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The total cost of a chargeback can include refund of the sale, lost product and additional fees such as chargeback fees. For this reason many merchants go out of their way to resolve customer satisfaction complaints and have lenient refund policies.


The total cost of a chargeback can include refund of the sale, lost product and additional fees such as chargeback fees. For this reason many merchants go out of their way to resolve customer satisfaction complaints and have lenient refund policies.

Some merchants will go out of their way to resolve customer service complaints up front to prevent a charge-back fee. They create policies of refunds on disputes; they encourage customers to call the business if they aren’t happy and they allow for refunds without returns. Why would a merchant do this? Well consider what is at stake. To the merchant their risk is the sum of the charge-back fees, the goods themselves, either lost or not returned, and the potential for increased basis points on their sales if their fraud losses get too high.

On this page you will find a Charge-back Liability example providing a numerical representation of the total costs of a chargeback in terms of how many good orders for the same amount would be required just to offset the losses from one chargeback. You will also find an example business case study showing the effect of higher chargeback rates on a merchant's margin while their number or orders and average order amount remain constant.

BE FOREWARNEDFor Internet casinos, the U.S. card associations and issuing banks follow a policy that accepting a wager by a U.S. individual is in violation of federal law, and upon receiving a dispute from the cardholder, will immediately issue a charge-back.

In the previous payment sections detailing the money flow we introduced the concept of charge-backs. As you can see, no one is really excited about charge-backs. They were intended to provide a means for merchants, banks and consumers to resolve cases of abuse and fraud. They have been pretty good at doing this, but they have also created a lot of finger pointing and higher costs for everyone involved.

Fraud online costs a lot more than the direct loss of product or services...

Let’s refresh our memory when it comes to who is liable to pay for fraud. For fraud that occurs in the card-present world, the card association typically picks up the costs for fraud. However the merchant will still have some associated costs that are not covered by this. These include the costs to process an order, to handle the charge-back, the shipping costs, etc. The merchant will also have to pay a charge-back fee.

In the card-not-present world the merchant is typically the one paying for the fraud. They already paid and lost the goods, all of the overhead costs they spent on the order, and they will still have to pay a charge-back fee.

For customer-service charge-backs the merchant pays a charge-back fee and unless they can resolve the customer service issue they may have physical loss of goods and services and associated overhead costs as well.

Charge-back Liability Example:

Total Sale =        $100.00

Margin (22%) =    $22.00

CreditCard Issuer Interchange & Acquirer MDR (3.5%) = $3.50

Net Profit = Margin – Credit Card Issuer Interchange & Acquirer MDR

The merchant will make $18.50 from this one sale, if it ends up as a charge-back, it will cost them:

Net Profit = $18.50

Consumer Refund = $100.00

Charge-backFee = $25.00

Net Loss to Merchant = Net Profit – (Consumer Refund + Charge-backFee)

The merchant will have lost $106.50 on this order. That means they would have to sell 4.8 more orders at this same amount just to make up this one loss. This example does not even take into account all of the merchant’s costs, such as overhead and processing fees. It also assumes a very low charge-back fee — if they are doing e-commerce and are considered high risk, the charge-back fee could be $100 or more.

Charge-back fees are not fixed, they are different from bank to bank, and they also grow in cost depending on the number of charge-backs you have. If you have a significant problem with fraud you could find yourself paying higher charge-back fees than the actual cost of the goods sold.

How did this happen? As merchants tried to prevent abuse by consumers, they pushed disputes to the bank. The banks retaliated by increasing their fees. The card associations reacted to the increase in charge-backs by setting thresholds for the total percentage of orders that are charge-backs, along with the total percentage of dollars processed. If your charge-backs go above these thresholds you get hit with higher fines, and they keep going up until you get below the threshold. We call this the “going out of business plan” for the merchant. At the time of writing this website the thresholds were around 1% of total monthly transactions or 2.5% of total dollar volume. More recently it has become increasingly complicated with monthly time intervals and the corresponding thresholds for charge-backs. Beyond the charge-back fees, the number of charge-backs you have can effect the basis points you pay on each order. Merchants that exceed these limits are considered high risk. If they were considered high-risk they would have lost $181.50 on that same order and would now have to sell 8.25 orders of the same size to make up that one loss.

As you can see it is a scary proposition — one that has high stakes for the merchant. Merchants are very focused and motivated to control their losses to ensure that they don’t get compounded by escalating charge-back fees.

Business Case Study:

ABC Electronics is evaluating the impact of charge-backs on their net profit. ABC Electronics is a $25 million dollar a year business with margins of 14%. The company is experiencing 5% charge-backs and the CEO has asked the CFO to explain the impact of charge-backs on the business, showing what the impact would be if they lowered it to 3% and what would happen if it increased further to 8%.


Covers the basic information about chargebacks everyone on a risk team needs to know from the manual review staff to the risk manager. Topics covered include basic definitions of chargebacks and other key terminology to the details of the representment process and evidence needed to dispute a chargeback.


This course provides a comprehensive overview of the chargeback and representment lifecycle, process flow and parties involved; the steps and procedures to follow from when the chargeback was received until it is reversed; and the specific documentation, evidence and strategies needed for disputing chargebacks based on the chargeback reason.


Covers the credit card process flow defining each of the "payment players"; reviews payment concepts such as authorizations, settlements, reversals, chargebacks and the credit card association's high risk programs.

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