What is the True Cost of Chargebacks?

Would it frustrate you if we told you that the true cost of chargebacks is impossible to quantify? Yes, we can tell you that for $100 dollars in chargebacks, the true cost to you is $240 dollars. But this doesn’t really tell you the entire story about chargebacks and what they actually cost your business.

What is a Chargeback?

A chargeback occurs when your customer disputes a charge to their credit or debit card. When this dispute happens, you have to refund the purchase and then go through a lengthy process to prove that the charge was in fact valid. At the end of this process, if you were able to adequately identify all the necessary data about the transaction, you might be able to recoup the money you originally refunded.

It’s important to note that the onus is on you to prove that the customer did in fact make the purchase. This means that you must be the one who provides the evidence of authentication, authorization, and approval of the purchase on the customer’s card.

(Learn more about chargebacks in our Knowledge Base.)

The True Cost of Chargebacks

Because you’re a business owner, we understand that you do want to know some numbers. While, the reality is that the true cost of chargebacks can’t be quantified, we can give you these widely accepted industry dollar costs:

• Chargebacks are a $40 billion problem that impacts every business owner’s bottom line.
• It’s estimated that for every $100 in chargebacks, your true chargeback cost is $240 in wasted time, expensive fees, penalties or additional losses of goods and services.

So these are the figures most websites, blogs, and articles like to talk about when discussing the cost of chargebacks. But what we want to do here is dig deeper into the cost of chargebacks and look at the trickle-down costs chargebacks have on your business and bottom line.

Fees and Penalties

As you know, the cost of doing business is not cheap. For every service you use, there is an associated processing, set-up, or management fee.

Your merchant account likely has stipulations that detail mandatory chargeback fees that are charged to you whenever there is a chargeback claim (valid or not). In addition to the fees you must pay when a customer files a chargeback, there are also penalties that come with chargebacks.

If you receive multiple chargebacks, your bank may increase your chargeback fees, charge additional penalties for these chargebacks, or worse yet – terminate your account.

Card issuing banks ultimately want to keep their customers happy. Yes, the same customers you want to keep happy. So this means that rather than passing on chargeback costs to the customer making the claim, these are passed on to you, the merchant.

What is the true cost of losing your relationship with Visa, Discover, MasterCard, American Express, or PayPal? Knowing how much of your business relies on credit card purchases will go a long way in your understanding of chargeback costs. If you receive too many chargebacks, you could lose your privileges to process certain card brands, as you would be deemed, “too high risk.” Having a complete understanding of where, when, and how your sales are occurring can help you mitigate your chargeback costs.

Brand Loyalty and Customer Retention

The lifeblood of your business is your customers. You work hard to develop products and services that meet the needs of your customers. You work even harder to find these customers and then convince them to buy your product or service. Ultimately, you want your customers to think of your company first whenever they’re making a buying decision.

Now think about that one customer who decides to file a chargeback. Maybe the product received didn’t match the exact description on your website. Ideally, you want this customer to contact you first if they are unhappy about how a product or service was delivered. Even if your customer does contact you, they might also post a negative review or complain about the product on social media. Now not only do you have to deal with the standard costs of managing the chargeback, you also have to spend time, resources, and energy on managing this customer relationship and your brand image.

How much do you think it costs to fix a brand image problem on social media and Internet product review sites? Do you have employees who know how to respond to such complaints? When you read a negative review for a product that you’re thinking of buying, what is your first impulse? Knowing how to manage such issues and having a strategy in place to respond to complaints, can help you retain your customers and prevent lingering damage to your brand.

Customer Service

You can have the best product or service, but if you don’t have a good team of employees representing your business, it really won’t matter. You need to invest in a good customer service team.

In fact your customer service team is probably one of your most valuable assets when it comes to chargebacks and reducing the costs of chargebacks. A good customer service team will:

• Build customer confidence.
• Communicate clearly and honestly with customers.
• Establish relationships with your customers.
• Be accessible over email, phone, live chat, and social media.
• Keep detailed and organized records of every customer conversation and transaction.

While all of these customer service keys are vital, most important is the relationship building and customer confidence. When your customers trust you, they are more likely to contact you with a problem, giving you the opportunity to resolve the problem directly with them, rather than having to deal with the chargeback process.

Not to be overlooked is the attention to detail your customer service team devotes to every conversation and transaction. In order to prove that a chargeback is fraudulent, you must provide supporting documentation that demonstrates the customer authorized, authenticated, approved, and received the order.

How much does it cost you to train and manage your customer service team? How much turn-over do you experience in this department? How do you respond when you have a negative or slow customer service experience? Having a solid customer service team of skilled communicators that is also highly organized and Internet savvy can help you reduce your chargeback costs.

The Reality of Chargeback Costs

The idea that chargebacks are simply a cost of doing business is old-school.

There is no reason for you to accept the numbers we rolled out earlier in this blog post. This is how much chargebacks will cost you if you operate your business with outmoded thinking and technology.

Data analysis and research on customer behavior and patterns is easily available, allowing you  to really understand your customer habits and history. The technology is available to help you quickly respond to chargebacks, minimizing fees and penalties before they happen. The skilled people are hireable that can give your company the public and professional persona you need to build an established and reliable brand.

Yes, these are costs. But they are necessary costs when you are competing in a global marketplace and fighting for a limited number of customers. You use the latest technology to sell, market, research, and develop your product or service – so why rely on out-of-date thinking when it comes to business costs, specifically chargeback costs.

Learn more about chargebacks in our Knowledge Base and of course do contact us with any of your questions.