What is Chargeback Fees?
Paying penalties or fines is often a common occurrence in our lives. We pay a penalty whenever we forget to make a payment or request a rework for a service or product, it does cost us as there is a dependency of people and resources. Likewise, every time an acquirer receives a chargeback, there is a certain cost involved known as the Chargeback Fees.
A chargeback fee is the amount charged by the card network for every chargeback dispute. The chargeback fee is intended to cover the costs associated with every chargeback as it involves the banker’s time and resource. In most cases, the fee is charged even if the chargeback is eventually reversed.
How much does chargeback fees cost and what factors determine the fees?
The cost of a chargeback varies based on the situation, the payment processor, the card network, and other elements. Chargeback fees are outlined and evaluated by issuing banks and it consist of factors like:
- Processing and handling fees
- Administrative fees
- Transaction fees
- Operational fees
- Reclaimed purchases
- Product cost, etc
To understand this a bit more, let us delve into the illustration of chargeback on a two-hundred-rupee purchase.
What is the necessity of a Chargeback fee?
Chargebacks were intended to protect customers whether it be from fraud, transaction system errors, etc.
Furthermore, they operate as barriers against retailers who might provide poor customer service or inferior goods, or even engage in their own fraudulent activities.
Chargeback fees are in place because the process of managing chargebacks requires time and resources, resulting in costs for the involved parties. Imposing fees on merchants also serves as a strong incentive for them to identify and address the underlying issues that lead to chargebacks.
When a chargeback occurs, the issuing bank is responsible for reimbursing the cardholder using their own funds. To cover this expense, funds are withdrawn from the acquiring bank, resulting in an increased merchant reserve and loss of income for the merchant.
Throughout the chargeback process both the bank and the card network team are actively involved in activities such as securely transferring funds, ensuring communication, and maintaining records. The expenses associated with these actions are transferred to the merchant in the form of chargeback fees.
In cases where disputes escalate to the arbitration stage, additional fees are imposed. At this point, representatives from the card network intervene directly. Arbitration fees are typically borne by the losing party in the dispute, which can be quite substantial.
Chargeback fee for “high-risk” merchant:
Chargeback fee for high-risk merchants might increase significantly. A lot of processors and acquirers won’t work with high-risk merchants, as they pose a significant risk to the acquirer’s profitability. The credit card networks also participate in the discussion of increased chargeback risk. They impose restrictions on both the overall number of chargebacks received by a business and chargeback ratio. Likewise, a cardholder also has a cap on how many chargebacks they can raise in the card’s lifetime. The merchant might be placed in a chargeback monitoring program if they go beyond such restrictions.
Depending on the circumstances of the merchant, these costs are typically put up in tiers.
For example, let us consider the Visa chargeback ratio for high-risk merchants. The chargeback fee structure will be:
- For first 6 months, Chargeback will be Rs 4,105 (approximately)
- For next 6 months, Chargeback of Rs 4,105 plus an additional monthly review fee of Rs 20,52,206 (approximately)
How to prevent chargeback fee?
Let us consider a situation here,
A customer raises a dispute regarding the defect in the product that happened during delivery and has requested his card issuer to raise a dispute. Now, the issuer will pass over this dispute to the acquirer who in turn notifies the merchant to respond on time.
So, when the merchant gets back to their acquirer stating that this request does not hold mettle as he has clearly mentioned in the invoice that he is not responsible for what happens during delivery. Then the acquirer is at an advantage, he can close this conversation at the pre-dispute stage by providing the necessary documents in time.
Even in case this request becomes a chargeback, providing the documents in time will reverse the chargeback in their favor and all left to pay is the chargeback fees.
But there is one and only hiccup that remains, the acquirer does not have the necessary technology that can help them achieve this outcome. Here’s where Unified Dispute Management comes into play.
So, in a nutshell, even though chargeback fees are inevitable, with the help of UDM, acquirers and their band of merchants can respond to chargebacks or pre-disputes efficiently thereby streamlining and improving operational efficiency at its core.
Get in touch with us today to know more about UDM and how it can help regulate, tailor and modernize chargeback process and responses.