Chargebacks can be a significant financial burden for businesses encompassing both direct and hidden costs. By understanding these costs in detail, merchants can take strategic steps to minimise their impact. 

What is a chargeback? 

A chargeback occurs when a cardholder disputes a debit or credit card transaction, prompting the card issuer to review the claim and, if valid, reverse the transaction by debiting the merchant’s account. 

This process, known as a chargeback, is a growing concern for both merchants and issuers due to its associated costs and time consumption, especially as disputes and chargebacks are expected to increase with the rise of consumers using smartphones for in-store, online, and mobile app purchases. 

According to the 2024 Outlook: Strategic insights for issuers and merchants Ethoca Report, global chargeback volume is projected to reach 337 million transactions in 2026, a 42% increase from 2023 levels. 

The chargeback process is inherently complex and time-consuming. Unless the issuer can quickly determine that the transaction dispute is invalid, a chargeback will be initiated. 

The visible and hidden costs of chargebacks 

When a customer raises a chargeback, it’s easy to focus solely on the immediate loss of revenue and the shipped or delivered products. However, the financial impact of chargebacks goes far beyond these surface-level considerations. Here’s an overview of how chargebacks affect merchants: 

Forfeited revenue: The most visible consequence of a chargeback is the forfeited revenue from the sale. Whether or not the goods are returned, the income associated with the transaction is lost. 

Chargeback fees: Fees payable to the card processor are often overlooked but can accumulate quickly. These fees must be paid even if the dispute is resolved in the merchant’s favour and in some cases, the fee can exceed the transactions value. Mastercard estimates that operational fees to each chargeback range from $15 to $70 in operational costs for every card dispute, creating a substantial burden. 

Lost goods or services: In cases of fraud, chargebacks often mean merchants lose both the revenue, and the goods provided, or the value of services rendered.  

Tools and solutions for chargeback prevention 

Preventing chargebacks is in the best interest of both merchants and card issuers. A variety of tools are available to mitigate disputes before they escalate into costly chargebacks: 

  • Mastercard solutions: Tools such as Ethoca Alerts and Ethoca Consumer Clarity provide real-time information, helping merchants address potential disputes early.
  • Visa solutions: Products like Real-Time Dispute Resolution (RDR), Compelling Evidence 3.0, and Order Insights empower merchants to proactively manage and reduce chargebacks. 

These tools can prevent fraud-related disputes, provide transparency in transactions and enable merchants to detect disputes early, allowing them to hold or cancel shipments before a chargeback happens, significantly reducing losses. Issuers can leverage dispute data by converting it into actionable alerts. They can utilise collaboration networks that offer tools for securely and reliably sharing payment intelligence in real time, facilitating faster dispute resolution, reducing losses, and lowering chargeback volumes. Additionally, adopting solutions that enhance the customer experience and reduce operational expenses, such as call centres, can be beneficial. 

Merchants can implement tools such as chargeback alerts to proactively address disputes before they escalate into chargebacks. These alerts help minimise financial losses associated with processing chargebacks and save employee’s time. Additionally, they enable businesses to take action to prevent potentially fraudulent orders. 

Best practices for chargeback prevention 

Merchants can adopt several practices to reduce the likelihood of chargebacks: 

  • Clear billing descriptors: Billing statements should clearly identify the origin of the transaction to minimise customer confusion.
  • Strong customer support: Resolving customer issues promptly and effectively can prevent disputes from escalating
  • Transparent policies: Terms, conditions, and return policies need to be easily accessible on the business’s website. 
  • Robust documentation: Maintaining detailed records and transaction documentation strengthens chargeback defence efforts. 

Embracing chargeback management 

Despite the best preventative measures, chargebacks are an inevitable part of doing business. The key is to minimise their frequency and manage their costs effectively. By leveraging technology, fostering transparency, and enhancing customer support, merchants can protect their profitability and focus on growth. 

With proactive measures and the right tools, businesses can transform chargeback management from a financial strain into a strategic opportunity for improvement. Our team of experts is ready to assist you in developing a robust strategy to manage chargebacks effectively. Contact us: https://www.payxpert.com/contact/