Running a business is full of challenges. Throughout just one day there are many twists and turns that can happen, some creating opportunities, some causing problems. As a high-risk business, you’re probably painfully aware of chargebacks. In fact, most businesses are; according to studies, there were 238 million chargebacks in 2023 alone, and chargebacks related to online fraud grew by 15%, resulting in $48 billion in losses.
Let’s touch on disputes – the same study showed that, on average, only 45% of chargebacks are decided in the merchant’s favor. So, that’s 55% that you lose.
Put simply, chargebacks are costly in both time and money and high-risk businesses deal with them all too often. In fact, a high instance of chargebacks is one of the main reasons why some industries are deemed high-risk in the first place, and this causes many payment processing problems.
If you’re wondering what is a chargeback, let’s backtrack for a moment. A chargeback is a transaction that is reversed, usually by the cardholder’s bank. In this case, the customer disputes a charge that appears on their account and asks for it to be reversed. From this, you can easily spot lost revenue as a problem, but in this guide we’ll talk about the bigger picture of what happens if you lose a chargeback.
TL;DR
- Chargebacks occur when a transaction is reversed, usually by the customers’ bank.
- Losing a chargeback dispute can cause significant financial losses.
- Businesses face operational issues in the event of several chargebacks, including inventory management.
- Multiple chargebacks can damage a business’ reputation, affecting customer trust and brand image.
- If a business is found non-compliant with regulations, legal problems may arise.
- It’s important to implement chargeback prevention strategies to reduce the number of chargebacks experienced.
- High-risk industries face more chargebacks than others, due to complex billing methods and high fraud risks.
- Technology can help to reduce chargebacks, including fraud prevention tools, biometrics, and data analytics.
- PayCompass offers high-risk merchant accounts with built-in chargeback prevention and real-time transaction monitoring.
Financial Implications and Operational Challenges
Facing a chargeback dispute is frustrating for many reasons; mainly because it’s the first sign that you might be about to deal with a loss of money. However, regular chargebacks can also affect how your business operates, restrictions placed upon it by payment processors, and many headaches you could certainly do without.
In this section let’s explore the consequences of facing a chargeback.
The Immediate Financial Hit
The most obvious problem with losing a chargeback is that you lose the money, but it doesn’t end there. Not only do you lose the cost of the product, but the actual product itself. Add to that chargeback fees. In effect, merchants lose up to 2.5 times the transaction cost on a chargeback.That’s bad enough in just one instance, but if you experience several within a week or month, the losses add up.
Generally, once a chargeback decision is made, the payment is reversed within 24-48 hours and fees are automatically deducted from your merchant account. For this reason, choosing the right high-risk merchant service provider is key. At PayCompass, we have robust chargeback prevention on our merchant accounts, taking the issue of chargebacks out of the equation.
Transaction Reversal and Fees
We briefly mentioned fees involved in a chargeback dispute, so let’s explore this a little more. Fees vary across the board, and this often comes down to the actual payment processor and your business’ risk level. If you experience several chargebacks over a set amount of time, your fees may increase.
Loss of Goods or Services
In most cases, you do not get the product back. That means not only have you lost the money but the physical good too, or the service you provided. It’s lost time as well as money and for small businesses in particular, it can be a really damaging occurrence.
Long-term Financial Repercussions
The problem doesn’t end with the initial chargeback dispute, but how it continues to snowball through your general finances. The more chargebacks you experience, the higher your fees are likely to be, and it’s going to cause you to be placed in a high-risk category, if you’re not already. That means you may not be accepted by specific payment processors, or face harsh restrictions from some that do.
The table below outlines chargeback ratios and their potential consequences.
| Chargeback Ratio | Potential Consequences |
| 0.5% – 0.9% | Increased monitoring |
| 0.9% – 1.5% | Higher processing fees |
| 1.5% – 2% | Risk of account freeze |
| > 2% | Potential termination |
Potential Account Termination
In some cases, too many chargebacks could cause your account to be closed. That means everything is fine one minute, and totally chaotic the next. Your account has been closed with no warning, leaving you scrambling to find another option extremely quickly. Not only does it mean you have to handle the initial chargeback dispute but your business is suddenly halted until you can fix the problem or find an alternative. It’s one of the most troubling parts of navigating high-risk payment processing challenges.
