How Do Chargebacks Impact Retailers

Alex ForbessChargebacks3 Comments

Retailer Specific Chargeback Breakdown (White Paper)

In our white paper, we dive deep into knowing how, and why, retailers receive chargebacks. Data from the Federal Reserve Bank of Kansas City revealed a stark division in how revenue loss can occur from Visa and MasterCard transactions, and American Express and Discover transactions.

At face value, the chargeback values from both schemes showed a battle between card-present (CP) and card-not-present (CNP) transactions. And a deeper look showed reason code categories having its own shares of chargebacks, risks and merchant losses. Instead of looking only at retailers, Industry Dispute Ratios reveal what retailers and department merchants can expect from their industry.

A Tale of Two Schemes

Visa & MC: Average Values by Channel

Visa and MasterCard

American Express and Discover

American Express and Discover

Department merchants can expect disputes from Visa and MasterCard transactions to develop higher chargeback values in-store. On average, a chargeback was valued at $364 while department merchants lost $306 per CP transaction. That was roughly 37% larger than the chargeback values from CNP transactions. And roughly 32% larger in terms of revenue loss (the worst kind of loss).

But disputes from Visa and MasterCard transactions developed lower chargeback values overall when compared to American Express and Discover transactions. But that doesn’t mean these values will be less severe. That will depend on what kind of dispute had initiated a chargeback. And that depends on the reason code it is affiliated with (which you’ll see below).

Disputes from American Express and Discover transactions had a stronger tendency to produce higher chargeback values from CNP transactions ($305 per transaction). For example, ordering apparel from a Macy’s website will produce higher chargebacks than if a cardholder buys the apparel in-person.

The percent difference between both scenarios is astonishing. It seems disputes that initiated CNP chargebacks from American Express and Discover transactions was roughly 12% more valuable than CP chargebacks. And that resulted in department merchants losing roughly 10% more in revenue than they would from CP transactions.

It’s interesting to notice how eCommerce transactions were also higher in value from American Express and Discover transactions. One reason could be the exponential growth of department merchants using platforms such as Shopify and Magneto. In fact, Statista predicts retail e-commerce revenue to reach $123.4 billion in the U.S. by 2022. That’s a 52.4% growth from the revenue earned in 2017!

Another [related] reason could be American Express and Discover cardholders authorizing more eCommerce transactions over CP transactions. For example, American Express conducted a survey in 2017 and found that 90% of their cardholders made at least one online purchase in the past 12 months. About 73% of cardholders made at least three or more online purchases in that same timeframe. Time will only tell if its chargeback value will increase from eCommerce transactions—although there’s a good chance it will happen.

The Odds Are Stacked Towards Visa and MasterCard

Visa and MasterCard

Visa and MasterCard

American Express and Discover

American Express and Discover

Here’s where we’ll see likelihood of chargeback occurrence. And the ratios developed from American Express and Discover don’t look that good for department merchants. All transactions developed a 94% chargeback ratio.

A dispute does not inevitably initiate a chargeback. And a chargeback does not inevitably result in revenue loss (the risks rates below will give us a better picture).

But a dispute filed by an American Express or Discover cardholder showed a strong possibility of a chargeback. CP transactions took first place with a 97% chargeback ratio and a 94% merchant loss ratio. eCommerce transactions were in last place with a 90% chargeback ratio and a 81% merchant loss ratio. However, a ratio higher than 80% shows a strong possibility of chargeback occurrence and revenue loss.

Disputes filed by Visa and MasterCard cardholders had a stronger likelihood to initiate CNP chargebacks (87%). The chargeback ratio from CNP transactions were 28% higher than CP transactions. CP  and eCommerce disputes from American Express and Discover cardholders did not initiate chargebacks as frequently as you may think. The chargeback ratio from CP transactions was 59%, and eCommerce transactions had a 65% chargeback ratio.

Overall, department merchants should revise their methods in chargeback management. This will help decrease the likelihood of a chargeback and its affiliated dispute.

