Chargeback fees – What are they?

A chargeback occurs when a customer disputes a credit card transaction. It’s the last line of defense for the customer and can result in the transaction immediately being reversed: the customer gets refunded and your merchant account is debited. You may be given a chance to prove the legitimacy of the transaction before the money is returned otherwise you will have to provide proof after the fact. You will also be charged a penalty fee or chargeback fee. Chargeback fees are applied whenever a chargeback is successful and is in addition to the amount that is refunded to the customer. A chargeback can be a fixed fee or a percentage of the transaction value.

Selling on the internet has some drawbacks and chargebacks is one of them. As you know there’s not much point in selling on the internet if you don’t accept payment by credit card, but in doing so the ball is in your court to prove that the customer ordered from you and that you delivered the product or service. There are four main categories of chargebacks. Technical issues and clerical issues do crop up and these chargebacks are usually fairly sensible. This could include duplicate billing, erroneous amounts, expired authorization and so forth. On the other hand, a quality based chargeback can be difficult to disprove because your customer may or may not have a legitimate claim regarding the condition or quality of the goods received, or can claim they never received the goods at all.

Chargebacks categorized as fraudulent occur when a customer claims that they never authorized the transaction i.e. their card has been stolen or their card details were otherwise obtained without their permission.
The problem for banks that provide merchant accounts is that when a chargeback occurs they are responsible for refunding the cardholder’s bank, even if they can’t reclaim the money from the holder of the merchant account (you). So apart from the administrative hassle of processing chargebacks, banks are also taking on a degree of risk by offering merchant accounts.

Either way the chargeback fee is there to compensate the bank. Risk-wise a bank will charge you progressively higher chargeback fees the more chargebacks you receive. At some point a bank may refuse to do business with you and close your merchant account, if too many of your transactions result in chargebacks.

Whether chargebacks and the associated fees are fair to sellers with merchant accounts is open for debate. For example, buyer’s remorse has prompted more than a few buyers to try to reverse a transaction and because banks are not required to label a cardholder’s account as compromised when a fraudulent transaction is reported, unscrupulous customers have an incentive to initiate a fraud-related chargeback if they no longer want an item.

As a seller you can take a few precautions. Make sure order history, shipping and tracking information is easily accessible and offer a generous return policy. A lot of chargebacks are initiated because a customer does not recognize the name of the company on their credit card statement, so be sure to advise customers what will show on their statement beforehand. You may also want to refuse shipping to certain countries and you could bar very large orders. There is essentially nothing you can do to completely avoid chargebacks but you can shop around to find merchant accounts with the lowest chargeback fees, and there are several strategies you can implement to reduce chargebacks to a minimum.

Related content:

1. Authorization Fees – What are they?
2. Annual Fees – What are they?
3. Statement fees – What are they?
4. Customer service fees – What are they?