In many cases regular processors have a 1-2% chargeback ratio and after that, they start to consider whether your account should be terminated. This can also mean you’re placed on the MATCH list, which affects any future account applications. Of course, with PayCompass you don’t have to worry about this; our accounts come with fast approval and excellent customer support from the first moment you contact us.
Operational Challenges
Image showing charts assessing business performance and growth.
We’ve talked about the financial aspect, but now let’s talk about operational challenges. It’s true that chargebacks can throw your entire business into chaos, so let’s explore some of these challenges in more detail.
Resource Allocation
Regular chargebacks require a plan, and that means you’ll need to allocate funds to help cover the costs to dispute chargeback claims. Of course, as we’ve touched upon already, it’s not only money but time too – and time is money in business! You could be focused on growing your business but instead you’re constantly trying to stop new holes from appearing in your boat.
Policy Revisions
It’s also possible that you need to rewrite your policies to help prevent as many chargebacks occuring. This means strict return policies, and perhaps even more robust verification processes. However, there is a balance that needs to be met here; if you go too far with rule setting, you may scare off customers who have no intention of filing a chargeback dispute. Ultimately, the protection versus customer approach is a difficult one to get right.
Reputational Damage and Customer Relations
While looking at what happens if you lose a chargeback, it’s not only what it does to your bank balance, but what it does to your reputation. We live in an age where one negative review can quickly spread across social media within seconds, easily affecting your brand image, and ultimately affecting trust within your customer base.
Brand Image Deterioration
When you build a band, you’re ultimately telling your customers, and future customers, what you will offer them, do, and not do. However, when you experience an increased number of chargebacks, it looks like you’re going against your promise. From the outside, people won’t know that perhaps the chargebacks weren’t your fault; they’ll simply see that your promises don’t hold up.
Before you know it, negative customer reviews appear online, your competition starts to take advantage of the situation, and your hard-earned reputation is badly affected.
There are some technological answers to this problem. Brand sentiment analysis tools are an excellent addition to your armory. These can help to track any problems in reviews or general customer satisfaction, giving you time to take proactive steps to fix the issue.
Social Media Backlash
We mentioned social media earlier, and it’s important to understand the extreme impact this can have on your brand reputation. Just one comment is enough to make people doubt you, and before you have a chance to get to the bottom of the issue, you’re looking at a PR disaster.
One disgruntled customer in a chargeback dispute can easily go viral, causing your customer base to question their loyalty, while potential customers decide to go elsewhere.
Again, automated sentiment analysis tools are invaluable here as they can easily identify any complaints related to chargebacks. Having a dedicated social media response team is also a positive step, helping to avoid some of the negative impact.
Customer Loyalty Challenges
Once a customer has been through a chargeback with your business, their trust in you is affected. Even if it’s to a small degree, the seed of doubt is still there, and it can easily grow into an orchard if you don’t take action. As you can see, there are many domino-effects when exploring what happens if you lose a credit card dispute, and the table below gives some key insights.
| Customer Action | Impact on Loyalty |
| First Chargeback | 25% less likely to return |
| Second Chargeback | 50% less likely to return |
| Third Chargeback | 75% less likely to return |
| Successful Dispute | 10% increase in loyalty |
Trust Erosion
Trust is everything in the business world, especially in ecommerce merchant services. Chargebacks quickly erode that trust, especially if the situation happens more than once. As soon as your costumes start to lose faith in what you can offer, they’ll go to one of your competitors instead.
All of this leads to extra marketing campaigns and efforts to build trust, which can cost a significant amount as time goes on.
Legal and Regulatory Consequences
Image of a wooden gavel, representing the legal challenges that chargebacks can cause.
Of course, the business world is more complex than just one thing, and that means chargebacks cause damage beyond mere finances. In this case, there is a risk of becoming stuck in a confusing mess of red tape.
Let’s explore the legal and regulatory consequences.
Regulatory Scrutiny
One chargeback is unlikely to cause major problems, but when they add up over a period of time, regulatory bodies may start to take notice. When chargeback rates go over 2% of total transactions, FTC (Financial Trade Commission) investigations may take place, causing worry and potential for fines.
Compliance Audits
If the FTC decides to investigate, this could lead to a compliance audit. Of course, regulatory audits are time-consuming for you as a business owner too, and in many cases they can take significant hours in terms of documentation and compliance checks.
If you fail the audit, fines are significant and will continue on a monthly basis until you can demonstrate compliance. In some cases, these fines can be anything up to $100,000 per month. When you consider that 75-86% of chargebacks are often down to ‘friendly fraud,’ all of this signals a significant problem for businesses.
