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Credit Card Disputes and You: The True Cost of a Chargeback to a Merchant

Updated on October 16, 2013

What is a Chargeback?

A chargeback as defined by Dictionary.com "a sum of money deducted by a credit card company from a merchant to cover losses for disallowed or fraudulent transactions".

Simply put it is money taken back by a credit card company for it's cardholder based on a claim of fraud or other lack of good business practice by a merchant. These other business practices range from lack of a promised refund, a cancellation request that did not get processed, or merchandise not being received. All of which are good reasons for a consumer to want their money back.

The protection provided by the dispute process was given to consumers by the "Truth in Lending Act" which was enacted on May 29, 1968. Since that time it has allowed consumers to contact their issuing bank to dispute any charge to their account, and received a refund, while the bank investigates these charges with the merchant who placed that transaction. This investigation can require as little information as a receipt of transaction, but more commonly requires much more to ensure a favorable outcome for the merchant.

What are the Real Costs?

If you are a consumer the real cost is nothing but some time, and being upset enough to contact your bank. You notify their agent that a charge is unauthorized, unrecognized, or that you had a bad experience in which the merchant failed to deliver. You will typically be asked to submit documentation to the bank, a signed statement confirming all information provided to be factual and accurate, then you wait for your temporary refund. Simple, easy, and problem solved.

As a merchant however this is where the process begins. You received this claim and are required to provide all documentation possible to validate that your company has done everything it can to ensure the identity of the cardholder before processing a charge. This means receipts, a confirmation of a positive result through Address Verification System (or AVS), a match to the Card Security Code (the code on the back of a card to the right of the signature panel), a signature for the transaction, and many others if you are an online merchant. To provide all of that information has a simple cost to a merchant, time and personnel costs. But what are the other costs involved?

  1. A chargeback fee with costs that can exceed $75.00 per dispute.
  2. Loss of product costs.
  3. Loss of shipping costs in case of an online retailer.

These are just the financial losses to be felt by a merchant for a dispute that is not won. But what about the costs that are not so easy to calculate?

  1. Potential to lose your merchant account or ability to accept a certain type of credit card.
  2. Reputation with consumers.

Both of these issues can have a much larger impact to your business than any fee or charge. As of June, 2013 Visa has processed 85 billion transactions! Losing just that one card type can sink a business.

Reputation is another major concern for any merchant. In a world where anyone can have their voice heard using Facebook, Twitter, Yelp, and countless other social media sources to speak out about a bad interaction with a company, can you risk having a bad customer experience?



Wall Street Journal May 26, 2009
Wall Street Journal May 26, 2009 | Source

The Customer is Always Right?

We have discussed the costs to a merchant when a dispute is legitimate. But there is an ever growing problem with this process, and it is known as "Friendly Fraud".

What is Friendly Fraud? A term used to describe when a consumer disputes an online charge but doesn't return the item or has already used the product.

To put a perspective on how much of an impact this type of dispute can have on a merchant, we have some statistics that just might astound you.

"Friendly fraud accounts for more than one-third of the total fraud for online-accepting merchants. This equates to an average of 0.4% of total annual revenue lost to friendly fraud. Merchants are paying $100 billion in fraud losses due to unauthorized transactions and fees/interest associated with chargebacks, nearly ten times the cost incurred by banks. Far surpassing bank costs of approximately $11 billion in 2008, merchant fraud losses also amounted to more than 20 times the total value of consumer losses (approximately $4.8 billion). Factoring in the additional cost of lost/stolen merchandise, U.S. retail merchants are suffering a total industry-wide fraud loss of $191 billion." - The 2009 LexisNexis True Cost of Fraud Study


All is not lost..

Sorry to scare you with those numbers, but be strong! You have options! Of course you can handle each case as it comes and will do alright. But if you are like me doing alright is like saying, "Average is all I want to be". I strive to be the best at anything I do, and that includes business. So when there is something I don't understand, or need help with I want an expert to give me that assistance and information.

That is where we come in. Merchant Lifeline is here to give you the tools you need, not just to win a dispute case, but to UNDERSTAND how to make your practices better to REDUCE the amount of cases your business receives.

MerchantLifeline.com or Chargebackssuck.org

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      azravenwood 3 years ago

      We just experienced credit card fraud, a client hired us for SEO services, paid by credit card, we supplied them, she later took her money back telling her credit card company we didn't supply her with what she wanted. We had thousands pulled out of our account along with said fees. Won the dispute but the client had shut her credit card down so we are out even more money.

      Needless to say, we don't take credit cards anymore. People are liars and cheats so providing them with the means just exacerbates the situation.