you’ll be able to navigate these costs more effectively and reduce your chargeback risk over time.

What Are Chargeback Fees?

To understand these costs, let's break down what chargeback fees entail, why they’re imposed, and how they affect your bottom line. Chargeback fees are costs merchants incur when a customer disputes a transaction, and the bank reverses the charge. Imposed by the payment processor or acquirer, these fees offset administrative in managing the dispute. For merchants, this cost is not just another service – it’s often an unexpected expense that directly impacts profitability.

Why Are Chargebacks Expensive for Merchants?

A chargeback isn’t just a simple transaction reversal; they’re a costly setback that can significantly affect a merchant’s business. Beyond the refunded amount, merchants face operational expenses –  time and resources dedicated to gathering evidence and responding effectively -which only add to the total cost of a chargeback. Additionally, chargebacks have long-term effects, potentially straining customer relationships and causing future revenue loss. Recognizing the full cost of each chargeback highlights the importance of proactive prevention and efficient management to sustain profitability.

How Are Chargeback Fees Calculated?

Chargeback fees depend on several factors such as card network, payment processor, and the merchant’s chargeback history. Generally, these fees cover the costs in the chargeback process flow – from processing and investigating disputes to resolving them. Fees generally range from $15 to $100 per chargeback, but some high-risk industries face even higher charges. Understanding the fee structure allows merchants to make informed decisions about payment providers and identify recurring fees’ root causes, potentially reducing their frequency. 

Understanding Chargeback Rules and Time Limits

The chargeback process includes strict rules and time limits, varying by card network. Merchants typically have a limited window to respond to disputes – generally between 10-15 days from the time of notification. Missing these deadlines often results in an automatic dispute loss and associated fees. Familiarizing yourself with these rules and responding quickly will be key to successfully resolving disputes.

Chargeback Process Flow: From Dispute to Resolution

The chargeback process has multiple stages, requiring clear documentation and quick responses to improve resolution changes. Here’s a step-by-step breakdown to ensure a successful outcome:

1. Dispute Initiation
   When a cardholder disputes a transaction, charges are often initiated due to fraud, unrecognized charges, or dissatisfaction. The issuing bank temporarily reverses the payment, initiating the chargeback.
2. Issuing Bank Review
   The bank investigates the claim. If the bank determines the claim is reasonable, it begins its formal collection, and the payment processor is notified, who then alerts the merchant.
3. Merchant Notification
   The merchant receives a chargeback notice with a chargeback reason code (e.g., "Not as Described" or "Fraud") and the disputed amount. This notice includes a deadline for the merchant to respond.
4. Evidence Collection by Merchant
   The merchant gathers the necessary documentation within the response time frame, usually 10–30 days. Documentation such as proof of delivery, transaction records, signed receipts, and customer communications may be required.
5. Merchant Response (Representment)
   If the merchant believes the chargeback is unreasonable, they may submit a reply (known as "representment") to the acquiring bank with evidence consistent with the reason code. In the case of fraud, this may include customer authentication (such as CVV or AVS check).
6. Acquirer and Issuer Analysis (Bank Analysis)
   The merchant evidence is reviewed by the bank and, if sufficient, is forwarded to the issuing bank for final review. Both banks assess the sufficiency of the evidence and ultimately decide whether to support or reverse the chargeback.
7. Resolution and Final Decision
   The issuing bank makes the final decision based on the evidence. If the evidence is decided in favor of the merchant, the chargeback is honored. If the cardholder wins, the merchant loses the chargeback fee and releases the transaction amount, and unresolved disputes could increase the merchant’s chargeback ratio, affecting processing fees and account stability.

‍

How to Reverse a Credit Card Chargeback

Once a merchant wins, the next step involves the chargeback reversal, where the originally disputed funds are essentially returned to the merchant's account. This step-by-step process ensures merchants recover their losses:

1. Submit Evidence and Win the Dispute
   Effective evidence submission (e.g., delivery confirmations) is critical to winning a dispute.
2. Awaiting Issuing Bank Confirmation
   If successful, the issuing bank confirms the positive outcome and notifies the processor to start the reversal.
3. Verify the Credit Reversal
   The funds should reappear in the merchant’s account, within a few business days.
4. Update Financial Records
   Ensure accurate reporting by documenting the reversal details.
5. Monitor for Additional Fees
   Some processors will still charge administrative fees, so check your statements to find out.

Tips for Prevent Future Chargeback 

While winning disputes is positive, preventing chargebacks should still be the goal. Clear return policies, fraud detection tools, and accurate transaction records help reduce the frequency of chargebacks. Merchants can also benefit from specialized chargeback management tools to identify patterns and better manage disputes.

By following these steps and preventive measures, merchants can reduce chargeback impact, strengthen their defense, and maintain a healthier bottom line.

Mastering the Chargeback Process to Protect Your Profits

Understanding the chargeback process flow, from dispute initiation to resolution is essential to protect your business from unexpected losses and maintain good customer relationships. By staying organized, rapid response, and using all available resources effectively, merchants can minimize the impact of chargebacks and improve their win rates. Remember that prompt actions such as accurate record-keeping, managing customer communications, and using chargeback management tools can make all the difference.

Ready to take control of your chargeback process? Partner with Chargeflow for seamless management and let us help you protect your bottom line and customer relationships.