Are Chargebacks a Cost of Doing Business in 2023?

Every business has unavoidable expenses that affect the bottom line, and are accepted as the cost of doing business. Many merchants view chargebacks as one of these costs you just have to live with, but that's a category error.

Many chargebacks are avoidable, and you shouldn't just accept them as a cost of doing business. Ignore chargebacks, and you could see up to 40% of your revenue lost to fraudsters and unhappy customers.

The "True" Cost of Chargebacks

Considering chargebacks are growing at alarming rates (increasing an estimated 20% per year and eating up $4 billion in revenues from merchants across the world), accepting them as simply a cost of doing business isn’t just expensive—it’s a downright threat to your livelihood.

You see, chargebacks don’t just cost you the loss of the product or sale.

When you factor in transaction fees, marketing costs, operational expenses and chargeback fees, the average "true cost" of a chargeback is 2.5 times the sale price (essentially $250 on a $100 sale.)

On top of this, rising chargeback rates can mean higher payment processing fees or, in really bad scenarios, even put your entire merchant account at risk. For most business owners, this just isn’t a risk they’re willing to take.

The Problem of Not Knowing Your Root Causes

The ability to prevent, avoid and fight chargebacks lies in identifying their root causes. Why are these chargebacks occurring in the first place? What are the issues at hand that push a customer to dispute a charge and request a refund?

Once you know what’s causing your chargebacks, you can take steps to address those issues and reduce chargebacks from the ground up. 

Determining what’s causing your chargebacks isn’t as hard as it may sound. In fact, card networks assign what are called “reason codes” to each chargeback, which essentially tell you right then and there what’s behind the dispute. A chargeback with the Visa reason code 13.1, for example, means the product was never received or provided. A chargeback with a 4841 MasterCard reason code? That would indicate the customer cancelled their subscription but was charged anyway.

Unfortunately, most merchants don’t pay attention to these codes—and it’s often a grave mistake. Without knowing the cause, you can’t pull together the proper evidence to fight the chargeback, thus wasting time, effort and resources, and reducing your chance of winning. You also can’t take steps to proactively prevent chargebacks from occurring in the first place, an even bigger (and more expensive) issue in the long-term

The Consequences of Not Fighting Chargebacks

Most business owners are incredibly busy—so busy, the mere thought of gathering the evidence, writing up an explanation and poring over receipts just to fight a chargeback seems impossible.

But letting chargebacks go—particularly when they’re unwarranted—can be a serious mistake, especially in the long run. Choosing not to fight an illegitimate chargeback can lead to:

• Significant lost revenue and profits over time
• A poor reputation
• Repeated instances of fraud
• Higher-cost payment processing
• Threatened merchant accounts
• Penalties for failing to acknowledge chargebacks

Your Options for Handling Chargebacks

Fortunately, business owners don’t have to go it alone if they want to fight chargebacks (or, more importantly, prevent them). If they don’t have the resources and industry knowledge to handle it solo or build an in-house team, they can instead:

1. Use an automated tool to fight them – There are several automated and semi-automated tools that can help you monitor your chargebacks, hone in on their root causes and take steps to prevent and fight them.
2. Hire a chargeback management firm – These are full-service firms that have the tools, knowledge and resources necessary to attack chargebacks head-on. They’ll help you monitor your chargeback rates and causes, as well as craft strategies to address them from the ground up.

If you do choose to use a professional tool or chargeback management firm, make sure you research your options carefully. Choose a vendor who is proven, has plenty of industry experience and who doesn’t require a long-term contract. Any legitimate firm will prove their worth to you month after month.

Learn More About the Danger of Chargebacks

Want to learn more about the threat that chargebacks pose to your business? Need advice on how to fight and prevent them? Download our newest eGuide, Why Chargebacks Are No Longer a Cost of Doing Business, now.