What do chargebacks mean to merchants?

Chargebacks shouldn’t have to be part of the cost of doing business, but unfortunately for many merchants it is their reality. This creates a real challenge for businesses of all types, everywhere.

Consumers are increasingly leaving merchants out of the dispute process, initiating a fraud-related chargeback directly with issuing banks up to 76 per cent1 of the time. In fact, issuers and merchants alike believe that it is too easy for consumers to dispute transactions. This vulnerability in the dispute process, as it has evolved over time, may be contributing to a growing risk of friendly fraud. 

When a merchant learns of a dispute, it's often too late to even begin a chargeback defence. The merchant loses the chance to resolve the consumer’s issue, determine if true fraud has happened, or avoid additional and significant chargeback losses. And it’s only getting worse.

By continuing the current broken chargeback process, costs will continue to escalate for merchants and issuers. Based on research conducted by Verifi and Javelin Strategy & Research, in 2017 chargebacks were a $31 billion problem in the US market alone, with $19 billion of the burden falling squarely on merchants. To make matters worse, research has shown that 63 per cent of consumers ceased merchant patronage after a dispute, which is not a sustainable trend.

So, what are the key challenges facing merchants, and what can they do? 

The challenges

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, and face three key challenges within the chargeback process. These are:

1. Accessing all transition documentation from a variety of sources and presenting it to issuers or consumers in a timely manner
2. Deciding which disputes are legitimate or worth contesting
3. Keeping track of dispute timelines and customer histories

The odds stacked against merchants’ success are even higher when considering the short and long-term impacts on customer retention and lost brand loyalty.

The cost to merchants

Merchant chargeback liability can include fines and fees, refund costs, recovery of lost merchandise, and the loss of customer loyalty. The most common charges associated with chargebacks that merchants face are:

1. Chargeback fee – Merchants pay an acquirer fee for every chargeback, even when the claim is denied – this can reach or be in excess of £100.
2. Resources and labour – The merchant must foot the cost for handling and resolving chargebacks from start to finish, which can have a considerable impact on bottom line profits.
3. Arbitration costs and retrieval requests – In order to successfully fight a claim, merchants must build compelling evidence – this starts with a retrieval request, a digital copy of the purchase receipt from the acquirer. Then, once a claim reaches arbitration, the merchant must pay the associated arbitration costs. If the merchant loses the case, they may have to absorb a network fee.
4. Chargeback Penalties – When the merchant’s chargeback ratio reaches a certain level of their total sales they are placed in a chargeback monitoring programme. The criteria to be placed on a chargeback programme is specific to each payment brand, but can be up to 1.5 per cent. Each subsequent chargeback comes with an additional fee. The ultimate penalty results in the termination of the merchant’s account by the acquirer.
5. Other Fees – Some credit card associations may charge ‘review fees’ for merchants that do not have a transaction dispute reduction plan.

If merchants are frozen out early in the dispute process, they are put on the back foot and must play catch-up when investigating fraudulent activity. This gives fraudsters an opening to commit further criminal acts, creating a troublesome cycle of challenges for merchants. In addition to this, the manual review process required to review disputes is a drain on resources and time for merchants, dragging the process out and incurring further costs.

Not only are there process issues associated with chargeback fraud, but there is also the loss of goods/services. Merchants frequently do not recover the lost (or stolen) goods or services and associated shipping costs from a fraudulent chargeback. In addition to this physical loss, there is also the brand and customer loyalty damage that merchants must manage.

Consumers have low tolerance for a lengthy dispute process and are quick to abandon merchants. 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 process

Most merchants would agree that the chargeback process is outdated and inefficient. However, they may not know that they have the power to make substantial changes that will reduce disputes and associated costs.

As with resolving most issues, this starts with drilling down to find the real source of pain points for businesses. This will allow merchants to identify how chargebacks are hurting their business and then work with their customer service team, issuers, and customers to create an open and collaborative environment to resolve disputes efficiently. 

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.