Got A Chargeback Fee? Here’s What It Means, How Much You’ll Pay–And What You Should Do Next
As an enterprising retail business owner, credit card sales provide you with a major revenue boost. Whether you operate a brick-and-mortar retail store or market your products through an eCommerce platform, every credit card sale contributes to your business’ growth. However, one credit card transaction always makes your palms sweat and makes your stomach churn: the dreaded chargeback fee.
What Is A Chargeback Fee?
A chargeback fee is a fee charged by acquiring banks to cover the administrative expenses incurred when processing a chargeback.
A credit card chargeback fee occurs when a cardholder (customer) disputes a previous credit card charge and wants to nullify the sales transaction. Essentially, the customer asks the card-issuing bank to return those funds to the customer’s bank account.
Several factors can trigger a chargeback fee. First, someone may have stolen the customer’s card and used it for a spending spree (a form of credit card fraud). When the customer found out (probably from their card-issuing bank), they likely requested that the fraudulent transaction(s) be canceled.
On the flip side, the chargeback may be due to “friendly fraud.” The customer may have forgotten they purchased the item. Maybe they’re not happy with the product, or they don’t know how to return it to your store. Or, if the customer doesn’t recognize your business name (e.g. a DBA name) on their card statement, they may initiate a chargeback because they suspect fraud. In certain instances, a more sinister form of chargeback fraud can take place. This happens when the customer purposely initiates a chargeback for products they’ve legitimately purchased and received.
Unfortunately, sometimes the merchant is at fault. Maybe you entered the wrong purchase information or charged the customer twice for the same item. In some cases, products are shipped to the wrong address. Either way, you can’t always blame the customer for deciding to cancel the purchase.
How Does It Work?
Here’s a brief overview of how a merchant might incur a chargeback fee:
- The customer contacts their card issuer or credit card provider and requests a chargeback
- The issuing bank credits the transaction amount back to the customer and pulls funds from your merchant account
- Your payment processor alerts you about the chargeback
- You look into your records to dispute the chargeback
If you’re unable to produce enough evidence to counter the chargeback or if your business is at fault, then the funds won’t be returned to your account and you will incur a chargeback fee.
Chargeback Fees vs. Refunds
Note that a credit card chargeback fee isn’t the same as a returned item chargeback fee. When a customer returns an item to your store, you credit their card for the purchase amount and place the item back in stock. So, the card-issuing bank never gets involved. If you can quickly resolve most issues with a refund, that will help to decrease your chargeback rate.
Why Merchants Incur A Chargeback Fee
When a customer’s card-issuing bank processes their chargeback request, you (the merchant) will likely get dinged with a chargeback fee. If you wonder about the chargeback fee source, consider two reasons for the bank’s action.
First, the card-issuing bank just dipped into their funds and returned the customer’s purchase amount back to their card. The bank wants to recoup that cash outlay, so they’ll retrieve the funds from your account.
Or, let’s say that a careless mistake triggered a chargeback request. Maybe you charged the customer for an incorrect item, or you accidentally rang up the sale twice. Either way, expect a chargeback fee to be assessed in the very near future.
Your payment processor will require you to research and resolve the chargeback issue. If the chargeback investigation determines that you’re not at fault, you’ll likely get the purchase amount returned to your account. However, you probably won’t get so lucky with the research fee.
How Much Do Chargeback Fees Cost?
Generally speaking, chargeback fees range from $15 to $50. High-risk merchants will pay considerably more than that.
Note that chargeback fees also vary depending on your payment processor. Here’s a quick rundown of the fees charged by popular payment processing providers:
- PayPal’s chargeback fee – $20 when the customer files a chargeback. This fee is waived if you’re enrolled in PayPal’s Seller Protection program.
- Square’s chargeback fee – Usually $15 to $25 for every disputed charge. The company offers $250 per month for chargeback protection on qualified transactions.
- Bank of America’s chargeback fee – $25 to $50 whenever the buyer files a chargeback.
