Global chargebacks exceeded $117 billion in 2023 (source: Mastercard). These costs can quickly add up, impacting a company’s revenue, product inventory, and even its ability to work with payment processors. Let’s uncover the true costs of chargebacks and explore how they can eat away at your profits.
Understanding Chargebacks
Chargebacks occur when customers dispute transactions and request their bank to reverse the payment. This process bypasses your company’s refund process and can result in the loss of revenue, products, and additional chargeback fees. Additionally, banks have the authority to take the money from you immediately to re-coop the funds from the disputed transaction, making chargebacks a significant threat.
Lost Revenues and Merchandise
When a customer successful wins a chargeback, you not only lose the revenue from the sale but also the products sold. Unlike refunds, customers are usually not required to return the items they received. This can lead to significant financial losses, especially if chargebacks are abused by customers seeking free products. In fact, up to 80% of chargebacks are estimated to be the result of friendly fraud (Mastercard).
Chargeback Fees
In addition to lost revenue and merchandise, you are also required to pay chargeback fees. These fees vary based on your chargeback ratio and the financial institution you work with. Chargeback fees typically range from $20 to $100 per transaction and can increase as the number of chargebacks rise. These fees are used to cover the costs of managing chargeback disputes and processing transactions.
Impact on Payment Processing Fees
Payment processing fees, known as interchange fees, are another factor to consider. These fees are a percentage of each sale and are paid to the issuing bank by the acquiring bank. If a chargeback occurs, and the money is returned to the customer, you are responsible for covering the interchange fee. Higher chargeback ratios or being deemed a higher-risk merchant can result in increased payment processing fees.
Operational and Marketing Costs
Running a business incurs various operational and marketing costs. These costs include setting up storefronts, stocking inventory, packaging, shipping, and marketing campaigns. When chargebacks happen, all the resources spent on marketing, inventory, and fulfillment go to waste. These costs can account for up to 40% of your revenue, further exacerbating the impact of chargebacks on profits.
Chargebacks can have a significant impact on a business’s profitability, with costs far exceeding the initial sale. You must take proactive steps to prevent chargebacks and win disputes when they arise. By implementing strategies such as clear refund policies, responsive customer service, and accurate product descriptions, you can reduce the risk of chargebacks. Being proactive in combating chargebacks and friendly fraud is essential to protect your profits and maintain a healthy business. To learn more, review our best practices to avoid chargebacks blog. BC Solutions is always here to help with any of your chargebacks questions, contact us for further details.