By J. Preston Carter, J.D., LL.M.
A Working Paper released by the Federal Reserve Bank of Kansas City reveals that about 70 to 80 percent of payment card chargebacks are resolved as merchant liability and that half of all chargebacks are due to fraud. The authors, Fumiko Hayashi, Zach Markiewicz, and Richard J. Sullivan, write that although chargebacks are perceived as one of the major cost components for merchants to accept card payments, little research has been done on them. Their paper—“Chargebacks: Another Payment Card Acceptance Cost for Merchants”—attempts to “fill that gap” by generating detailed statistics on chargebacks in order to describe the current chargeback landscape.
The authors collected data from merchant processors that processed more than 20 percent of all signature-based transactions in the United States. The data revealed that, for Visa and MasterCard transactions, chargebacks merchants receive are, on average, 1.6 basis points (bps) of sales number and 6.5 bps of sales value. About 70 to 80 percent of chargebacks are resolved as merchant liability.
The most common chargeback reason is fraud, the data revealed. This accounts for about 50 percent of the total chargebacks. The merchant fraud loss rate is 0.7 bps in number and 2.6 bps in value. For American Express and Discover transactions, the total and fraud chargeback rates are somewhat lower. For all of the four networks, the total and fraud chargeback rates are significantly higher for card-not-present transactions than for card-present transactions. They also vary by merchant category. The authors note that the fraud results are generally consistent with other available fraud statistics.
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