Fines and Penalties
It’s not only chargeback fees and the regulatory problems that cost money. Visa and MasterCard also impose their own fines for what they deem to be excessive chargebacks. These fines can be anywhere between $25,000 to $100,000, and constantly repeating the “offense” can mean fines escalate even more.
Legal Vulnerabilities
We’ve covered regulatory issues, now let’s talk about the potential legal problems. You might wonder can merchants sue due to chargeback claims? The answer is muddy and lawsuits are extremely expensive. Not only is there the high chance of an unsuccessful outcome, but it’s equally as important to consider legal fees. These can be anywhere from $50,000 to $200,000 on average.
Consumer Lawsuits
Let’s talk about consumer lawsuits because these are some of the most troubling. This is when a customer takes your business to court, meaning that what seemed like a small dispute has suddenly turned into a huge, spiralling issue. In this case, there is the potential for large settlement costs, legal fees, and meditation fees if the case doesn’t go all the way. For this reason, dispute management is vital.
Contract Disputes
It’s not only your customers that may have something to say about chargebacks, but your partners too. Your larger business ecosystem may want to conduct their own investigations or even cut ties entirely if chargeback rates hit a certain level. This can include suppliers, business partners themselves, or payment processors. All of this can hit your business on an operational level, and could, in the worst cases, create major difficulties in even staying open.
Proactive Strategies for Chargeback Prevention
We’ve talked in length about the consequences of mounting chargebacks, so let’s now talk about how to prevent them as much as possible. It’s probably impossible to say that you’ll never experience one chargeback if you put good prevention strategies in place. There may be the odd one from time to time, but what you should aim to do is to avoid excessive or regular chargebacks. In this case, you need to be proactive. Let’s explore how.
Transparent Communication
The first point is certainly one of the most basic and easiest to implement, but it has one of the strongest impacts. Being clear and honest with your customers is a solid step and it will help prevent a large number of chargebacks. In this case, your customers will be left under no illusions about what they should expect from your business, including the products or services, returns policies, and fees. In this case, they’re far less likely to complain or initiate a dispute, meaning you’ve managed their expectations well.
Detailed Product Descriptions
The first thing to consider is your product descriptions. These should be crystal clear; make sure your descriptions are detailed, accurate, and leave no space for ambiguity. This is your chance to paint a solid picture of what your customers can expect from this product or service, meaning they’re far less likely to be disappointed. You could even consider video demonstrations to really bring your product descriptions to life.
Responsive Customer Service
Customers like to know they can contact someone quickly and easily if they have a problem, so make sure that your customer service is responsive and easy to access. If you can solve your customers problems quickly, they’re less likely to file a chargeback dispute. This means having 24/7 customer support, using chatbots for easy questions, and following up after purchases.
Robust Fraud Prevention
Fraud is something every business must be aware of, and it’s more important than ever before considering the digital age we live in. Effective and robust fraud protection is something you should certainly turn your attention toward and prioritize. PayCompass’ specialized merchant accounts make this easy thanks to our real-time transaction monitoring tools. That means you can easily spot a suspicious transaction and take action before it snowballs into something much bigger.
Advanced Authentication Methods
These days, simple passwords don’t work as well as they used to, and we need to look toward more robust measures to authenticate identity. Biometrics are very useful here and these have been shown to reduce fraud quite considerably. Two-factor authentication is another solid option, along with behavioural biometrics. In this case, sophisticated technology can track customer behavior in areas such as mouse movements or typing speed, spotting any unauthorized access to an account.
Real-time Monitoring
We mentioned that PayCompass’ accounts provide real-time monitoring, and you can trust us when we say how important this is. This type of technology works within the blink of an eye and spots potentially fraudulent transactions within seconds. Then, once a transaction is flagged, you can assess it closely and decide whether action needs to be taken.
Streamlined Refund Processes
Sometimes you need a virtual crystal ball, and in this case, it means trying to predict a customer’s next move in order to avoid a chargeback. Having easy, streamlined refund processes can do this, so customers are far more likely to use the refund service than try to initiate a chargeback. Automating your refund system makes the entire process faster, takes out the manual work on your side, and can also be a lot more accurate.
Clear Refund Policies
Many businesses have extremely complex refund policies, meaning that customers are more likely to simply initiate a chargeback than try to understand it. Simplifying the entire process and taking the hassle out of it from your customers’ side gives you a much lower instance of chargebacks.
