Understanding and Avoiding Chargeback Fees for Businesses

Table of Contents

1. What is a chargeback fee?
2. Why do banks charge a chargeback fee?
3. How does a chargeback fee occur?
4. Why are chargeback fees so high?
5. How do I avoid chargeback fees?
6. Paystand: a zero-fee solution to avoid chargeback fees

Key Takeaways

• Chargeback fees are costly for businesses, especially high-risk transactions, resulting in lost revenue and additional expenses.
• A chargeback occurs when a customer disputes a charge as fraudulent, and if the merchant cannot provide sufficient evidence, they lose the funds and face fees.
• Merchants typically cannot refuse chargebacks but can dispute them if there's enough evidence.
• Banks charge chargeback fees to offset processing costs, deter frivolous claims, and encourage resolution between cardholders and merchants.
• Chargeback fees vary based on the business's risk level, and additional operational costs exacerbate the financial impact.
• Businesses can avoid chargeback fees by verifying customer identities, providing clear billing and return policies, and using dispute management tools.

Chargeback fees can be costly and frustrating for businesses, especially when dealing with high-risk transactions. Every chargeback results in lost revenue and includes additional fees that can quickly add up.

Understanding how chargeback fees work—and, more importantly, how to avoid them—is essential to maintaining your business's financial health. In this guide, we’ll walk you through everything you need about chargeback fees, from how they’re triggered to the steps you can take to minimize their impact. Keep reading to learn how to protect your business and save on fees.

Ready to dive deeper into chargeback fees and how to avoid them? Let’s get started.

What is a Chargeback Fee?

A chargeback – also known as a reversal – occurs when one of your customers initiates a cardholder dispute and claims it was fraudulent or made without their knowledge or permission. The disputed funds are withdrawn from your business account until you can show enough evidence to prove that the purchase was made with the customer’s knowledge. If you cannot provide enough evidence, you will be charged a chargeback fee on top of losing the dispute.

Chargeback fees vary depending on the acquiring bank’s policy, your business's high-risk status, your payment processor, and the products and services your company sells.

Can You Refuse a Chargeback?

Merchants can't usually refuse chargebacks, but they might if there's evidence of fraud, the cardholder has already filed a chargeback, or the cardholder hasn't provided enough proof. If a merchant refuses a chargeback, the cardholder can appeal the decision. Merchants can avoid chargebacks by accurately describing their products, providing clear instructions, and responding to inquiries quickly.

Why Do Banks Charge a Chargeback Fee?

Banks charge a chargeback fee for many reasons.

• To offset the costs associated with processing chargebacks: Chargebacks can be time-consuming and expensive, and banks must recoup these costs. The fee helps to cover the cost of investigating the chargeback, contacting the merchant, and issuing a refund to the cardholder.
• To discourage frivolous chargebacks: Chargebacks can be a costly inconvenience for merchants, and banks want to dissuade cardholders from filing them for frivolous reasons. The fee helps deter cardholders from filing illegitimate chargebacks.
• Banks want to encourage cardholders to work with merchants to resolve disputes before filing a chargeback: The fee makes it more expensive to file a chargeback, helping to incentivize this.

How Does a Chargeback Fee Occur?

A chargeback fee is added after a specific process occurs. Here’s what that looks like:

1. The customer contacts their credit card provider to request a chargeback.

2. The issuing bank credits the transaction amount to the customer and takes those funds from your merchant account.

3. Your payment processor informs you that a chargeback has occurred.

4. You review your records to collect as much evidence as possible to dispute the chargeback.

5. If your business has enough evidence to show that it is not at fault, a chargeback fee won’t occur; however, if you cannot show enough evidence, you will not be credited the funds and will incur a chargeback fee.

6. This fee can cost your business anywhere from $15 to $50 (and sometimes even more if you run a high-risk business) on top of the initial payment refunded to the customer.

Why Are Chargeback Fees So High?

The price of a chargeback fee will vary for numerous reasons. Many different factors go into determining the fee's price. In addition to the chargeback fee, your business must be responsible for the lost product or service sale plus any shipping costs.

There are also other fees included as well, including the following:

• Transaction processing fees: Transaction fee equals wholesale cost plus processor's markup. Chargebacks result in lost income and still incur fees.
• Acquiring bank fees: Chargeback fees cover processing costs for acquiring banks, typically $15-$50, with higher fees for high-risk businesses.
• Business operations expenses: In addition to chargeback fees, businesses must cover operational costs such as inventory, shipping, labor, and anti-fraud software.
• Merchant marketing costs: Businesses lose money on chargebacks, including the sale value, fees, and advertising costs used to acquire the customer.
• Higher chargeback ratio expenses: High chargebacks lead to higher fees and potential categorization as high-risk clients, resulting in additional fees for each chargeback.

How Do I Avoid Chargeback Fees?

• Confirm the cardholder’s identity: Merchants can verify customers' identities before purchases to reduce chargeback fees. Ask for IDs and signatures; for card-not-present transactions, require CVCs.
• Make your billing details clear: Display your business name, not the parent company's, on receipts and statements. Include maximum transaction details and make customer service contact information accessible to avoid fraud reports and chargebacks.
• Document all shipping and return policies:
  • State shipping and return policies.
  • Keep transaction receipts and statements as required by your finance team.
  • Use accounting software to share data with your finance team.
  • Respond to chargebacks within seven calendar days.
  • Use dispute manager tools and consult your payment processor for support.
• Lower your payment processing fees: Lowering transaction fees can help businesses save on costs and maintain solvency. Paystand's zero-fee B2B network enables businesses to accept digital payments without credit card fees. Schedule a consultation to switch to a B2B payment solution designed to save on revenue.

Paystand: A Zero-Fee Solution to Avoid Chargeback Fees

As chargeback fees burden businesses, finding a solution that minimizes these costs is crucial. Paystand’s zero-fee B2B network allows companies to process B2B payments without the hefty credit card fees often accompanying chargebacks. With our blockchain-powered platform, you can protect your revenue and streamline your payment processes.

Ready to eliminate chargeback fees and save your business money? Learn more about Paystand’s B2B network and schedule a demo today.