Chargebacks: The Merchant’s Perspective

Chargebacks shouldn’t have to be part of the of the cost of doing business, but for many merchants this is their reality. The payments industry uptick in chargebacks and their associated costs have made it very challenging for merchants to stay true on their path of success.
Because merchants absorb the majority of costs resulting from chargebacks and fraud, it is in their best interest to take action. This means deploying advanced payment solutions, accessing data, and working with issuers to improve and increase resolutions on consumers’ purchase issues.
By continuing the current broken chargeback process, costs will continue to escalate for merchants and issuers. In 2017, chargebacks were a $31 billion problem with $19 billion of the burden falling squarely on merchants. To make matters worse, 63% of consumers ceased merchant patronage after a dispute, which is not a sustainable trend.
Three Key Challenges Facing Merchants
Merchants are in a precarious position when it comes to chargebacks. They typically find out about the dispute too late in the process to take active measures. Merchants face three key challenges within the chargeback process:

  • Accessing all pertinent transaction documentation from a variety of sources and presenting it with issuers or consumers in a timely manner
  • Deciding which disputes are worth contesting
  • Keeping track of dispute timelines and customer histories

Stacking odds against merchant success even higher are the short and long-term impacts on customer retention and lost brand loyalty.
How Chargebacks Cost Merchants
Merchant chargeback liability can include fines and fees, refund costs, recovery of lost merchandise, and the loss of customer loyalty.
Busy merchants typically don’t have the time to understand the breakout of their chargeback costs. Here are the most common charges:

  • Retrieval Requests. The merchant pays a processing fee of $5 – $15 each time an issuer requests an electronic copy of the purchase receipt from the acquirer.
  • Chargeback Fee. Merchants pay up to a $100 acquirer fee for every chargeback, even when the claim is denied.
  • Arbitration Costs. For claims that reach arbitration, the merchant must pay the associated arbitration costs. If the merchant loses the case, they may have to absorb a $500 network fee.
  • Chargeback Penalties. When the merchant’s chargeback ratio exceeds 1% or 1.5% of their total sales volume (depending on multiple card association requirements), they are placed in a chargeback monitoring program. Each subsequent chargeback comes with an additional $100 fee. The ultimate penalty results in the termination of the merchant’s account by the acquirer.
  • Other Fees. Some credit card associations may charge ‘review fees’ for merchants that do not have a transaction dispute reduction plan.

Dollar costs are only one component of the problem. Fraud vulnerabilities and the resulting revenue drain continue to be a threat.

  • Increased Fraud. Merchants frozen out of the early dispute process must play catch up, giving fraudsters more time to commit further criminal acts.
  • Manual Reviews. The manual process required to review disputes is a drain on resources and time.
  • Lost Goods/Services. Merchants frequently do not recover the lost (or stolen) goods or services and associated shipping costs.
  • Lost Consumers and Brand Damage. Consumers have low tolerance for a lengthy dispute process and are quick to abandon merchants.
  • Consumer Experience. A merchant-consumer relationship is almost non-existent in digital sales. This lack of relationship means consumers don’t know who to contact or trust to resolve their dispute, so they typically bypass the merchant and contact the issuer.
  • False Positives. Highly sensitive fraud controls can trigger a false positive, resulting in declines for legitimate purchases. By the time this problem is discovered, the consumer is long gone.

Resolving the Broken Chargeback Process
While most merchants agree that the chargeback process is outdated and inefficient, they may not know that they have the power to make substantial changes that will reduce disputes and associated costs.
This starts with a thorough accounting of how chargebacks are hurting them and then working with their customer service team, issuers, and consumers to create an open and collaborative environment.
Payment solutions like Verifi’s Order Insight™ are designed to reduce transaction disputes for both merchants and issuers by enabling communication without tying up valuable resources.
The benefits of collaboration between merchants, issuers, and consumers can be significant. When the right party has the right information about a transaction at the right time, a dispute can be resolved before it becomes a chargeback. When that happens, everyone wins.