Chargeback Cost: What is the True Cost of a Dispute

Sydney VaccaroChargebacksLeave a Comment

There is a lot more that goes into the cost of chargebacks for merchants than just the loss of the transaction value. But there are a couple of things merchants can do to prevent and lower the cost of disputes.

The dispute process was created to protect customers from fraudulent activities done by merchants and fraudsters. This process creates a payment landscape that makes cardholders feel safe making purchases from merchants they have never shopped with before. While the dispute process is a vital part of what makes the ecommerce economy work, it can also be an issue for merchants if they are not careful. So, what is the actual chargeback cost for merchants, and how can it be avoided?

The Chargeback Cost

When a merchant receives a customer dispute, the amount is immediately pulled from their merchant account. Which means the merchant is now guilty until proven innocent. Merchants are allowed to respond to the cardholder's claims with a dispute response. By submitting a response document with the correct compelling information, the merchant can regain the transaction amount that was lost. So, there is the initial cost of a dispute: Losing the transaction amount.

If you are a merchant that sells a physical product or service, receiving a dispute can mean losing the product or service (time and labor cost), which brings us to our next cost: Product or service cost.

When a merchant receives a dispute, even if they submit a dispute response proving that the customers' claims are wrong, they will receive a dispute fee. A dispute fee is charged to the merchant whenever a dispute happens. Why do processors tack on an additional fee for chargebacks? Just like merchants, processors have a business to run, and as you know, chargebacks are a time-consuming process all-around. These fees are intended to cover the costs associated with data transmission, the chargeback itself, and coverage against the chargeback exposure for the processor — cost: Dispute fee.

As was mentioned previously, the only way to regain the transaction amount from a dispute is to create and submit a dispute response document that disproves the cardholder’s claim. The creation and submission of this document requires labor and time. Which means merchants have a: Dispute response creation cost.

As you can see, there is a lot more that goes into the cost of chargebacks for merchants than just the loss of the transaction value. But there are a couple of things merchants can do to prevent and lower the cost of disputes.

How to Stop and Lower the Cost of Chargebacks

Preventing Disputes From Ever Happening

The first step merchants can take to lower dispute costs is to take preventative measures to stop disputes from ever happening. To do so, merchants need to understand the four types of disputes that can occur. True fraud disputes result from a fraudster getting a hold of credit card credentials and successfully using them at a merchant's site or store. Because it is the merchant's responsibility to prevent fraudulent transactions, these disputes are not winnable for the merchant even with a dispute response.

The next type of dispute that is not winnable for the merchant is valid disputes. These happen when the cardholder has a legitimate reason to dispute the charge. For example, they never received the product because of a logistical error, never received their refund, the product they received was damaged, etc. To prevent these types of disputes, merchants need to keep an eye on all sides of their operations. If you are receiving valid disputes, make sure you track what reason codes you are receiving. By doing this, you can pinpoint where your operational problems are happening and fix them.

On the other hand, chargeback fraud and friendly fraud are winnable disputes for merchants. Chargeback fraud disputes happen when a cardholder is disputing a charge out of malicious intent. This fraud can be rooted in buyer's remorse, wanting to sell the product for profit, a disgruntled customer that feels wronged, among other reasons.

Friendly fraud disputes come from a confused customer that is accidentally disputing the charge. Friendly fraud can happen because of simple forgetfulness, a family member making unknown purchases, or an unclear merchant descriptor.

For friendly fraud and chargeback fraud, it is extremely difficult to detect before the transaction happens because it is your actual customer who is disputing the charge. That is when tools like VMPI can help merchants prevent disputes. With VMPI, the dispute analyst can use transaction details to decide if the dispute is invalid and prevent it from being filed. In cases of friendly fraud, the additional data helps jog the cardholder's memory about the purchase. And in cases where the cardholder is trying to intentionally misuse their chargeback rights, the extra layer of confirmation acts as a critical deterrent from proceeding with the dispute.

Cutting the Cost of Responding to Disputes

After doing all you can to prevent disputes from ever happening, merchants need to create the most effective way to respond to the disputes that do happen. When a merchant has the most efficient system set up, it will help regain the most revenue possible. There are a few aspects of the response process that merchants need to focus on to make that happen.

The first is to make sure your team knows the exact evidence they need to submit based on the reason code, transaction type, and any other transaction modifier. The second is creating a method that allows your dispute team to find the necessary evidence for the dispute response quickly. The way merchants can make this happen by establishing a knowledge base that can tell the dispute team what information goes in the response document. Merchants can use templates, spreadsheet workflows, homegrown systems, or dispute management software. The combination of correct evidence and the ability to quickly create a response will result in an increased win rate and lower cost in labor.

To learn more about how to dispute management software can benefit your company and the possible ROI, you can schedule a demo with one of our dispute experts.

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