Chargeback Fee Explained: Causes, Impact, and How to Avoid Them

Chargeback Meaning

Whenever a customer transacts using their credit or debit card, the purchase is confirmed once funds are transferred from their personal account to the business account. However, in some instances, funds can be reversed following a purchase, which is known as a chargeback. Chargebacks usually occur once a customer disputes a specific transaction with their bank or credit card provider.

What is a Chargeback Fee?

Whenever a customer disputes a transaction and the payment processor or bank reverses the charge, a fee is imposed as a penalty on the business or merchant. This fee is known as a chargeback fee. It is levied to cover the administrative costs incurred by the payment processor or bank for managing the chargeback process.

Chargeback fees vary according to the nature of the dispute, the business’s agreement with the bank, and the nature of the dispute. That said, chargeback fees typically range from S$15 to S$50 per incident. The fee can also be a percentage of the transaction amount. So, it’s important to review these terms with your payment processor.

Apart from attracting fees, chargebacks can also result in a loss of the original transaction amount for the business. A higher rate of chargebacks might even dent your business’s reputation and result in greater scrutiny from card networks and payment processors. So, chargebacks cost businesses not only time and money but also their reputation in the long run.  

How Chargebacks Work

Here is an overview of the chargeback process:

A dispute is raised

A chargeback is raised when a customer disputes a transaction by contacting their card-issuing bank. Some common reasons for chargebacks include transaction processing errors, missing goods or services, or unauthorised transactions. 

Chargeback is initiated

The customer’s issuing bank will then review the claim, and if it is legitimate, a chargeback will be initiated. 

Business’s bank is notified

The customer’s issuing bank will notify your business’s acquiring bank or the bank that processes your payments about the chargeback. In turn, the acquiring bank will communicate this to the business, and a chargeback fee will be imposed.

Response to chargeback

You will need to respond to the chargeback claim raised by the customer’s bank. You can either accept or dispute the claim. If accepted, you will need to issue a refund, and if disputed, supporting evidence must be submitted to support the transaction’s legitimacy. Evidence to be submitted can include shipping details, order confirmation, etc.

Review and outcome

Upon receiving the evidence you submit, the customer’s issuing bank will review it. If needed, it might ask for additional information. Based on the evidence, the bank might either reverse or uphold the chargeback.  

Cause of Chargebacks

True fraud

True fraud occurs when someone other than the authorised cardholder uses it to make a purchase without the owner’s consent and knowledge. Upon realising this, a customer can file a dispute against the charge and start the chargeback process. Such instances result in significant financial losses not just to the cardholder but also to the business. They attract a chargeback fee and might also incur potential fines from the payment processor.

Friendly fraud

Unlike true fraud, friendly fraud occurs when a customer disputes a legitimate transaction they authorised. It usually occurs due to reasons such as the customer forgetting about a specific transaction or not recognising the business’s name on their banking statements. Regardless of the reason, the effect is the same: a chargeback is initiated.

Processing errors

Processing errors refer to any glitches in the payment system or technical malfunctions. The outcome is they result in an incorrect transaction amount. For instance, duplicate transactions and processing issues can result in a chargeback.

Merchant error

Chargebacks can also be triggered due to merchant errors. Shipping the wrong items, multiple charges for the same transaction, or failing to deliver the goods or services as promised can result in a chargeback.

Dissatisfied customers

Customers who aren’t happy with the product or service or feel their complaints aren’t properly addressed might resort to disputing a charge, which triggers a chargeback.

Chargeback Dispute

At times, a business or merchant can also contest a chargeback claim raised by a customer. In such instances, you must provide evidence to support your claim about the legitimacy of the transaction. 

However, this can be time-consuming because it involves multiple parties, such as your bank, the acquiring bank, and the customer’s issuing bank. You can speed things up by promptly responding to a chargeback dispute and providing detailed documentation to support your case. After review, the chargeback can be upheld or reversed. This determines if you are liable to pay a chargeback fee or not.

Credit Card Chargeback

Credit card chargebacks occur when credit card payments made by a customer are disputed and later reversed by their bank. Such chargebacks can result in significant financial losses for businesses apart from incurring chargeback fees and potential fines. Learning to manage such chargebacks is needed to minimise losses and maintain a healthy chargeback ratio. To resolve any disputes related to a credit card transaction, you will need to work with the credit card issuers or banks.