Make sure that your refund policy is clearly displayed on your website and any promotional materials. You can also try A/B testing on the wording of your refund policy, giving you feedback on how easy to understand it is. That way, you can tweak the wording if you feel it needs it. Finally, consider extending your returns window, giving your customers more time to make up their minds.
Psychological Impact on Business Owners
Image showing a female business owner suffering from stress.
When you’re getting several chargeback claims in a short space of time, it’s stressful to say the least. As a business owner, you have a lot on your plate and you need to know that your revenue is at least steady, so you can move toward business growth. That’s why it’s just as important to consider the psychological impact of chargebacks as well as the operational ones.
Entrepreneurial Confidence Erosion
Running a business requires many things, and confidence is certainly one of them. When you’re constantly batting away chargeback challenges, it’s going to chip away at your confidence and make you question every single decision you need to make. That’s a dangerous situation because overthinking can be just as troublesome as not thinking enough.
Of course, it’s easy to take chargebacks quite personally; they might start to feel like a personal attack in some ways, making your business journey feel like walking through mud.
Risk Aversion Development
Being too cautious can be as bad as just throwing caution to the wind. It’s vital to find a suitable piece of middle ground between being careful and being too bold. You’ll probably want to grow your business at some point, and it’s possible that regular chargebacks will delay this. Not only is this because of the financial problems that chargebacks create, but because you may become too risk averse and refuse positive opportunities that come your way.
Imposter Syndrome Amplification
Everyone has experienced imposter syndrome at some point. However, when you’re dealing with regular chargebacks and it feels like you’re climbing a mountain every day, it’s even harder to handle.
A small but loud voice in the back of your mind may start to question your ability to succeed, and the more problems you face, the louder it becomes. In some ways, it’s a self-fulfilling prophecy, because you’ll start to take actions that limit any risk, fuelling the voice and affecting your actions.
Stress-Induced Decision Making
Decisions are hard enough to make when you’re feeling positive. It’s normal to think for an extra second and question the outcome of what you’re about to do. However, chargeback-related stress can cloud your mind to the point where decisions feel almost impossible. Then, when you do make a choice, it’s more likely to be a poor one.
Knee-Jerk Policy Changes
We’ve talked so far about being proactive, but in some cases that’s not the best strategy either. If you’re getting many chargebacks and it’s affecting your business, it’s extremely tempting to change your policies to prevent further disruption. Yet, knee-jerk policy changes can be too restrictive, possibly affecting your loyal customers while you’re trying to get to the ones that are causing the issues.
For instance, implementing extremely strict verification processes could be off-putting to customers who genuinely want to buy a product and pay. In that case, they may decide to go to one of your competitors to complete the purchase instead.
Neglect of Core Business Functions
Chargebacks are annoying at best and extremely disruptive at worst, and it’s easy for this situation to take up far too much space in your mind. When the situation becomes all-consuming, you may neglect other parts of your business, creating a type of tunnel vision that blinds you to other challenges.
Industry-Specific Chargeback Vulnerabilities
The term ‘chargeback’ is a pretty wide one, and there are certain industry-specific types to consider. Understanding the specifics is just as important as knowing what happens if you lose a credit card dispute.
With that in mind, let’s look at some industry specifics.
Travel Industry Pitfalls
The travel industry is profitable yet challenging. In many cases, businesses need to look toward specialized travel agency merchant account services to overcome problematic situations. This is because the travel industry as a whole is known to experience high levels of chargebacks and, as such, it’s labelled as high-risk by payment processors.
Of course, there are complicated bookings, high-value transactions, multiple vendors, multiple currencies, and the possibility of cancellations to take into account. It’s a complex picture, for sure. This industry is also largely seasonal. While people do go on vacation during the colder months, it’s certainly far business during the summer months, and at certain times, there may be itinerary changes due to the weather. This can all lead to cancellations and disputes.
In these cases, it’s important to communicate very clearly about the risks of booking at certain times of the year and your policies as a result. You could also consider a proactive rebooking system to deal with weather-related cancellations or disputes.
Third-Party Booking Complications
Many travel bookings also include more than one vendor, which creates a tangled mess in some cases. Third-party bookings can often lead to confusion and frustration, and this is another clear route toward chargeback disputes.
To simplify the process, it’s important to implement a standardized communication process. This can help to reduce confusion and keep everything running smoothly across vendors.
