Are merchants negatively impacted by chargeback defects?

Chargeback defects are damaging for a number of reasons including:

• Chargeback was processed regardless of the merchant’s action. The merchant is therefore liable for associated fines, fees and penalties.

• Because chargeback defects occur in a very compressed window of time, retailers often do not have time to stop the shipment of products or delivery of services resulting in additional lost revenue.

• Double refunding often results from the timing of the refund failing to stop the chargeback. The merchant will pay the refund offered the customer to take care of the dispute and the issuer will require a refund to be paid once the false chargeback results.

The scenario below illustrates the damage caused by chargeback alert defects:

Cost per alert – $48

Defect rate – 52%

Chargeback volume/year – 13,500

Average price of product – $65

Chargeback fee from acquirer: $25

Resulting calculations:

• $648,000 paid to solution provider to stop 13,500 chargebacks on $877,500 in sales

• Additional impacts of defects:
  • $336,960 paid for 7,020 faulty alerts
  • $175,500 in chargeback fees on the defective chargebacks not stopped
  • Merchant account processing privileges at possible risk
  • Addition profit loss on transactions where double refunding occurred

In addition, to calculate the true cost per transaction, the merchant would need to factor in the costs of lost product, chargeback fees, cost of man-hours spent on unnecessary manual review. Needless to say, the costs do not align favorably.