The invisible revenue drain: The untold story of chargeback

Chargebacks, where customers dispute a transaction and request a refund via their bank, have become a familiar challenge for online retailers. In the last few years, chargeback rates have steadily increased, and are now at unprecedented levels.

The invisible revenue drain: Chargeback

More than three out of four customers in the UK and US filed a chargeback in the past year, contributing to a global chargeback volume expected to hit $165 billion by 2024 – writes Aviram Ganor, General Manager EMEA at Riskified.

Why? The pandemic created a boom in online sales and changed how customers shop forever, making filing a chargeback rather than returning in store or at a post office more normalised.

Pairing this with the ongoing economic challenges and cost-conscious consumers who want to recoup funds (legally and fraudulently!) means filing a chargeback is now normal consumer behaviour.

As for merchants, managing a chargeback has had to become a core part of an online retailer’s business, putting additional strain on profitability while they too grapple with a sluggish economy and shrinking margins.

While the refund of a sale is the most apparent cost of chargebacks, it only scratches the surface of the financial burden these disputes place on merchants.

The Human Time Suck: Operational Costs

Managing chargebacks is a complex and time-consuming process.

Automated solutions have existed for a while, but recent research suggests 60% of merchants are still managing chargebacks manually, often requiring one to three full-time employees to handle the workload.

Each dispute can take upwards of ten minutes to resolve, with 18% of merchants spending more than 20 minutes per case.

Root cause analysis and prevention work further adds to this time, making the process even more resource-intensive and inefficient.

The manual nature of chargeback management increases the risk of missed or lost disputes. Compiling evidence from various gateways, teams, and data streams can be a daunting task, often hindered by reliance on external suppliers.

Unsurprisingly, 55% of merchants find the process excessively time-consuming.

Barriers to Efficiency: Technical Costs

A consequence of chargebacks exploding so quickly is that the systems designed to manage them evolved in a disordered way.

The resulting fragmentation is headache-inducing for merchants, with most working across multiple payment service providers (PSPs) and acquirers, leading them to need disjointed management systems. Over half of merchants cite this fragmentation as a significant challenge.

Disconnected systems also make it difficult to access and correlate information, increasing the manual workload and risk of errors. It also hampers effective measurement, tracking, and reporting of key performance indicators (KPIs).

A significant number of merchants (35%) struggle with accessing relevant data as evidence, while others face challenges related to visibility and monitoring.

Bureaucratic Hurdles: Compliance Costs

Chargebacks and processes for disputing these (that help retailers recoup costs) are subject to regulatory requirements, further complicating processes.

Periodically, card schemes and issuers who set these guidelines will update them, requiring merchants to stay vigilant and adapt quickly.

For example, Visa’s Compelling Evidence (CE) 3.0, introduced in April 2023, and PayPal’s Seller Protection Program updates in January 2024, needed prompt procedural adjustments from merchants.

Non-compliance with these evolving rules can result in fines or, in extreme cases, losing acquiring accounts.

Plugging The Leak – How Merchants Move Forward

High chargeback rates are no longer a trend – it’s a new reality.

Merchants are at a critical juncture now to mitigate the true cost of chargeback management and establish fittingly more efficient, sophisticated processes for the size of the operation to the business.

Increasing automation tops the list, with 65% of merchants wanting to do this to streamline processes.

Meanwhile, half of the merchants emphasise the need for a unified system to access all chargebacks in one place. Better data processing practices, including labelling and managing evidence by gateway, PSP, or issuer are also crucial.

Finally, and most excitingly, setting up smarter systems also allows retailers to incorporate chargeback data into fraud prevention processes that can help strengthen defences. After all, offence is the best defence!

It’s clear chargebacks are far from just simple refund costs and are losing merchants millions every year, without them even realising.

But this invisible revenue drain doesn’t need to stay hidden any more – or even exist! Merchants today can take action and adopt more automated, centralised and sophisticated systems that can better navigate the complexities of chargeback disputes and safeguard their revenues.

In an industry of shrinking margins, the retailers who survive will be those who put the plug back in quickest.


The post The invisible revenue drain: The untold story of chargeback appeared first on Payments Cards & Mobile.