- Shopify’s chargeback fee – $15 per chargeback for U.S. merchants
- Stripe’s chargeback fee – $15 for every dispute
What’s Included In A Chargeback Fee
Chargeback fees can vary depending on the situation. The acquiring bank (the merchant’s bank) and payment processor will often have some input on the fee amount, along with credit card networks like Visa and Mastercard.
The types of products or services sold, plus several other factors, play a part in a chargeback fee calculation. However, the actual chargeback fee is only the beginning. Bear in mind that you’ll be on the hook for the amount of the lost product sale (plus any shipping costs). Here are several other fees that you’ll incur for every chargeback request.
Transaction Processing Fee
This ever-present fee usually includes the transaction’s wholesale cost along with the processor’s rate markup. When you’re hit with a chargeback request, you lose the transaction income while the fee still applies.
Acquiring Bank Fee
The acquiring bank wants to recover its chargeback processing fees, so it assesses a fee to your business. Although typical chargeback fees range from $20 to $50, you’ll pay more if you’re a high-risk business.
Business Operations Expenses
In addition to the actual chargeback fee, your business must absorb the chargeback transaction’s operational expenses. Besides the value of the lost sale, these expenses include inventory and shipping costs, employee labor costs, and fraud prevention software costs.
Merchant Marketing Costs
You’ve likely invested considerable resources in your marketing and advertising campaigns. These programs help to attract customers to your store and encourage them to buy your products or services. When a sale is negated because of a chargeback request, your business can’t recoup those lost marketing and advertising dollars.
Higher Chargeback Ratio Expenses
If you’re hit with numerous chargebacks, your chargeback fees will keep going up. At some point, your acquiring bank will likely designate your business as a “high chargeback ratio” client. This means you have a chargebacks-to-transactions ratio of one percent or greater, and you’ll incur extra fees for each subsequent chargeback.
If your chargeback ratio keeps climbing, your acquiring bank will probably place your business into a chargeback monitoring program, which carries its own service fee. In extreme cases, your bank may even terminate your merchant account. In a worst-case scenario, all your potential acquiring banks will blacklist your business, and you won’t be able to accept credit cards, period.
View A Sample Merchant Chargeback Fee
To illustrate how a chargeback can negatively impact your business, view this sample $150 transaction from an upscale kitchen equipment retailer.
Transaction amount…………………….. $150.00
Transaction fee (4%)……………………..$6.00
Product expenses (23%)………………..$34.50
Operational expenses (20%)………….$30.00
Marketing expenses (35%)…………….$52.50
Total chargeback cost…………………$298.00
Note: If your business falls into the “high chargeback ratio” group, your chargeback fee will be considerably higher. And, if you’re placed into a monitoring program, you’ll also incur that service fee.
Can Merchants Dispute A Chargeback Fee?
Yes, you can contest a chargeback fee. However, don’t procrastinate, as you have limited time to respond during each phase of the chargeback resolution cycle. In addition, you’re the last party to be notified of the chargeback, so there’s really no time to waste.
First, clarify any miscommunication with the customer. If you can prove that you issued a credit, for example, you may come out ahead in the chargeback investigation. If you do it quickly enough, you might be able to avoid the chargeback.
However, know that chargeback rules clearly favor the customer, and you’ll probably lose most chargeback battles. If the circumstances indicate that you won’t win, don’t waste your resources fighting this chargeback. Instead, target your efforts on situations in which you have ironclad evidence to prove your case.
Finally, if you know the chargeback is your fault, admit your mistake and let the chargeback stand. Although you’ll take a financial hit, you’ll maintain your honest reputation in the marketplace.
Minimize Your Chargeback Fee Risks
Although chargeback fees are an unwelcome part of retail business operations, you can minimize the chances that you’ll be impacted by this growing hazard. Here are three tactics that will help to knock down your risks.
Confirm The Cardholder’s Identity
With stolen credit cards now the top reason for a chargeback fee, verifying your customer’s identity is a big step toward eliminating the problem. So, request a photo ID for in-person purchases, and always ask for card verification codes. Get the customer’s signature for a magnetic stripe card transaction.
