Chargebacks: definition, fees and solutions in 2024

How money moves in a card-centric payments ecosystem

Written by
Qi Cao

Editor’s note

One of the benefits for consumers of paying with card – in particular credit card – is the ability to request a reversal on any transactions considered fraudulent or unauthorized, or for goods and services that did not meet expectations. While important for consumer protection, this also leads to a major headache for merchants who need to be able to manage and potentially dispute these requests, as well as the costs associated with doing so. This feature is also one of the factors that contribute to higher fees on card transactions. Here, Qi Cao of Chargeblast explores where chargebacks come from, how they work and how businesses can do more to make sure the impact on their bottom line remains minimal.

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The term “chargeback” sounds daunting at first, but understanding why the chargeback process exists and how it benefits consumers can make it much clearer. When used correctly, chargebacks safeguard consumers against fraudulent activities or unsatisfactory transactions. However, in some cases, consumers can abuse this system once they discover how easy it is to leverage chargebacks for friendly fraud or to receive free items.

For merchants, chargebacks can result in revenue loss and operational headaches, especially as they try to scale. Here we provide a comprehensive review of chargebacks and how merchants can protect themselves against them using tools like Chargeblast.

Understanding chargebacks

Chargebacks were first introduced in the US in 1974 via the Fair Credit Billing Act. The chargeback option “reassured consumers by strictly limiting their liability in the case of fraud, while keeping merchants honest by giving cardholders the ability to fight back against deceptive practices.”

In the year 2000, the EU Commission defined a chargeback as: “The technical term used by international card schemes to name the refunding process for a transaction carried out by card following the violation of a rule. This process takes place between 2 members of the card scheme, the issuer of the card and the acquirer (the merchant’s bank).”

At its core, a chargeback refers to the reversal of a credit or debit card transaction initiated by a customer, typically stemming from disputes regarding the validity of the charge or the quality of goods or services provided. This process allows consumers to receive a refund in cases of unauthorized or fraudulent transactions, non-delivery of goods or billing discrepancies.

Although chargebacks are a valuable means of protecting consumers from financial mismanagement or fraudulent activities, they can have significant implications for merchants.

Common reasons for chargebacks

  1. Fraudulent transactions: The rise of online transactions has amplified the risk of fraud, where unauthorized individuals gain access to sensitive financial information and make illegitimate purchases. Compromised consumers who detect these unauthorized charges often resort to chargebacks to recover their funds and safeguard their financial assets.
  2. Non-delivery of merchandise: In e-commerce and service-based industries, non-delivery or inadequate fulfillment of goods can trigger chargeback requests from disgruntled consumers.
  3. Billing mistakes: Despite advancements in transaction processing systems, billing errors remain persistent, occasionally resulting in duplicate charges or erroneous billing statements. When consumers identify such discrepancies, they often chargeback to reclaim overcharged amounts.

Chargeback fees

Chargeback fees are fees that the acquiring bank and the payment processors charge merchants to cover the costs of processing a customer's dispute regarding a transaction. These fees help cover the cost of headcount to review evidence submitted by merchants and consumers and ultimately arbitrate disputes.

Chargeback fees vary depending on the industry, geography and individual merchant circumstances, but they generally range from $20 – 100 per chargeback. Chargebacks and their various fees could quickly add up and bring numerous challenges to merchants, such as revenue loss, reputational damages and even account risks and closure.

Visa and Mastercard dispute monitoring programs

Visa and Mastercard will not tolerate chargeback rates (i.e. the number of chargebacks out of total charges over a time period of three months) above 0.65%. This percentage is the first early warning threshold set by the Visa Dispute and Fraud Monitoring Program – a program designed to identify merchants with excessively high disputes and/or fraud, and promote fraud controls and fair business practices.

If merchants exceed a chargeback rate of 0.9%, they will start receiving fees from Visa. Mastercard’s threshold is higher at 1.50%, but most merchants will have already lost their low-risk payment processor (e.g., Stripe, Shopify Pay, etc.) by then and will need to set up shop with a higher-risk payment processor that would likely come with both higher fees and less desirable technology. When a payment processing account is shut down, the merchant may lose business for months while trying to find another processor that can support them.