These ratios are a good excuse to reflect on your current methods. For example:

  • How does your customer service team respond to disputes from American Express and Discover cardholders? How does that compare to their response with Visa and MasterCard cardholders?
  • How transparent (and clear) is our policy statements? Are they clearly visible before and after the cardholder makes a purchase?
  • How do you write your chargeback responses? Are you providing the most relevant evidence (anything irrelevant can negatively harm your chargeback ratio)?

There really is no right or wrong answer. But you can decrease the likelihood of chargebacks by reflecting on what you’re doing now. This will give you a better understanding of what you can improve on for future objectives.

Department Merchants: Watch Out for These Reason Codes

Visa and MasterCard

Visa and MasterCard

American Express and Discover

American Express and Discover

Or at least watch out for Authorization reason codes from Visa and MasterCard transactions. No Receipt Information reason codes from American Express and Discover transactions also deserve your attention. But other categories clearly produce expensive chargebacks, too.

We cannot understate how sometimes it’s the little things that make a big impact. And forgetting something as little as receipt information is expensive with American Express and Discover cardholders. And on top of that, department merchants seemed to had lost the same amount of revenue from no receipt information-related chargebacks that matched its value ($543 per transaction).

But what was the likelihood of a no-receipt-information dispute to initiate a chargeback? That answer will be revealed in the next section (SPOILER ALERT: that kind of dispute developed a 100% chargeback ratio).

What’s interesting is cancel-related chargebacks from American Express and Discover transactions developed the second largest chargeback value ($405 per transaction). Cancel-related chargebacks come from disputes that often revolve around recurring billing.

Cancel-related chargebacks tend to be affiliated with CNP disputes. That is why department merchants may experience this reason code category. This is a great excuse to review how your teams manage recurring billing in-store and on the web. For example:

  • Do your cashiers experience disputes related to product cancellation or recurring billing? How do they manage the scenario?
  • How does your team inform cardholders about recurring billing? Do you notify them in advance or right after they authorize the transaction?

Now, what about Visa and MasterCard transactions? Authorization reason codes may have developed the highest chargeback value ($280 per transaction). But it also developed the second smallest merchant loss value. Why is that? The answer may lie in at least one of two areas:

  1. Visa and MasterCard may have policies that reduce the severity of merchant loss from authentication-related chargebacks. Verified by Visa, for example, gives participating merchants some protection from fraud- and authorization-related chargebacks.
  2. Visa and MasterCard see authentication-related disputes as less severe than others (fraud-related disputes are clearly another story).

Don’t. Forget. Receipts.

Visa and MasterCard

Visa and MasterCard

American Express and Discover

American Express and Discover

Disputes affiliated with No Receipt Information reason codes developed a stronger likelihood of chargebacks. And its merchant loss ratio has a slightly stronger likelihood at 95%. But it seems cancel-related disputes from Visa and MasterCard cardholders were less likely to initiate chargebacks. Its chargeback ratio was 32%.

You can expect cancel-related disputes to initiate chargebacks from American Express and Discover cardholders. Again, cancel-related chargebacks have a tendency to originate from CNP transactions. So it is not surprising to see these chargebacks have a high ratio.

But another, more specific, answer may come from the cardholders themselves. Ask yourself these questions whenever you have some free time:

  • How often do American Express and Discover cardholders make CNP purchases at my store? How does that compare to Visa and MasterCard cardholders?
  • How often do cancel-related disputes originate from American Express and Discover transactions on a monthly basis?

There is no denying that the issuing banks and card networks’ role has an affect on cancel-related disputes. But this will help knowing to what extent cancel-related chargebacks affect you, personally.

Now, let’s take a moment to look at the ratios developed by Quality reason codes from both schemes. Disputes from Visa and MasterCard cardholders had a strong likelihood to develop chargebacks and merchant losses. But a merchant loss had a stronger likelihood from American Express and Discover transactions (98%). This is understandable. Quality goods and services tend to be a prerequisite for department merchants.

