With the rise of eCommerce and online shopping, card-not-present (CNP) transactions have steadily increased. Unfortunately, a costly drawback to accepting CNP transactions is chargebacks, which negatively impact merchants nationwide and are notoriously costly and difficult to fight.
Chargebacks result in significant revenue loss for merchants every year. Instead of accepting this loss as a “part of doing business,” merchants can learn more about the root causes of chargebacks, how much it costs them over time, and how Open Banking Payments are the best solution for preventing them from happening altogether.
Why Do Merchants Suffer Chargebacks?
A chargeback occurs when a customer asks their credit card issuer to reverse a transaction, returning funds used in a purchase. Consumers may want to initiate a chargeback for many legitimate reasons: to protect against card cloning, swiping, or other fraudulent purchases made without their consent. After all, the chargeback process was created to serve as a form of protection against genuine fraud or scams. However, chargebacks often occur despite the consumer's legitimate receipt of the product.
While the ability to start a dispute and initiate a chargeback against a merchant exists to protect consumers from predatory and dishonest businesses, the sad truth is that it is often misused in the form of friendly fraud. Friendly fraud is when a consumer initiates a chargeback for illegitimate reasons, such as dissatisfaction with a product, confusion about a payment, or an attempt to receive the product without paying.
Most consumers (52.5%) who file a dispute against a merchant admit to never contacting the merchant beforehand to resolve their issues, and 72.4% equate bank disputes and chargebacks as equal to requesting a refund. In other words, not only are there individuals who abuse bank disputes to weaponize chargebacks and steal, but many consumers don’t see anything wrong with committing friendly fraud in general. To compound this issue, fighting against a chargeback is an uphill battle for most businesses, especially since the win rate is generally abysmal.
While major businesses can mitigate chargeback losses or have the means to mount a somewhat successful defense against them with time and resources, most small and medium-sized merchants end up eating the costs. Merchants can choose to go through the time-consuming and costly process of fighting a dispute. Still, the likelihood of winning is very low. Most banks and credit card issuers will almost always side with the consumer and take back the money, meaning time, effort, and labor gets wasted.
The Cost of Chargebacks
While merchants can contend the legitimacy and merit of a chargeback, a dispute always results in a chargeback fee. These fees can total from anywhere between $15 to $50 or more per chargeback, depending on the industry the merchant is in, payment value, etc.
Many consumers who commit friendly fraud think that they’re just “making a simple refund” when, in reality, the costs cut much deeper. Merchants affected by chargebacks often have to deal with losses stemming from the labor and effort to try and fight them, thus significantly increasing the amount of loss stemming from a chargeback. Once you factor in all of the labor costs and fees associated with chargebacks, a chargeback of $100 can cost up to $240, sometimes even more.
The True Cost of Chargebacks
- Chargeback Fee - $25
- Processing Fee (3%) - $3
- Product Cost (45%) - $45
- Chargeback Dispute Loss - $100
- Operational Costs (20%) - $20
- Assumed Brand Damage Loss - $7
- Total Loss = $240
High-Risk Merchants Face Increased Chargeback Risk
A high-risk merchant is a business that can potentially be at increased risk for card disputes, fraud, and chargebacks. It’s important to note that high-risk merchants are often susceptible to higher chargeback fees should they arise.
While every industry is vulnerable to friendly fraud and at risk for chargebacks, a few are more susceptible than others. Here are some examples of high-risk merchants:
- Travel Industry. Susceptibility to chargebacks has risen for the travel industry, with a 50% increase in chargebacks since 2019, largely due to the pandemic restricting travel but also due to the fickle nature of travelers feeling buyer's remorse or having a sudden change of plans. Chargebacks account for a loss of 1.6% of the total revenue for all travel merchants, and card fraud generally accounts for roughly $1 billion per year.
- Subscription Industry. Subscription-based merchants are considered to be especially vulnerable to chargebacks and friendly fraud. Consumers often forget they have an ongoing subscription, fail to recognize the charge, and file a dispute, resulting in a chargeback.
- Gaming Industry. Online gaming, particularly sports betting, has expanded steadily throughout the US. Despite its steady growth, friendly fraud is a major issue in the gaming industry. Players may try to file a dispute to reclaim lost money through a chargeback, claiming they never authorized the bets they made. This makes industries like gaming and sports betting high-risk due to their higher-than-average risk of chargebacks and fraud from consumers.
Reducing Payment Risk with Open Banking and Guaranteed Payments
Card payments constantly put merchants at risk of chargebacks. However, alternative payment methods (APMs), such as Open Banking Payments, lessen that risk by accepting payments outside traditional card processing networks. Open Banking Payments operates using ACH payment rails, allowing merchants to avoid the traditional chargeback risks inherent to card processing.
ACH Returns vs Chargebacks
As with any ACH payment, Open Banking Payments have their own risk in the form of ACH returns or reversals. ACH returns can happen for a number of reasons: insufficient funds, account errors, etc., but because ACH transactions are cleared between banks automatically, there is nothing to “chargeback” to the merchant. Instead, an ACH return is a more straightforward process in comparison, without direct involvement from the consumer or the merchant. While the risks of ACH returns are present, they are not equal compared to chargebacks, as Trustly has effective measures to reduce this risk.
Navigating ACH Returns with Guaranteed Payments
Trustly provides guaranteed payments and helps remove the risk of ACH returns. In other words, once a transaction is approved, the funds are guaranteed, even if an ACH return happens, meaning that Trustly will assume all risk. Trustly can guarantee payments for merchants because of its Open Banking-powered risk engine that uses a mix of risk strategies such as machine learning and artificial intelligence to approve or deny a transaction. Additionally, Open Banking APIs allow direct access to consumer-permissioned bank data, providing valuable insight and context into consumers pre-purchase to help reduce false declines, increase approval rates, and screen potentially risky transactions to proactively prevent disputes.
Open Banking Payments providers such as Trustly have a direct relationship with merchants, allowing them to work through disputes and prevent chargebacks. Should disputes arise, Trustly works closely with merchants to resolve any issue accordingly rather than defaulting to the consumer like most card companies do.
Prevent Chargebacks with Trustly Pay
Year-over-year, chargebacks across industries continue to rise by roughly 19% annually, and merchants are beginning to feel the pressure as mounting friendly fraud becomes increasingly difficult to manage effectively. Standard payment providers levy chargeback fees and penalties to merchants that are victims of friendly fraud. Despite taking these fees from merchants who are victims of costly chargebacks, almost none of these payment providers give the merchants that use their platform any sort of meaningful fraud prevention or management tools to reduce chargebacks and mitigate the risk of disputes.
Merchants no longer have to wave the white flag when faced with chargebacks. Trustly Pay utilizes Open Banking technology to allow consumers to pay directly from their bank account. Our proprietary technology enables real-time and reliable connections with financial institutions, allowing merchants to harness the power of bank data for payments. Trustly Pay’s Guaranteed Payments are processed using our risk engine, enabling us to assume financial risk on behalf of merchants. In doing so, Trustly eliminates the financial liability of chargebacks and returns arising from fraudulent or disputed transactions. Want to learn more about how we can help you mitigate chargeback risk? Request a free demo today.