What Is a Chargeback Fee? Costs, Risks, & How To Prevent

Owning an e-commerce store has led me to deal with chargebacks and, by extension, chargeback fees. I want to help businesses understand what to expect with chargeback fees.

I’ll explain these fees, the factors that determine them, the fees on various platforms, and how to potentially mitigate chargebacks in general.

Learn how much a chargeback will cost.

Key Takeaways

• Chargeback fees are penalties businesses pay for disputed transactions.
• Businesses deemed "high-risk" face higher chargeback fees.
• Chargebacks can cost more than the original transaction value.
• Chargeback fees vary depending on the bank and payment processor.
• Chargeback fees exist to cover dispute costs and promote good business practices.

What Is a Chargeback Fee?

A chargeback fee is a cost a business pays when a customer disputes a transaction. Acquirers (merchant banks or payment processors) will withdraw this amount from their business accounts automatically.

This dispute goes through the customer's bank (the issuing bank). If successful, the bank reverses the charge and returns the money from the business. The business also pays a fee to its acquiring bank for handling the chargeback, ranging from $20–$50.

This fee is in addition to other costs the business already faces. These costs include lost revenue, shipping expenses, and payment processing fees. Chargeback fees vary depending on the issuing bank and payment processor.

I’ll provide more details later.

These fees occur for each successful chargeback a customer files.

Summary: A chargeback fee is a penalty businesses pay when customers successfully reverse a card transaction through their bank.

Cost of a Chargeback Fee

Chargeback fees range between $10 and $100 per chargeback in the United States and £10 and £50 in the UK. This amount will vary by payment processor and acquiring bank (merchant’s bank). They’ll also vary by country and whether the transaction was international.

Or we can think about it this way.

Every dollar a business loses from losses, they must spend an additional $3.00 on average on chargebacks (in 2024) [1]. Meaning, they lose triple the money of the transaction.

This fee increases if the banks consider the business as “high-risk.”

What About High-Risk Chargeback Fees?

Businesses who banks or payment processors identify as “high risks” will face higher fees when receiving a chargeback. Why? Because it’s riskier to work with these businesses.

Acquirer’s don’t want to lose money. Thus, they impose higher fees.

Credit card networks deem a business "high-risk" if they believe it's more likely to generate a high volume of chargebacks.

That’s when these factors come into play:

• Businesses operating in industries known for high fraud rates (e.g., consumer electronics) or frequent customer disputes are often considered high-risk.
• A merchant's own history of excessive chargebacks signals a higher risk to the card networks.
• Lack of clear descriptions, poor customer service, or deceptive practices can increase chargeback likelihood.

That’s not all.

If a business reaches a chargeback threshold, card providers will automatically place them into monitoring programs. These programs cost more money monthly until the seller reduces the number of chargebacks within a time period.

And if merchants don’t reduce your chargebacks, they lose the ability to use that card processor.

Let’s use the Visa Dispute Monitoring Plan (VDMP) as an example. Visa automatically places merchants in this program for 12 months if they have more than 100 chargebacks in a month or their ratio is 0.9% or higher [2].

Merchants who can’t get out of this range within that timeframe lose their ability to accept Visa cards.

This gets much worse, though.

Sellers in the VDMP for 1–4 months won’t incur monthly fees. But those in the program for 5–9 months must pay $50 (€45) per chargeback. Merchants in the program for 10–12 months must pay a $25,000 (€21,750) monthly review fee on top of $50 (€45) per chargeback.

Mastercard has a similar program that charges monthly fines that start from $0-$1,000 and go all the way up to $100,000. Merchants face these fines as each month in the program passes.

Summary: Card networks classify businesses as high-risk based on industry, chargeback history, and sales practices. Moreover, programs like Visa's VDMP bring added fees and requirements for merchants with excessive chargebacks.

Chargeback Fees on Different Platforms

Here are the chargeback fees that businesses will suffer from throughout different platforms [3, 4, 5]:

• PayPal: Varies by currency. Examples include $20 (USD), 22 AUD, 28 SGD, and 14 GDP per incident.
• Stripe: $15 per incident
• Square: $0
• Shopify Payments: $15 per incident
• Braintree: $15 per incident
• Amazon Pay: $20 per incident
• Authorize.net: $25 per incident
• BigCommerce: $20 per incident

Lesser-known platform chargeback fees are as follows:

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Why Do Chargeback Fees Exist?

