Chargebacks TRUE cost refers to the apparent and hidden costs associated with chargebacks to your business. These costs range from the chargeback fees to the inventory fees as highlighted below.
Card transaction charges
eCommerce merchants are charged a specific percentage for every card transaction a cardholder makes. And if the cardholder goes on to charge back the transaction, the merchant does not get a refund on the card processing fee – they lose that money with the cost of the merchandise.
When a cardholder files a chargeback, the merchant acquirer also includes additional charges for their involvement in the mediation processes. The fee could be in the range of $20 to $100 and calculated based on the level of associated risks, i.e., the number of chargebacks the merchant received in a given period. Chargeback fees are non-negotiable for the most part, whether you win the dispute or lose.
Excessive chargeback penalties
Banks and card networks pay keen attention to merchants’ chargeback rates to ensure they don’t cross established thresholds. When the merchant enters the “high risk” category, the fees become astronomical. Excessive chargeback penalties can range from $5000 to $25,000.
High cost of operation and brand damage
Chargebacks don’t just take money away from your pocket. They also cost online merchants time, human resources, and brand equity. These are, perhaps, the most expensive aspects of dealing with eCommerce chargebacks. No one will do business with you if you cannot maintain a reasonable fidelity as a formidable brand in the industry. Banks can’t work with you because they’ll see your brand as high risk, and even if they happen to take your business, they’ll make you pay excessive fees to cushion their risks and future reputational crisis.
Inventory and overhead costs
eCommerce transactions involve several distinct deliverables, such as pick-up, packaging, warehousing, and shipping. These activities also involve costs. And when a scammer relieves you of the transaction revenue with a false chargeback, these overhead costs also affect your balance sheet. Inventory management expenses often represent about 20% of an average merchant’s losses due to chargebacks.