How Much Money Are You Losing By Not Disputing Chargebacks?


When online retailers receive a chargeback dispute, one of two things can happen. Either the chargeback is assessed to determine if it should be fought or a business decision is made that the dispute be filed away and ignored. The latter generally happens at online merchants without a team dedicated to fighting chargebacks because the effort to respond is deemed more expensive then the result of the process.

Although contesting chargebacks can seem daunting, online retailers may be losing out by not fighting them. The key to determine if your online business needs a strategy for contesting chargebacks is to calculate how much money your business is losing as a result of chargebacks.

Calculating annual average chargeback loss

The first step to calculating the amount lost is by figuring out the average order value (AOV) of fraudulent transactions and customer-service disputes. The chargebacks that were filed away will be important to helping you get a clear number. The AOV for chargebacks is not the same as the AOV for your overall business. The chargeback AOV will typically be higher because chargeback disputes are usually made up of mostly fraudulent transactions. Coupled with the fact that fraudsters want to get the largest payout they can from the companies they target, these order totals will be substantially larger than regular customers.

It’s also important to calculate the AOV over a long period of time. Most companies tend to review historical data from the past three months, which does not provide a broad enough view of fraud and chargebacks committed on their websites. Be sure to include both peak and non-peak shopping seasons to accurately assess the AOV.

Once you obtain the AOV, tally the number of chargebacks filed with your company from previous months. It’s important to consider the seasonality of fraud and customer service activity; don’t forget to include numbers from months with increased chargeback activity. Multiply the average monthly AOV for chargebacks by the number of chargebacks filed per year to calculate the annual chargeback loss.

Bike shop example

To emphasize the importance of contesting chargebacks, consider as an example a bike shop. Let’s say that, on average, the retail price of a bike sold is $90 with a $10 shipping fee. That brings the total for an average order to $100. Over the course of a year, the shop receives 100 fraudulent orders. Using the formula listed above, you can expect to lose $10,000 in sales to chargebacks alone. If you have detailed order information, you can get a more accurate estimate of your chargeback losses. Segment the chargebacks into fraud and customer service disputes, then solve for the average of both.  This will not only allow you to understand your total losses, but also determine whether fraud or customer service disputes are a bigger concern.

This is just a rough estimate of potential losses. To refine your estimate of losses by not contesting chargebacks, you may also need to consider shipping costs. Most fraudsters request orders to be shipped quickly so the package is delivered before the legitimate cardholder notices the fraudulent transaction. Often one sign of a possible fraudulent transaction may be a new customer placing a large order with expedited shipping. Another red flag is when a customer chooses to have a package shipped to a location that’s different from their billing address. It’s also important to note that merchants have the opportunity to recover the amount of shipping fees charged if it was presented in the original order. However, if you gave away free shipping for promotional reasons for example, then you would still be out the cost of shipping even if you fight the chargeback.

Although the numbers provided in the bike shop example are hypothetical, consider the following industry statistics: In 2014, merchants on average lost 0.68% of revenue each year to fraud according toLexisNexis’s 2014 True Cost of Fraud report. This report also states that online stores processing more than $50 million in annual sales, experienced a loss of about 0.85% of revenue to fraud over the past year. So processing more sales doesn’t necessarily mean you’re offsetting the costs of chargebacks; in fact, you may be losing a larger dollar amount to fraud.

Sunk costs

Although it’s tempting to include the inventory and shipping costs associated with the fraudulent order, it should not be factored into the calculation. This cost is different from the shipping fees we discussed earlier. Shipping costs are what merchants pay to the shipping provider. Conversely, shipping fees refer to the amount merchants charge customers for the shipping.

With these types of costs, regardless of whether the bike shop wins or loses the chargeback, the bike shop will not get the bike back nor will it be reimbursed for the shipping amount. However, these sunk costs are important to keep in mind and should be considered when implementing strategies for responding to chargebacks.

By contesting and winning chargeback disputes, the bike shop could potentially recover $10,000 in revenue. Part of this amount could be used to repurchase new inventory or offset the shipping costs. Then again, if steps are not taken to contest chargebacks, the recoveries of funds lost and the flexibility it might provide would not exist.

Non-Monetary losses to consider

The last set of factors to consider is non-monetary losses. Not contesting chargebacks can make your website a more susceptible target for friendly and hostile fraud, increasing the number of chargebacks received through the website. Another factor to consider is whether your chargebacks are growing each year. If the number increases each year, your business could incur continued losses in the future. If left unmonitored, your company could develop a reputation for not contesting chargebacks and become a prime target for fraudsters.

The increased number of chargebacks can also tarnish your reputation with your bank and cause lasting damage to your brand.

Choosing to contest chargebacks

The first step to proactively contesting chargebacks is getting a clear overview of the amount of money you’re currently losing. Within your company, you can retrieve and review past order documentation and compile your data. Externally, you can also request past account information from your payment processor or review detailed bank statements. If you do not have data stored, begin taking steps to implement a process that tracks this information. Be sure the data is reviewed periodically to monitor chargeback trends.

Once you get a clear estimate of the money lost, start weighing the cost of contesting the chargebacks against the amount lost. In some cases, you may find that the monetary benefits may not be substantial. However, don’t let this deter you from pursuing fraudsters targeting your website. By contesting chargebacks, your business may deter new fraudsters from taking advantage of your online business.

It’s also important to note that once you start contesting chargebacks, the marginal cost for contesting each additional dispute may decrease. It will become easier to identify which cases have the highest winning probability, and your team contesting chargebacks will gain both experience and expertise in how to do so successfully.