Chargeback fees exist because managing the chargeback process costs a lot of time and money. When a cardholder disputes a card charge, the customer’s bank initially refunds them using their own funds. This means the funds temporarily come from the merchant's account to reimburse the issuer.

Then there’s the labor cost.

Employees at banks and payment providers investigate the claim, transfer funds between accounts, and manage communication and record-keeping.

Moreover, chargeback fees act as an incentive for merchants to improve their practices and reduce the likelihood of customer disputes. Proactive fraud prevention and excellent customer service can help limit chargebacks and the fees that come with them.

Then there’s the arbitration stage.

If chargebacks reach this stage, then employees at card networks get involved, and there’s more work for employees at the business’ payment processor and bank to deal with the arbitration.

Thus, the fees involved with arbitrating a chargeback can reach the hundreds.

Summary: Chargebacks fees compensate for the cost of resolving disputes and encourage merchants to take steps to avoid them.

Additional Fees You’ll Encounter During a Chargeback

The following sections will talk about all the additional costs that come from a chargeback:

• Labor: Time spent by employees handling the chargeback
• Marketing: Costs associated with acquiring the customer
• Production: Costs to create or manufacture the product.
• Business Operations: Expenses to keep the business running.
• Arbitration: If you arbitrate a chargeback, this comes with additional fees.

Here we go.

1. Labor Costs

Whenever you sell a product, the following positions are involved:

• Sales: The salesperson who closed the deal loses the value of their time spent developing the lead and nurturing the customer relationship.
• Marketing: Marketing efforts that generated the lead, such as advertising or content creation, become a wasted investment.
• Product Development: If the disputed product required design and development, the chargeback erases the investment of those resources as well.
• Manufacturing/Procurement: The labor involved in producing or obtaining the product becomes a sunk cost if the chargeback is successful.
• Logistics: The effort put in by product pickers, packers, and delivery drivers is wasted if the sale is ultimately reversed.
• Customer Service: Representatives handling the dispute might have otherwise assisted with new sales or supported existing clients.

All of the money spent on paying these folks to sell, ship, and handle post-sale inquiries is wasted because there aren’t any profits to reap.

Moreover.

You’ll need to move additional staff into dealing with the chargeback process, which involves spending more money on labor. Such departments include customer service for communicating with the customer. Fraud prevention for investigating the transaction. Then accounting for tracking the losses.

Summary: Chargebacks trigger various labor costs across a business, from customer service and logistics to fraud prevention and accounting teams. These costs compound the financial impact of the original chargeback fee.

2. Marketing to Sell Item

In addition to labor and chargeback fees, businesses likely pay these expenses to expose your product to the customer:

• Paid Advertising: Budget spent on search ads, social media campaigns, or display ads.
• Content Creation: The cost of blog posts, videos, or other content used to attract customers.
• SEO Efforts: Time and resources dedicated to search engine optimization.

These costs compound, putting additional strain on a merchant's bottom line.

But wait, there’s more.

Summary: Chargebacks represent a double loss: the cost of the disputed item and the marketing expense it took to generate the sale originally.

3. Production Costs

Here's what's typically included:

• Raw Materials: The cost of the basic materials or components used to create the product.
• Manufacturing Labor: The wages for workers involved in the physical assembly or product creation.
• Overhead: Factory rent, utilities, machinery depreciation, and other expenses associated with maintaining the production facility.
• Design and Development: If the product required a design, development, and prototyping stage.

If it’s a digital product, then the loss isn’t as severe.

Summary: Successful chargebacks mean a loss of revenue and the additional cost of all resources invested in producing the disputed product.

4. Business Operations Expenses

These expenses might include:

• Administrative Costs: Staff salaries for functions like accounting, human resources, and general management
• Sales and Marketing: If the product required dedicated marketing or sales efforts beyond the initial acquisition.
• Technology: Investments in software, e-commerce platforms, or other technology that enable product sales.
• Legal and Compliance: Costs associated with legal consultations or maintaining regulatory compliance related to the product.

Summary: These expenses might encompass administrative costs, sales and marketing efforts, technology investments, and legal compliance.

5. Transaction Processing Fee

Even if a chargeback is reversed, the merchant will not recover the original transaction processing fee. 

This fee covers these aspects of the initial sale:

• Interchange Fee: Fee paid to the card-issuing bank as part of every transaction.
• Assessment Fee: Fee charged by the card network (e.g., Visa, Mastercard) for performing the transaction.
• Payment Processor Markup: The additional fee charged by the merchant's payment processor for their services.