E-commerce Specific Challenges
Ecommerce has booked over the last decade at least, and during the COVID-19 pandemic, it was a life-saver for many people. However, this is another industry that experiences a high number of chargebacks, leading to a need for specialized ecommerce merchant services.
In this case, there are many risks to take into account, including card-not-present fraud, to disputes around digital goods. Implementing 3D Secure is one way to help reduce chargeback rates, but it’s just as important to be aware of friendly fraud and address that directly.
In this case, friendly fraud happens when a customer disputes a legitimate charge. It’s a growing problem and it’s mostly due to the fact that customers often find it easier to file a chargeback than return a product. However, it’s troubling and creates a major problem when it adds up. In fact, studies show that this type of fraud accounts for over 70% of chargebacks. So, it’s clear that if you can target friendly fraud reduction, you can bring down your overall chargeback rate.
Digital Goods Disputes
There are far more digital goods on the market than ever before, and these also have their own challenges. Proving that an item has been delivered can be tricky, and such businesses struggle to fight chargebacks as a result.
In this case, the reason for the chargeback is listed as “item not received,” when it’s entirely possible that it was sent and received by the customer. Yet, it’s hard to prove. After all, emails can be sent and not received and there’s no easy way to prove it. For all of these reasons, ecommerce chargeback prevention strategies are key.
Leveraging Technology in Chargeback Prevention
We’ve covered the main challenges and reasons, now let’s look at how technology can help in the fight against chargebacks.
AI-Powered Risk Assessment
AI is a complex tool that can help significantly in the fight against chargebacks. In this case, AI can rapidly analyze huge amounts of data in real-time. From there, it can identify any patterns or trends that a human eye simply wouldn’t be able to pick up, and certainly not that fast.
Machine learning models are extremely successful in this regard, while AI-driven risk scoring systems can help to reduce false positives in fraud detection. In many cases, AI systems are also adaptive and can learn over time, boosting their accuracy through continuous learning.
Behavioral Biometrics
When it comes to credit card disputes, biometrics can go a long way toward helping reduce their instances. Behavioral biometrics record who you are, from how you type on a keyboard or on your mobile device to how you use a mouse. All of this can be used to track whether an individual is who they say they are. From there, biometrics can flag any potentially suspicious activity, giving you the time to take action before it becomes a bigger problem.
Predictive Chargeback Modeling
Here’s that crystal ball again. Being able to spot chargebacks lurking in the future gives you all the power. Predictive modeling can look at historical data and utilize powerful machine learning to predict any potential chargebacks. Again, you can take action, stopping the dispute chargeback ever happening.
Blockchain for Transaction Verification
Blockchain has so much potential across many different industries and it’s extremely useful in this regard too. This is a decentralized technology, which is ideal for high-risk businesses, and includes a distributed ledger system that creates immutable records. All of this makes tampering almost impossible.
Using blockchain to verify transactions can reduce your dispute rates. You can also use smart contracts within this, while identity verification using blockchain drastically reduces unauthorized account access.
Smart Contracts for Service Delivery
We briefly mentioned smart contracts, so let’s dig into this a little more. Smart contracts are self-executing contracts that are designed with predefined conditions. They then use these conditions to automate payment and service delivery. As a result, they reduce the misunderstandings that can sometimes lead to a dispute and chargeback.
Learnings Recap
By this point, you’re no doubt clear on what happens if you lose a chargeback. Even a handful can be an issue, but when they add up over time, it’s extremely disruptive for your business. High-risk businesses, such as ecommerce, travel, gambling, and specialized retail, face higher chargeback instances, leading to a world of problems that can, in some cases, completely disable their ability to run their businesses effectively.
It’s clear that chargebacks don’t only affect finances, but operations, reputation, and mental health too. It’s easy to overlook the psychological impact of dealing with chargebacks, but it can be significant.
Thankfully, there are many technological tools you can use to help spot chargebacks before they even happen. AI, blockchain, and machine learning are all extremely sophisticated and have major potential in this regard.
However, as a high-risk business, chargebacks can never be ruled out completely, making dedicated high-risk merchant accounts even more important. At PayCompass, we understand the struggles you face, and we know better than anyone how to deal with them. Our accounts feature built-in chargeback prevention and real-time transaction monitoring, giving you peace of mind from the start. We also offer fast approval, multi-currency accounts, and many other tools, such as virtual cards.
So, if you’re ready to turn your payment processing on its head in the best possible way, contact us today!
