What is an online payment chargeback? A chargeback can happen for a number of reasons. Perhaps the merchant shipped out a broken item and refused to replace it or perhaps the merchant accidentally processed a stolen credit card and the legitimate cardholder complained to their bank. Another common scenario is known as “Friendly Fraud” where a legitimate cardholder places and receives an order and then claims they never received it.
Whether the merchant chargeback is justified or not, the merchant suffers a chargeback fee when the chargeback is claimed. The chargeback fee is set by the merchant’s payment gateway and is intended to cover the costs and efforts involved in returning funds from the merchant to the rightful cardholder.
Common types of chargebacks
About half of all chargeback fraud types and the other half are caused by customer disputes. Unfortunately for merchants, the merchant dispute chargeback fees are the same regardless of whether the chargeback is related to fraud or not. Most fraudulent transactions for online merchants will be assigned either Code 83 by Visa or Code 4837 by MasterCard for “Card Not Present” fraud.
Signifyd’s 100% financial guarantee covers merchants to prevent chargebacks for every order we approved. However, apart from using Signifyd, there is little merchants can do about these chargebacks so being protected upfront is the best option.
Among non-fraudulent chargebacks, merchants will most commonly see the following types:
Item Not Received
Item Not Received is an especially painful chargeback fraud detection type and there are several reasons why this can happen. A package could’ve been stolen from a customer’s front porch, the package could have been lost in transit or the customer may have received the package and is now simply lying about not receiving it.
Shipping companies like UPS and Fedex pitch signature on delivery documentation as a way for retailers to prevent chargebacks. Because getting a signature is a large piece of evidence merchants can use to fighting chargebacks, many companies actively encourage signatures. PayPal for example won’t offer seller protection to merchants unless they get signature on items $750 and over. Requiring a signature would actively prevent certain schemes fraudsters like to pull, such as shipping to abandoned homes or to reshippers.
Shipping for packages can be a rough journey. While most packages make the journey in tact, breakage happens and retailers take the blame. While retailers can get shipping insurance, the reality is if an item is delivered broken consumers expect it to be replaced for free. Retailers who refuse to replace or refund the transaction will likely see a chargeback.
While a merchant may have actually shipped the wrong item this chargeback also applies to cases where the consumer wants to return or exchange what they bought. The desire to exchange items is common among consumers. It is estimated that ⅓ of all online purchases end up as returns and this number can be as high as 40% in the fashion industry. Depending on the item, it can cost the retailer or the consumer a lot of money to return the product. Many customers may feel the easier option is to simply file a chargeback. Retailers with poorly displayed return policies (or those who have none at all) are simply inviting chargebacks as consumers will want their money back if they’re unhappy with the product they received.
Law enforcement for chargebacks
It should come as no surprise that online fraud is notoriously under investigated by both local and federal police. Police will typically only investigate an order if the dollar amount is high. Thus, a merchant suffering a $8,500 chargeback abuse (due to fraud) may feel like they have a case and need police investigation, but local law enforcement may the case as unworthy of their limited resources. This may explain why many merchants feel like chargebacks due to fraud is like being fined for being robbed.
Chargeback fees from various payment gateways
Chargeback fees average around $15-$25 dollars per payment gateway. This doesn’t seem too bad if you have one or two types of chargeback a year, but it can be crushing for merchants with a rising chargeback problem.
Chargeback Fee: $20 for US merchants, $25 for international
Pro: Chargeback FAQ’s online with avoidance tips
Chargeback Fee: $25
Pro: Free fraud tools are built in for prevention
Chargeback Fee: $15
Pro: Low chargeback fee
Chargeback Fee: $25
Pro: Offers the best assistance in the industry with dispute resolution to help merchants win chargebacks
Chargeback Fee: $20
Pro: Seller protection for merchants
Chargeback Fee: $15
Pro: Low chargeback fee, fee reversed if chargeback won
A costly mistake many merchants make when they get their first chargeback is to issue a refund to the customer hoping the chargeback will be dropped. This is a mistake most merchants will only make once as they soon realize the bank will take the funds from them for the chargeback and they will also lose the credit they’ve issued as a refund to customer. If a merchant suspects a chargeback is inevitable, then issuing a refund can be a great way to thwart a pending chargeback. But if a chargeback has already been filed then the merchant’s funds are bound to be reversed by the bank so issuing a refund at that point will only double the losses for the merchant. Consumers will rarely drop a chargeback claim once the chargeback process has begun because they know they’re protected by law, or they’ve figured this out from experience.
Another cost that is often forgotten until after the fact is the cost of shipping fees. When they receive a chargeback merchants lose the shipping costs which can be significant. For example, the shipping costs on a mattress can be over $100 dollars. These shipping costs will be lost by the merchant with the chargeback.
Are you a “risky merchant”?
Merchants with a high chargeback rate can be classified as “risky merchants” by their payment gateway. Risky merchant status can result in higher processing costs and a merchant may even need to find another payment processor if they’re deemed too risky by their payment gateway.
If a merchant’s chargeback rate continues above 1% (of all their transactions) they may be placed on a chargeback monitoring program.
Adding it all up… in losses
When put together, the worst-case scenario for a merchant looks like this:
Chargeback fee + Lost shipping fee + Potentially lost refund + Higher processing rate + Fees for chargeback monitoring program = Not worth it
Fraud prevention tools that simply provide a score or recommendation don’t protect merchants from chargebacks. They simply give merchants their best effort but without accountability since the merchant remains liable for chargebacks from fraud. As most merchants know this they take a conservative approach when approving orders and lose more in declined orders (“false negatives”) that they should have accepted than in chargebacks from fraud.
Signifyd eliminates a merchant’s risk from fraud by providing a 100% financial guarantee against every order we approve. We accept more orders than merchants can accept on their own since we leverage real-time machine learning across thousands of merchants with access to far more transaction data than any single merchant can acquire themselves. With Signifyd merchants can accept more orders and significantly reduce order review times without the fear of fraud with our guaranteed fraud protection.