It seems processing error-related disputes from Visa and MasterCard cardholders didn’t have a strong likelihood to initiate chargebacks (60%). But the opposite is true with American Express and Discover cardholders (88%). And you most likely lost revenue from  American Express and Discover disputes (98%) more so than from Visa and MasterCard (47%).

Overall, there is a strong possibility of a chargeback to occur across reason code categories affiliated to American Express and Discover.

Risks in Fraud, Cancel and No Receipt Information

Visa and MasterCard

Visa and MasterCard

American Express and Discover

American Express and Discover

But how much risk? That requires a closer look, especially within American Express and Discover transactions. The merchant loss rate may be high from fraud- (0.69), cancel- (0.41) and no receipt information-related chargebacks (0.35).

But the chargeback rates were relatively low. This means that the risk of receiving a chargeback from these codes are less probable. However, if a chargeback did occur, that would develop more risk in losing revenue.

Department merchants were at high risk in receiving a fraud-related chargeback (0.88) from Visa and MasterCard transactions. And the risk in merchant loss was 72% larger. This meant that these types of disputes would definitely hurt their bottom line. It seems department merchants were not at risk in receiving chargebacks from any other reason code except for Fraud.

Quality- (0.11) and authorization-related chargebacks (0.25) appeared to be more manageable. But the risk of revenue loss was slightly if a chargeback was to occur. These kinds of disputes should resolve accordingly.

Department merchants clearly show exceptional customer service from the low chargeback rates. Fraud-related chargebacks appear to resemble the highest risk. Ask yourself these questions as you review your fraud prevention tactics:

  • Have you successfully converted to EMV technology? The issuing bank will favor the cardholder if you haven’t yet fully converted.
  • What in-store procedures are you executing to prevent fraud?
  • What about non-present procedures? Are you asking all the necessary information for a cardholder to complete a transaction (e.g., CVV)?

There are also some tools that help strengthen your fraud prevention tactics. For example, the Chargeback App provides fraud alerts that connects your business to participating issuing banks and card networks. This feature is called Alerts. Along with notifying you of fraudulent activity, it provides a great advantage to resolve disputes before they turn into chargebacks. This is one of several features we provide that empowers you with real-time dispute resolution.

Feel free to share our research with friends and colleagues. You can also learn more about our research by downloading the white paper. We will provide a link once we have it fully polished. Feel free to contact us if you’re concerned about where you are in the chargeback landscape.

Department Industry At A Glance


Sources: Annual Reports and Deloitte’s Global Powers of Retailing 2017

No one can look at the U.S. department industry without looking at the growth of non-stores—most noticeably The e-retail juggernaut had its net sales grow an average of 22.18% from 2012 to 2016. It 2016 net sales was almost $136 billion, which resulted in a 27.08% growth from its net sales in 2015 ($107 billion). This shows earned roughly a 77.24% margin over four of the top U.S. department in 2016.

The only department store that showed growth within a five-year period was The TJX Companies, Inc.. Net sales from Macy’s, Inc. and The Gap, Inc. appeared to be relatively dormant between 2012 and 2014, and then gradually decreased between 2014 and 2016.  In fact, net sales from Macy’s decreased by 3.65% between 2014 and 2015, and then by 4.80% between 2015 and 2016. Net sales from The Gap decreased by 3.88% and 1.78% during the same periods, respectively. Sears Holdings Corporation was the only department store that experience a consistent decline in net sales. In 2012, Sears earned around $39.9 billion in net sales and around $22.1 billion in 2016—that is a 44.45% decline within a five-year period.

There are two important factors that aspiring merchants must be aware of before entering this industry. One, as mentioned by Deloitte’s Global Powers of Retailing 2017, is that department merchants must prepare to serve on-demand shopping. This includes, but not limited to, ‘one-tap’ checkouts and express delivery. The other factor is that the shopping experience, online and offline, needs to be considered high-quality from a consumer’s perspective. This requires niche marketing that is experiential and adaptive to your target market. It is important to know the likelihood and risks of losing revenue related to chargebacks. 

Industry Dispute Ration

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