Summary: This fee includes interchange costs, card network assessments, and the payment processor's markup.

6. Arbitration Fees

Arbitration is the final stage of a chargeback dispute. If a merchant disagrees with the outcome of previous steps, they can escalate the case to arbitration. This means the card network reviews the evidence and makes a decision.

However, arbitration requires card network providers to use resources and employes, which means arbitrating a transaction comes with fees like:

• Filing Fee: Merchants pay a fee to initiate the arbitration process, typically several hundred dollars.
• Win/Loss Fee: The merchant may also be responsible for additional fees imposed by the card network.

Arbitration, in general, can cost hundreds or even thousands of dollars depending on the card network. Businesses should only consider arbitration if the disputed transaction value is exceptionally high and they have substantial evidence to support their case.

Summary: Arbitration is a costly last resort in the chargeback process where the card network acts as the final judge, and the losing party often incurs significant fees.

Chargebacks vs. Refunds

Refunds and chargebacks result in a customer getting their money back. With a refund, the business directly returns the money to the customer. This process might happen if a customer returns an item or is unhappy with a service.

A chargeback is different.

The customer contacts their bank to dispute the charge. The issuing bank (customer’s bank) then forcibly takes the funds from the business, often without directly involving the company.

A chargeback might happen if a customer doesn't recognize a charge or believes the business never delivered the product.

Sometimes, a chargeback starts as an unresolved refund. A customer might contact a business for a refund but not receive a timely response. In this case, they may escalate the issue by filing a chargeback with their bank.

Summary: Refunds are initiated by the business, while chargebacks are forced by the customer's bank.

How to Prevent Chargebacks

We go more in-depth with different chargeback prevention and protection methods in a separate guide.

However.

Here are different ways to protect your business and potentially prevent chargebacks depending on the chargeback type:

1. Preventing Friendly Fraud Chargebacks

Friendly fraud happens when a customer files a chargeback on a legitimate purchase they received. This typically stems from a customer not being happy about product quality or flat-out abusing the chargeback system.

Here are ways to help protect your business against friendly fraud:

• Reduce misunderstandings (e.g., customer expects a phone case but gets a screen protector).
• Discourage fake claims by offering a hassle-free return process.
• Resolve issues promptly to prevent frustration-driven chargebacks.

It’s difficult to prevent friendly fraud cases if the customer is abusing the system. But using some of the above strategies can give you more evidence to give to the banks during the chargeback process. Increasing your chances of winning.

2. Preventing True Fraud Chargebacks

True fraud involves a criminal using a stolen card to make unauthorized purchases.

Here’s what you can do to help mitigate these chargebacks:

• Identify suspicious transactions like stolen cards or unauthorized purchases.
• Verify billing address to prevent unauthorized use of cards.
• Add a layer of security by requiring the customer’s CVV card code during checkout.

You’ll want to gather as much evidence as possible to help your claim.

For instance, if it’s not an instance of true fraud, you could grab the customer’s IP address they typically use when accessing your website and compare it to the “criminal’s.”

Doing this may give you more evidence to present during the chargeback process.

3. Preventing Merchant Error Chargebacks

Merchant error chargebacks occur when a business makes a mistake during the sales process. Such issues can stem from you sending the wrong item, billing a transaction twice, and not crediting the customer properly during a refund.

This type of chargeback is fully in your control and involves doing the following:

• Minimize errors by having clear procedures for order handling (e.g., shipping the wrong item).
• Double-check order details to avoid mistakes in pricing, quantity, or shipping.
• Keep customers informed with accurate order confirmations and shipping updates.

Have systems in place to make the transaction, shipping, and post-sale support as smooth as possible for the customer. Being a good business in general will help prevent this chargeback type.

FAQs for Chargeback Fees

Will Banks Reimburse Chargeback Fees if You Win a Chargeback?

Banks don’t reimburse chargeback fees, even if the merchant wins the dispute.

What’s a Chargeback Item?

A chargeback item refers to the specific transaction a customer disputes by initiating a chargeback.

Conclusion

Chargeback fees are a sometimes unavoidable expense that businesses must manage. By understanding the costs involved and implementing strong prevention strategies, businesses can mitigate financial losses and protect their bottom line.

Prevention tools are an excellent way in ensuring most chargebacks never happen. Learn how our chargeback prevention tool can help businesses.