After the sale, quickly send an itemized email receipt so the customer can verify the transaction while it’s fresh in their minds. If the transaction is declined, lock the cardholder out after a preset number of repeat attempts.
Make Your Billing Details Crystal Clear
Avoid using a DBA (doing business as) or parent company’s name on your credit card receipts and statements. Your customer may not recognize it and may cancel the transaction to avoid potential credit card fraud.
To avoid this unwelcome scenario, use your exact store or website name on all transaction details. If space allows, include your customer service phone number and hours. Include the maximum number of transaction details allowed by character counters.
Document Your Shipping And Return Policies
Always be transparent about your merchandise shipping policies and timelines. Don’t gloss over this issue so you can make the sale, as this practice can return to haunt you when the customer still doesn’t have their merchandise after the stated arrival time. Follow similar guidelines with your returns. Clearly post your return policy at the POS terminal and/or on your business’ website.
Finally, ask your accountant how long you should keep your transaction receipts and statements (if you still receive paper copies). Remember, you want to have those important details available when you need them. To resolve this issue for good, switch to tree-friendly cloud-based statements.
Adopt Chargeback Management Tools
When you’re hit with a chargeback, you have 7 calendar days (from the date of the notice) to respond to it. Failing to fight chargebacks in a timely manner will result in the loss of revenue for that particular transaction (plus additional fees).
As such, you must see to it that chargebacks are addressed immediately. One of the ways to do this is to use chargeback solutions like a Dispute Manager tool which gives you online access to chargeback notices along with tools to upload response documents (rather than sending them by mail). This saves time and helps ensure that chargebacks are handled sooner rather than later.
Talk to your payment processor and ask about any tools or solutions they provide to support you in the event of a chargeback.
Lower Your Payment Processing Costs
Chargeback fees often come with the territory of payment processing. You can’t always fight them, but one thing you CAN do is lower your overall credit card processing costs. Payment Depot’s innovative pricing model saves merchants hundreds, if not thousands of dollars per month in payment processing.
If you think you’re overspending on credit card fees, get in touch to get a free statement analysis. We’ll look into your merchant statement or proposal and offer unbiased advice on how you can save.
Quick FAQs about Chargeback Fee
Q: What is a chargeback fee and when does it occur?
A chargeback fee is a fee charged by acquiring banks to cover the administrative expenses incurred when processing a chargeback. It occurs when a cardholder (customer) disputes a previous credit card charge and wants to nullify the sales transaction, ultimately requesting the card-issuing bank to return the funds to their account.
Q: What are some common reasons for chargebacks?
Reasons for chargebacks include credit card fraud, “friendly fraud,” unrecognized DBA name on customer’s card statement, merchant mistakes (like charging for the wrong item), or issues with product shipment.
Q: What is the difference between a credit card chargeback fee and a returned item chargeback fee?
A credit card chargeback fee involves the card-issuing bank and occurs when the customer disputes a charge, while a returned item chargeback fee takes place when the customer returns an item to the store for a refund, without involving the card-issuing bank.
Q: How much do chargeback fees usually cost?
Chargeback fees generally range from $15 to $50, but they can be higher if the merchant is considered high-risk. The fees vary depending on the payment processor and the acquiring bank, as well as credit card networks like Visa and Mastercard.
Q: Can a merchant contest a chargeback fee?
Yes, a merchant can contest a chargeback fee, but there is limited time to respond during each phase of the chargeback resolution cycle. If a merchant immediately resolves miscommunications or issues with the customer, they might be able to avoid the chargeback altogether.
Q: How can merchants minimize the risk of chargebacks?
Merchants can minimize chargeback risks by verifying the customer’s identity, providing detailed transaction receipts, using their store or website name on all transaction details, being transparent about shipping and return policies, retaining transaction receipts and statements, and utilizing tools or solutions provided by payment processors to address chargebacks promptly.