The 6 Direct and Indirect Costs Associated with Chargeback Fraud

Chargeback fraud is one of the most difficult (and costly) types of fraud to manage. In this article, learn more about the direct and indirect costs of chargebacks.

It’s estimated that merchants will lose a total of $130 billion due to card-not-present fraud between 2018 and 2023.

Chargebacks are undoubtedly one of the key contributors to this problem and are notoriously one of the most complex forms of fraud to detect and prevent. 

If you manage an eCommerce business, it's essential that you understand the true cost associated with chargeback fraud, so that you can take the necessary steps to prevent it moving forward.

In this article, learn more about the six direct and indirect costs of chargebacks.

The Direct Costs of Chargeback Fraud

1. Chargeback Fees

The first and obvious cost associated with chargebacks is the fee that accompanies the chargeback claim. Chargeback fees typically range from $20 to $100 per claim, which may not seem like a large amount but factoring in card processing fees, a merchant could end up losing over $100 on a single order. 

Besides these standard fees, merchants also run the risk of incurring flat rate penalties if they receive too many chargeback claims in a given period. These can cost merchants anywhere between $10 to over $100,000 per month!

2. Lost Merchandise

If you are the victim of chargeback fraud, your eCommerce business will end up refunding the customer for the purchase, but it's very unlikely that the product will be returned to you.

Over time, this can result in a great deal of lost merchandise. If you lose enough inventory to chargeback fraud, this can start to eat into your profit margin.

3. Shipping Costs

Another of the direct costs associated with chargeback fraud is shipping expenses. When you ship out an order as an eCommerce company, the shipping cost should come out of your markup on the item.

When a chargeback occurs, the shipping cost is no longer covered by the item's price. Instead, you're essentially paying for it out of pocket. Instead of making money on the sale, you're losing it in sunk shipping costs.

The Indirect Costs of Chargeback Fraud

4. Operational Expenses

When it comes to indirect costs associated with chargeback fraud, operational expenses are top of the list. 

Processing an order requires a certain amount of operational resources. Picking, packing, and shipping require time, as does managing inventory. Logistics and transportation are another high operational cost that is required to stock and ship out products. 

What's more, it also takes time to deal with and potentially dispute chargebacks. Many companies resort to employing a full team of fraud analysts to ensure chargebacks are kept to a minimum. The more employees you have working on the problem, the more costly it will be for your business.

5. Merchant Account Termination

Another dangerous indirect cost of chargebacks is merchant account termination.

If you exceed a certain percentage of chargeback claims, you can face termination from certain credit card networks. This means that you will no longer be able to process transactions from these networks. 

6. Opportunity Costs

Indirect costs of chargebacks and chargeback fraud also include opportunity costs. 

For every order that results in a chargeback, you could potentially be filling an order that earns you revenue. Over time, that opportunity cost will compound and ultimately inhibit your business' ability to grow. 

How Can You Minimize the Cost of Chargebacks?

As you can see, both the direct and indirect costs of chargebacks can be significant. Added together, these unnecessary costs can cut into your bottom line. What's more, almost 80% of surveyed online retailers revealed that chargebacks have significantly increased over the last 3 years. 

Sadly, contesting chargebacks doesn't always work, with 31% of merchants experiencing difficulties (i.e. losing the chargeback dispute).

So how can you stop chargebacks from seriously disrupting your business' growth?

The key is to combat the issue before it even arises.

At Vesta, our purpose is to drive the cost of fraud to zero, at a global scale. We approve more than 97% of transactions and we also assume 100% of the direct cost of fraud for the transactions we approve. With us, your chargeback expenses could drop to zero. 

Interested in seeing how it all works?  Request a demo of our platform and we'll show you exactly how Vesta eliminates fraud for hundreds of online retailers around the globe.