Disputes 101: The hidden costs of chargebacks
Payment disputes, also called chargebacks, cost more than you think. Not only are there fees and fines, there are hidden costs like lost productivity and damage to your reputation.
Below, you’ll find an in-depth explanation of the direct and indirect costs of chargebacks that impact e-commerce and SaaS businesses alike. When you’re finished, you’ll have everything you need to start forming a strategy to reduce disputes and boost your revenue.
1. Credit card processing fees
If you sell a product, you already know about processing fees. Payment processors charge fees to facilitate transactions between financial institutions. Typically, these fees cost between 1.15% and 3.15% per transaction. There also might be an additional flat fee per transaction.
Processing fees are already expensive, but more so when intertangled with chargebacks. Processing fees are non-recoverable, meaning that you have to eat the cost of the chargeback and the associated processing expense, regardless of whether you win or lose the dispute case.
2. Dispute fees
Payment processors charge a fee for handling disputes. The exact amount varies depending on the processor, but you can expect to pay between $15 and $50 per dispute.
Here are the chargeback fees for popular processors:
$15
$20
$25
3. Network non-compliance fines
In addition to dispute fees, you might be entered into a card network’s dispute monitoring program and receive a non-compliance fine. Let’s use Visa and Mastercard as examples.
Both networks run dispute-monitoring programs. While there are differences between the programs, they operate similarly. In both cases, merchants with excessive instances of disputes are entered into a monitor program and fined until the issue is resolved or they are removed from the network.
Visa operates the Visa Dispute Monitoring Program (VDMP). Depending on the severity of non-compliance, merchants can be charged $50 per dispute and a monthly $25,000 review fee.
Mastercard runs the Mastercard Excessive Chargeback Program (ECP). Monthly non-compliance fees for merchants in this program range from $1,000 to $200,000.
4. Damages your payment health
Your payment ecosystem is interconnected. A change in one area can lead to unexpected consequences in another. For instance, a high chargeback ratio causes financial institutions to view your business as having a high fraud risk. Because of this, financial institutions are more cautious about transactions, leading to a drop in your authorization rate.
Improved payment health unlocks growth and reduces customer churn
5. Wasted marketing spend
Sales aren’t free. Most businesses have a team of marketers who capture potential customers' attention and convince them to purchase a product or service. In fact, according to Hubspot, businesses, on average, allocate 9% of their revenue to marketing annually. Chargebacks erase your marketing team's efforts, translating to higher customer acquisition costs.
6. Hit to your reputation
Chargebacks damage your reputation with customers. Data from the White House Office of Consumer Affairs shows that dissatisfied customers tell 9 to 15 people about their experience, and some tell as many as 20. Merchants with high chargeback rates risk being seen as untrustworthy, leading to reduced acquisition and customer loyalty.
7. Lost productivity
Chargebacks steal time from more meaningful and profitable activities like building better customer relationships and helping high-priority buyers. Why? Fighting a chargeback requires a team member to collect compelling evidence and manage the process.
Depending on the chargeback, you’ll need a team member to collect evidence that shows that you:
- Verified the cardholder’s identity
- Processed the transaction correctly
- Accurately explained the product
- Delivered the merchandise
8. Lost merchandise
Certain hidden costs affect e-commerce companies specifically. Lost merchandise is an example. Whether your customer's dispute is accurate or not, the product recipient doesn’t typically return the purchased item. This means you lose the value of the merchandise and the opportunity to resell it.
9. Shipping costs
Shipping is expensive–even more so if you offer free shipping. One estimate puts the cost between 10% to 15% of the total order value. In the event of a chargeback, you lose the money you spent to ship your product.
Perhaps more frustrating, if you win a dispute and want the product returned, you must pay the shipping cost again.
Reduce chargebacks with Butter
Chargebacks could be costing you millions. It’s time to fight back with Dispute by Butter.
Butter’s dispute solution captures disputes in real time before they reach your payment processor and then optimizes outcomes using historical transaction data and merchant-tailored rules. The result is fewer disputes and chargebacks, a lower chargeback ratio, and improved end-to-end payment health.
Contact us today to learn how much revenue you can save with Butter.