If you're a merchant wondering why there's a dent in your profits, chargeback fees are to blame. While these fees are avoidable, most merchants don't know they exist.
As per reports from the Pew Research Center, online fraud is on the rise, leading to nearly $16.6 billion in losses in 2024. If you're a merchant, you may be counting some of these losses. While you try to boost your revenue, chargeback fees are a silent killer, eroding your bottom line.
Unfortunately, most merchants usually write off the losses from chargeback fees as the cost of doing business. If you own a business, you have to stop treating chargeback fees as a small problem and start thinking about ways to prevent them from eating your profits.
Why Are Chargeback Fees Rising?
Mastercard reports that global chargeback costs will face a 24% increase from 2025 to 2028. Here are reasons for the increase:
Growing Digital Transaction Volumes
As the subscription economy grows, your business is likely to face an increase in digital purchase volumes. Since most online businesses are operating on a card-not-present (CNP) model, they face a higher risk of credit card disputes.
If you have chargebacks, you have to deal with:
- The loss of a sale
- Non-refundable fees
- Operational costs
- The expense of your product itself
Being unaware of these costs negatively impacts your business. As the chargeback volumes increase, these fees eat into your margins.
Increasing Fraudulent Chargeback Volume
Without physical cards and signatures to verify purchases, ecommerce fraud is on the rise. These scams will often lead to fraudulent chargebacks.
When criminals steal credit cards to buy products, the card owner starts a dispute. If your business is a victim of this fraud, you will have to take back the product and pay some fees.
Why Do Vendors Hate Chargebacks?
Once you're aware of the impact of merchant chargeback fees on your bottom line, you'll hate it. Here is why:
High Chargeback Costs
When you face a chargeback, you'll lose more than the original transaction amount. You'll also have to deal with the following losses:
- Chargeback fees
- Payment processing risks
- Time and labor dealing with payment disputes
- Lost goods or services if you have already made a delivery
Even if your business wins the dispute, the stress of handling the situation is quite costly. Additionally, if you're a high-risk merchant, a few chargebacks can put your whole business at risk.
The Growth of Friendly Fraud
Sometimes, chargebacks can be so frustrating since not all of them are legitimate. These are chargebacks that happen due to friendly fraud. With friendly fraud, a customer makes a valid purchase, then has a second opinion about it on purpose or out of confusion.
Some cases of friendly fraud happen when:
- A client forgets a purchase and assumes it's fraud
- A family member makes an unauthorized purchase
- A client claims the product they ordered never arrived when it did
If you're a merchant dealing with this type of fraud, you'll have to assess the false claims and get evidence. Even after doing all this, you may still lose the dispute.
Chargebacks Can Freeze Merchant Accounts
Payment processors hate risk. If your business gets involved in a lot of payment disputes, the processor can:
- Lock away a percentage of incoming payments
- Delay payouts for a while
- Freeze your account entirely with no access to funds
In some cases, the processor may terminate the relationship they have with you. As a result, you'll have to look for a new provider.
What Strategies Can You Use for Proactive Chargeback Prevention?
With chargeback costs explained, you now need to know how to protect your profits. Here are some chargeback prevention strategies you can use:
Verify The Cardholder's Identity
When processing online payments, put in place security measures to verify the identity of the cardholder. You can use an Address Verification Service (AVS). It will help you check if the billing address provided by your client matches the one recorded with the issuing bank.
Update Your Inventory
Shipping the wrong item or failing to deliver can lead to chargebacks. To avoid this, update your inventory regularly so that you have accurate stock showing on your website.
Improve Communication and Customer Service
A lot of chargebacks happen because of customer dissatisfaction. Improving the communication between you and your clients, as well as offering good customer service, can help prevent these disputes.
Frequently Asked Questions
What Is the Difference Between a Chargeback and a Refund?
A chargeback happens when a merchant returns money to the customer's card account after a payment dispute. With a refund, you get a repayment of a sum of money.
For chargebacks, the customer with a card informs their card issuer. Next, the issuer makes a formal dispute case via the appropriate card scheme. With refunds, the cardholder informs you, as the merchant, to request a refund directly.
Who Controls the Money in a Chargeback?
With chargebacks, your customer's bank is in control of the money. Once there's a notification of fraud, their bank will pull the funds in question from your business's account and hold onto them.
As a merchant, you no longer have access to the money. Your customer will get a provisional credit from their card issuer.
If you're involved in this dispute, you can only submit evidence to fight a chargeback and wait. The issuing bank also holds the authority over whether to return the funds to you or keep them credited to the cardholder.
Can a Chargeback Be Denied?
Yes, chargebacks can be denied. However, you can't block chargebacks as a merchant. Banks and card issuers can do it.
They can deny claims if your customer lacks evidence or breaks the rules. The outcome will depend on how well your case fits the issuer's guidelines.
Stop Chargeback Fees from Eating Your Profits
Chargebacks protect your consumer. However, if you're a merchant, chargeback fees can lead to a lot of losses, especially if they're illegitimate. You want to find ways to prevent these disputes and protect your profits.
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This article was prepared by an independent contributor and helps us continue to deliver quality news and information.