Were you aware that customers are more likely to file chargebacks before contacting a business if they have a problem with a transaction?
All businesses that sell digital goods deal with consumer chargebacks at some point. Chargebacks generally happen when a customer doesn’t agree with a transaction, but they can file one for many reasons. These prevent businesses from making money from sales and force them to pay penalty fees.
Chargeback fees are applied to every chargeback, so it’s best to understand how they work. Doing this makes it easier to prevent chargebacks in the future so that your business can continue earning revenue.
Read on to learn everything you need to know about chargeback fees!
What Is a Chargeback?
A chargeback is a transaction reversal that happens when a cardholder contacts their bank. Chargebacks are designed to prevent buyers from losing their money to false or faulty products and services. When initiating a chargeback, the bank will open an investigation to determine what happened.
When a customer buys an item, they expect to get exactly what they paid for. However, many people end up getting something different or nothing at all. When this happens, the bank will pull the money from the seller’s account and give it back to the buyer.
Banks have different chargeback protocols, but they all seek to find the same result. Some banks will distribute temporary credit to a cardholder’s account during the investigation whereas others wait until the investigation is over.
During the investigation, the bank will ask for statements and proof from both the buyer and seller. If the bank finds that the buyer has been wronged, they’ll reverse the transaction.
Chargeback Fee Overview
Consumer chargebacks are complicated because, unless you have a plethora of documents, it can be difficult to prove that a customer received a product. This is especially difficult with digital goods because there’s no real evidence that a buyer received something.
These chargebacks not only prevent sellers from getting money for a product or service but also force them to pay chargeback fees. These fees often cost more than the transaction value because they’re used to compensate everyone involved during the process.
The main chargeback fees are transaction fees and operational costs, both of which have a different value. The exact percentages will vary depending on the payment processor, but we’ll give you an example.
A standard chargeback for something that costs $100 may look like this:
- Transaction value($100)
- Transaction fee ($3.5)
- Production cost ($22.5)
- Marketing cost ($30)
- Operational cost ($25)
- Chargeback fee ($25)
- Total ($206)
As you can see, a merchant would end up paying twice the transaction value after a cardholder initiates a chargeback on the $100 transaction. This is why sellers must do everything they can to prevent them, including understanding how the fees work.
Transactions fees are charged by the payment processor, which is common when selling digital goods. You can expect to pay anywhere between 3% to 4% of every transaction value to the seller, which won’t get refunded if a charge is reversed.
Operational costs consist of everything you pay to send a package. For example, when running an online store, you may need to manage a warehouse with several employees. Whether the employees are getting paid hourly wages or salaries, money is coming out of your pocket to send packages.
When a charge is reversed, all the money you’ve spent on employee labor is wasted. Depending on how fast you send things and the value of a product, you may lose 20% of revenue with each reversed charge.
Similar to operational costs, marketing costs come out of your pocket. This is the money you spend advertising a product or service. Many businesses spend about 20% to 40% of their revenue on marketing, most of which will be wasted when your sales end up getting chargebacks.
If you use a chargeback calculator, you can get more info about how much you’d lose with each chargeback. This will help you set aside money to continue operating regularly when you lose revenue to chargebacks.
How to Prevent Chargebacks
When you get a better idea of how to prevent chargebacks, you’ll prevent your business from ever falling behind. Fortunately, there are several things you can do to minimize chargebacks and keep customers satisfied.
Don’t Fulfill Suspicious Orders
Any time you think an order seems suspicious, don’t fulfill it. For example, if a customer decided to order thousands of dollars worth of products but has never bought something from you, they may be trying to do chargeback fraud.
Provide Contact Info
Many customers end up initiating chargebacks because they can’t get a hold of someone to resolve their problems. To avoid this, all you must do is provide clear contact information on your site. Consider implementing a special support line for those that have purchased products to get things resolved quickly.
Inform Customers of Shipping Status
When shipping products, you should always inform customers of what’s happening to their products. This will prevent them from thinking that their products aren’t arriving, which will further help you avoid chargebacks.