Chargebacks, Who Pays?

February 1, 2024

Be sure to check out: A Merchant’s Perspective on Chargebacks.
We break down why chargebacks happen and discuss the methods for decreasing them.

A transaction is never free. Period.

And chargebacks are no different.

Every time a cardholder opens a dispute, that chargeback touches different levels in the Payments Ecosystem, snaking its way through the Issuer, the card association, and to the Acquirer. Every single point of contact, from the Cardholder’s Issuer to the Merchant’s Processor, charges a fee for their time, resources and services. That’s why the chargeback amount often exceeds the transaction amount—Merchants may see an additional chargeback fee, interchange fee and retrieval fee in their Processor portal.

Chargeback fee – charged by the Merchant’s Acquirer or Processor. The purpose of a chargeback fee is to cover the admin costs involved in handling the dispute. Expect between $20 to $100 per chargeback
Interchange fee – charged by the card network. Interchange fees are a set percentage (varies from network-to-network) for facilitating the transaction. Interchange fees tend to be 1.5% to 4% of the transaction amount
Retrieval fee – charged by the card network or Issuer. Some Issuers may charge a fee for accessing customer information. The card networks will also tend to charge a fee for retrieving transaction details. Fees can range from $5-$15 per chargeback

Fees can stack up quickly, especially for high-risk Merchants that carry a higher risk of chargebacks and higher chargeback fees. And at the end of the dispute, who pays for everyone’s time and resources? The Merchant.

Let’s break down the underlying factors that affect the true price of a chargeback.

First Stop – Issuing Banks Take Their Cut

A chargeback starts when a cardholder calls their bank – the Issuer – and says “Hey, this transaction is wrong.” From there the Issuer will investigate their claim.

Issuing banks are the first (and only) line of contact for their card holder. For each chargeback, Issuers use up time and resources sending relevant information upstream. They tend to bundle these costs and charge the card network in the form of a retrieval fee. The price of the Issuers cut depends on customer service, fraud protection and dispute resolution.

Customer service takes time. Retrieval costs factor in the time that goes into investigating the claim, giving guidance to card holders and initiating the chargeback
Fraud protection fees cover the Issuers own fraud prevention tools, services and investigations
Dispute resolution fees cover all the incurred admin costs, including communication with all parties involved and prepping the cardholder evidence

Card Associations Charge for Their Oversight

Card associations facilitate the communication between Issuer and Acquirer. They make it possible for both parties to exchange information and documentation. They also establish the rules that define what is and what is not a valid chargeback.

Card associations want to be as hands off as possible. They won’t say if a chargeback is valid or not (unless they are in arbitration, but that’s a topic for another blog). They are instead involved in providing the guidelines and rules for determining a valid chargeback. And providing the infrastructure for Acquirer and Issuer communication. Fees will change from association-to-association, and chargeback-to-chargeback.

Dispute resolution infrastructure makes handling chargebacks, storing data and catching fraud possible. But it isn’t free
Cards Associations take cut for acting as a neutral party. Think of them as a referee that makes sure everyone is compliant and playing by the rules
A set fee for every chargeback used to incentivize and minimize fraudulent transactions

Acquirer Fronts the Risk. Merchants Front the Costs

A Merchant’s Acquirer will get a communication from an Issuer notifying the chargeback. At this point, Acquirers reach out to their Merchant and allow them to reply. Acquirers also handle the authorization, settlement and deposit of funds from a chargeback.

Acquirers bundle their cost and risk into a chargeback fee. This fee can be flexible, like the interchange fee, differing from chargeback-to-chargeback and Merchant-to-Merchant. Baked into it are administrative costs, risk management costs and network penalties.

Administrative costs cover the Acquirer’s time. They include time spent on investigating the claim, communicating with Issuers and Merchants, and managing the paperwork
Risk management fees aim to deter Merchants from fraud and keep the ecosystem healthy. These fees can be set by the processor and negotiated. Factors that affect the fee are Merchant risks (MCC risk, transaction history, transaction size, Merchant location, etc.), and the Acquirer’s risk tolerance (internal risk appetite and how competitive the Merchant’s industry is)
Network Penalties are fees levied by the Card Association when an Acquirer breeches compliance levels or breaks a network rule (providing inadequate documentation or submitting a late response). These fees are trickled down to the Merchant’s chargeback because, well, that chargeback contributed to the penalty

Nobody Wins From a Chargeback

Even if every player in the payments ecosystem eventually makes their money back, they all hate chargebacks. Acquirers bear the financial loss and risk of default when paying. Not to mention the increased fees or potential termination caused from reputational harm. Card associations are forced to spend time and resources on managing the operational burdens. And Issuers run the financial risks of losing the chargeback, and in that case, they’ve wasted their time—not to mention potentially losing an unhappy customer.

Slyce360 Decreases Chargebacks

Everyone wins when Merchants stay compliant.

Slyce360 tells you the root cause of chargebacks. That means you can start playing offense and fix rising issues before they become costly problems.

Learn more about Slyce360 today