Merchant response and prevention strategies

Merchants must adopt proactive strategies to combat chargebacks before they put their payment processing accounts at risk. B2C subscription software and e-commerce companies are prone to chargebacks because consumers often forget to cancel their recurring subscriptions. However, there are several tools and strategies to mitigate chargeback risk:

  1. Leverage chargeback alerts: Chargeback alerts help merchants maintain a chargeback rate near 0%. With chargeback alerts, merchants will receive notifications whenever a customer disputes a transaction with their bank. Merchants can then refund the disputed transaction before it becomes an official chargeback on their payment processing account. This helps merchants reduce their chargeback costs and swiftly resolve any customer concerns.
  2. Employ verification tools: Merchants can utilize two-factor authentication or fingerprinting tools to confirm the identity of cardholders and customers. 3D Secure (3DS) is a useful tool that forces customers to confirm verification on their phone or other personal device before a transaction can be completed. However, merchants can find this as an obstacle to customer acquisition as it adds a couple more steps to complete the transaction and can result in a drop off of 10 - 30% in successful transactions.
  3. Use specific billing descriptors: To minimize customer confusion, billing statements must be transparent and include business details and a brief charge description. Consumers review statement descriptors irregularly, so they may not remember every transaction they make. As such, making descriptors as clear as possible with the support phone number included is the best way to reduce confusion and the potential for a chargeback request.
  4. Establish communication lines: Merchants should establish visible and responsive channels where customers can voice concerns and have queries resolved efficiently and promptly. This prevents chargebacks from escalating and creates excellent customer relationships. Leveraging a 24/7 call center is an effective way to make sure customers are always able to reach a representative of your company regardless of where they are located.
  5. Deliver goods and services on time: Merchants should process and deliver goods promptly to avoid chargebacks. Delayed orders alarm customers, decrease trust and prompt them to initiate disputes. Using order tracking tools and apps such as those found on the Shopify app store, for example, can be a good strategy to communicate to customers where their product is in the shipping process.
  6. Set clear refund and return policies: Prominently display easy-to-understand refund and return policies to manage customer expectations and avoid misunderstandings. This will inform customers about the proper actions to take when returning a product and reduce the likelihood of them filing a chargeback.
  7. Enhance customer service: Improve customer service by training staff to effectively handle customer concerns and day-to-day operations satisfactorily. With excellent customer service, merchants can avoid conflicts with customers, and it encourages customers to reach out directly rather than initiate a chargeback.

Benefits of chargeback prevention alerts

Lower dispute rates: Chargeback alerts enable merchants to resolve disputes before they escalate into formal chargeback requests. Thus, they minimize dispute rates and financial losses and protect merchants from being registered in account monitoring programs. It also shields them from account closure.

Reduced chargeback costs: By proactively addressing potential chargeback situations, merchants can avoid associated fees and expenses, safeguarding their profit margins and operational stability.

Enhanced customer experience: Proactively resolving consumer disputes mitigates financial losses and enhances the overall customer experience, fostering consumer loyalty and trust and bolstering long-term business success.

Preserved business reputation: By effectively managing chargeback risks and addressing consumer concerns promptly, merchants uphold their business reputation and credibility, reinforcing trust among consumers and stakeholders.

Preserve time and resources: Fighting chargebacks demands time and thorough investigation, as each case is unique. This can be an obstacle for merchants and their staff, preventing them from concentrating on the essential aspects of their business.

Chargeblast helps businesses lower chargeback rates to 0% and increase payment authorization rates by 5-10%

In essence, chargebacks represent a double-edged sword in financial transactions. They serve as a vital consumer protection mechanism while posing significant merchant challenges. By adopting proactive strategies, merchants can effectively manage and reduce chargebacks. These strategies include maintaining transparent communication with customers and using chargeback prevention alerts.

New tech like Chargeblast can help merchants reduce chargeback rates to near 0% through tools like pre-dispute alerts.

Pre-dispute alerts are sent to the merchant at the moment the customer charges back and before payment processors receive news of the chargeback. Alerts from Chargeblast include the disputing customer’s transaction details (e.g., the last 4 digits of their credit card, transaction amount, transaction date, etc.). Once merchants refund the customer or reach out to the customer to resolve it, Chargeblast notifies the credit card company not to open a chargeback dispute. This process is completed before the merchant’s payment processor is ever aware of the incident. Chargeblast allows merchants to save on chargeback fees, enhance their customer experience, and uphold their business reputation.

About the author

Qi Cao

Qi Cao is a co-founder & CEO of Chargeblast, the most tech-forward and white-glove client service chargeback alerts provider on the market. Before Chargeblast, Qi was a hedge fund analyst at Point72, covering enterprise software and multi-industrials. Prior to that, he worked in Corporate Development at Indigo Ag and as a biotech strategy consultant at ClearView Healthcare Partners. He graduated Yale University with a degree in Molecular and Cellular Biology.