Chargeback 101
In this entry, we will be giving a general overview of what Chargebacks are and the implications for merchants that receive chargebacks.
A chargeback occurs when a credit cardholder contacts his issuing bank to dispute a transaction or initiates a refund for a purchase made on his/her credit card. Chargebacks happen for a variety of reasons, part of which can be explained from the chargeback reason codes given to merchants but they are not always accurate. In general, chargebacks usually arise from the customers' dissatisfactions with the purchase (e.g. product not as advertised), buyers' remorse, and fraud. Chargebacks can often be classified into two larger categories: friendly fraud and True Stolen Card fraud, which we will cover in more detail in Part II and Part III of this series.
Why are chargebacks such a problem?
When merchants get a chargeback, they lose the following:
1) Revenue from the product or service sold
2) Value of the product/services sold (unless they can get customer to return the product)
3) Processing fees from the purchase
In addition, there is usually a chargeback fee, ranging from $15-30, levied per chargeback by the merchant's processor. Since chargebacks can happen up to six months after the original transaction took place (some issuers allow even longer time frames), this can present an cash flow issue since merchants may have already spent the earned revenue, for example, to buy more inventory. There are associated costs involved as well such as administrative and customer service related costs in dealing with the chargebacks
What happens if a merchant has too many chargebacks?
Aside from the financial losses due to fraud, chargebacks can actually do even greater damage to an online business. The card associations will levy fines against the merchant's acquirer, which in turn will pass on the fines onto the merchant for excessive chargebacks. What is considered excessive? The threshold is actually quite low. Merchants who have more than 1% of their total volume of transactions or 1% of the total revenue result in chargebacks are at risk. If uncontrolled, on top of the fines, merchant acquirers often will start keeping portions of the merchants' funds on reserve. This can cause serious cash flow problems. If merchants cannot cure the chargeback problem, there is a possibility that the merchants will have their merchant accounts terminated and/o lose the ability to accept credit cards online. Getting another merchant account after such a termination can be difficult.
What can merchants do to protect themselves?
Sounds serious? Well, it is. Chargebacks are an annoyance that all merchants will deal with at some point with various degrees of severity. Luckily, managing, reducing, and keeping your chargebacks under the 1% threshold is not that difficult with the right processes and tools. In the next two parts of this series, we will examine how to identify and how to reduce chargebacks related to friendly fraud and true Stolen Card Fraud.
A chargeback occurs when a credit cardholder contacts his issuing bank to dispute a transaction or initiates a refund for a purchase made on his/her credit card. Chargebacks happen for a variety of reasons, part of which can be explained from the chargeback reason codes given to merchants but they are not always accurate. In general, chargebacks usually arise from the customers' dissatisfactions with the purchase (e.g. product not as advertised), buyers' remorse, and fraud. Chargebacks can often be classified into two larger categories: friendly fraud and True Stolen Card fraud, which we will cover in more detail in Part II and Part III of this series.
Why are chargebacks such a problem?
When merchants get a chargeback, they lose the following:
1) Revenue from the product or service sold
2) Value of the product/services sold (unless they can get customer to return the product)
3) Processing fees from the purchase
In addition, there is usually a chargeback fee, ranging from $15-30, levied per chargeback by the merchant's processor. Since chargebacks can happen up to six months after the original transaction took place (some issuers allow even longer time frames), this can present an cash flow issue since merchants may have already spent the earned revenue, for example, to buy more inventory. There are associated costs involved as well such as administrative and customer service related costs in dealing with the chargebacks
What happens if a merchant has too many chargebacks?
Aside from the financial losses due to fraud, chargebacks can actually do even greater damage to an online business. The card associations will levy fines against the merchant's acquirer, which in turn will pass on the fines onto the merchant for excessive chargebacks. What is considered excessive? The threshold is actually quite low. Merchants who have more than 1% of their total volume of transactions or 1% of the total revenue result in chargebacks are at risk. If uncontrolled, on top of the fines, merchant acquirers often will start keeping portions of the merchants' funds on reserve. This can cause serious cash flow problems. If merchants cannot cure the chargeback problem, there is a possibility that the merchants will have their merchant accounts terminated and/o lose the ability to accept credit cards online. Getting another merchant account after such a termination can be difficult.
What can merchants do to protect themselves?
Sounds serious? Well, it is. Chargebacks are an annoyance that all merchants will deal with at some point with various degrees of severity. Luckily, managing, reducing, and keeping your chargebacks under the 1% threshold is not that difficult with the right processes and tools. In the next two parts of this series, we will examine how to identify and how to reduce chargebacks related to friendly fraud and true Stolen Card Fraud.