Chargeback Ratio

A chargeback ratio refers to the percentage of chargebacks concerning the total transactions a business processes. This ratio is used by banks and financial institutions to measure a business’s risk level. For instance, a higher chargeback ratio might imply higher chargeback fees, stricter borrowing terms, and even account termination in certain cases. Monitoring this ratio is needed because maintaining a low chargeback ratio helps avoid unnecessary fees and maintains a positive business reputation.

Avoiding Chargeback Fees

Though it is impossible to avoid chargebacks altogether, an effective chargeback management strategy can reduce the likelihood of dealing with them.

Identity verification

One of the most important things you can do is implement sufficient security measures before a transaction is processed. This is especially true for online transactions. For instance, using a Card Verification Value (CVV) or Address Verification Service (AVS) helps recheck the details entered by a customer to validate a transaction. This helps confirm that the person making the online purchase is the cardholder. It also reduces the chances of fraudulent transactions and prevents chargebacks related to true or friendly fraud.

Order confirmation

A helpful business practice is to confirm an order with the customer before processing it. This helps avoid disputed payments later. If an order is accepted, ensure the customer knows the delivery times and manages their expectations.

Updated inventory

Maintaining accurate records of inventory reduces the risk of making late deliveries or shipping the wrong items. This helps ensure customers only purchase items that are available and prevents cancellations or chargebacks.

Clear communication

Reducing customer confusion helps tackle potential chargebacks. For instance, a chargeback can be raised because the customer couldn’t identify your business on their banking statements. To avoid confusion, ensure the business name used or the transaction description offers a clear understanding of the transaction. Similarly, clearly communicate about your business’s return, refund, and cancellation policies. Providing accessible and professional customer support helps maintain a good rapport without harming your business’s reputation.

Quick and professional response

Regardless of how hard you try, disputes are unavoidable. How you respond to a dispute makes a difference when it comes to avoiding chargeback fees. Offering quick and professional responses helps. Whether it is clear communication, recognisable transaction descriptions, or prompt refunds, these proactive measures help reduce chargeback and maintain a healthy chargeback ratio. Some providers also offer pre-chargeback programs that alert merchants of disputes and gather the required evidence of the said transactions for effective dispute resolution.

Chargeback Fraud and Prevention

Friendly fraud prevention

Friendly fraud occurs when a legitimate transaction is disputed by a customer, either intentionally or unintentionally. Regardless of the reason, the business incurs chargeback fees, which result in a loss of time and revenue.

To prevent friendly fraud, a multi-faceted approach is needed.

• Ensure customers can easily recognise your business on their credit card statements. This can be done by using email confirmations, follow-up receipts, and easily recognisable transaction descriptors.
• Communicate clearly about your business’s refund and return policies.
• Work closely with your payment processors to implement fraud prevention strategies, such as CVV confirmation and the Address Verification System (AVS), to confirm a transaction’s legitimacy before approval.

Credit card security

• Ensuring strong credit card security ensures a reduction in frauds and credit card chargeback. This begins with implementing robust technologies such as tokenisation and encryption to safeguard your customer data.
• Regularly reviewing your security protocols is necessary to stay abreast of evolving credit card networks and payment processor regulations. Non-compliance increases the risk of penalties and the chance of fraud slipping through your systems.
• Closely monitor any suspicious activity and ensure your checkout systems are secure. By using real-time fraud detection tools commonly offered by your payment processor, this can be done.

Mitigating losses

At times, chargebacks can still occur despite having a good system in place. Therefore, a proactive approach is needed for chargeback management.

To mitigate losses:

• Regularly monitor transactions and respond quickly to disputes with detailed documentation.
• Work with your payment processor to install fraud filters, analyse past dispute patterns, and implement targeted solutions.
• Maintaining a healthy chargeback ratio is essential to ensuring your merchant account is in good standing. A well-executed chargeback prevention strategy is needed to do this.

Conclusion

In Singapore’s increasingly digital and highly customer-centric market, it’s important for business owners to understand how chargebacks work and ways to prevent them. When left unchecked, chargeback fees can quietly but surely chip away at your business’s profitability and reputation. From maintaining clear communication and secure payment processing to transparent refund policies, different steps can be taken to reduce chargeback disputes while maintaining customer trust.

Remember, running a business, regardless of its size, is no small feat. From managing cash flow and keeping track of expenses to ensuring compliance and team accountability, it takes time, energy, and smart systems.

That’s where the right partner makes all the difference. Partnering with a platform like Aspire gives you access to more than just business accounts. You get integrated tools for setting budgets, customising approval flows, managing corporate cards, and gaining real-time insights into your company’s financial health. With everything working seamlessly in one place, you reduce manual work, cut down on errors, and even as your business scales.