Chargeback Fee | B2B Finance Glossary

What is a Chargeback Fee?

A chargeback – also known as a reversal – occurs when one of your customers initiates a cardholder dispute and claims it was fraudulent or made without their knowledge or permission. The disputed funds are withdrawn from your business account until you can show enough evidence to prove that the purchase was made with the customer’s knowledge. If you cannot provide enough evidence, you will be charged a chargeback fee on top of losing the dispute.

Chargeback fees will vary in their amount depending on the acquiring bank’s policy, how high-risk your business is, your payment processor, and the types of products and services your company is selling.

How Does a Chargeback Fee Occur?

A chargeback fee is added after a specific process occurs. Here’s what that looks like:

1. The customer contacts their credit card provider to request a chargeback
2. The issuing bank credits the transaction amount to the customer and takes those funds from your merchant account
3. Your payment processor informs you that a chargeback has occurred
4. You go through your records to collect as much evidence as possible to dispute the chargeback
5. If your business has enough evidence to show that it is not at fault, then a chargeback fee won’t occur; however, if you’re not able to show enough evidence, you will not be credited the funds, and you will incur a chargeback fee
6. This fee can cost your business anywhere from $15 to $50 (and sometimes even more if you run a high-risk business) on top of the initial payment that has been refunded to the customer

What Specifically is Included in a Chargeback Fee?

The price of a chargeback fee will vary for numerous reasons because many different factors go into determining what the price of the fee will be. On top of the chargeback fee itself, your business will also have to be responsible for the amount of the lost product or service sale plus any shipping costs.

There are also other fees included as well, including the following:

• Transaction processing fees. This type of fee is equivalent to the transaction’s wholesale cost plus the payment processor’s rate markup. When your business incurs a chargeback, you lose your transaction income, and the fee still applies.
• Acquiring bank fees. The acquiring bank must pay processing fees to process the chargeback request, so it will apply that fee to your business to cover this cost. Remember, chargeback fees usually cost about $15 to $50, and high-risk businesses tend to have to pay even more.
• Business operations expenses. On top of the chargeback fee, your business is also responsible for absorbing the chargeback transaction’s operational expenses. On top of the value of the sale that’s been lost, these expenses include inventory and shipping costs, employee labor costs, and fraud prevention software costs.
• Merchant marketing costs. It’s no secret that businesses spend a considerable amount of capital on marketing and advertising efforts. When your business becomes responsible for a chargeback, it not only loses money on the value of the sale and the added fees, but it also loses advertising dollars that were initially spent to acquire that particular customer in the first place.
• Higher chargeback ratio expenses. Additionally, if your business is hit with continuous chargebacks, your future chargeback fees will be hiked even further. Your acquiring bank might even categorize your business as a high-chargeback-ratio client, which means you have a chargebacks-to-transactions ratio of 1% or more, and you’ll be charged extra fees for each additional chargeback.

How to Minimize Your Chargeback Fee Risks

Confirm the Cardholder’s Proper Identity

Stolen credit cards are the number one reason for chargeback fees, so being able to verify your customers’ identities before they make purchases can help mitigate the potential of incurring a charge.

For card-present transactions, merchants can ask to see their customers’ IDs before allowing them to make a purchase and also require a signature for all magnetic strip purchases; for card-not-present transactions, customers can be required to enter their CVCs before the purchase can be verified.

Make Your Billing Details as Clear as Possible

Make sure that the name of your business – and not your parent company – is clearly stated on any credit card receipts and billing statements so that your customers can recognize the transaction. If they don’t, they’re likely to report the transaction as fraudulent, and your business will be hit with a chargeback.

Also, try to include the maximum number of transaction details allowed on any receipts or billing statements, and be sure to make customer service contact information readily available.

Document All Shipping and Return Policies

Make sure your shipping and return policies are clearly stated at the POS terminal or on your business’s website. Check in with your finance team or accountant to ensure that transaction receipts and statements are being kept for as long as they need to be kept – this will ensure that you have all necessary details available to you if you need to use them to settle a dispute. With the right accounting software, you can ensure this data is readily available to your finance team via cloud storage.

Start using chargeback management tools: If you incur a chargeback, you have seven calendar days from the date of the initial notice to respond to it and dispute it. Therefore, it’s important for chargebacks to be addressed as quickly as possible. You can even enlist specific dispute manager tools and talk to your payment processor about any extra solutions they might have to better support you when it comes to dealing with chargebacks.

Lower Your Payment Processing Fees

While lowering transaction fees doesn’t necessarily help you in the event of a chargeback, it does help your business save on costs that can make or break when it comes to maintaining solvency.

Paystand created its zero-fee bank-to-bank network for this reason – helping businesses accept online payments without the need for credit cards and their punitive transaction fees (which can be as high as 3.5%). If you’re ready to break up with credit card fees for good and switch to a B2B payment solution that’s designed to help you save on revenue, schedule a time to speak with one of our payment experts here.