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Chargebacks: Another Payment Card Acceptance Cost for Merchants

72 Pages Posted: 22 Jan 2016  

Fumiko Hayashi

Federal Reserve Bank of Kansas City

Zach Markiewicz

Federal Reserve Bank of Kansas City

Richard J. Sullivan

Federal Reserve Bank of Kansas City

Date Written: January 1, 2016

Abstract

Although chargebacks are perceived as one of the major cost components for merchants to accept card payments, little research has been conducted on them. To fill that gap, this paper describes the current chargeback landscape by generating detailed statistics on chargebacks for signature-based transactions. Our data are from merchant processors, which, altogether, processed more than 20 percent of all signature-based transactions in the United States. 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, which 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. Our fraud results are generally consistent with other available fraud statistics.

Keywords: Chargebacks, Fraud, Payment cards

JEL Classification: E42, L81

Suggested Citation

Hayashi, Fumiko and Markiewicz, Zach and Sullivan, Richard J., Chargebacks: Another Payment Card Acceptance Cost for Merchants (January 1, 2016). Federal Reserve Bank of Kansas City Working Paper No. 16-01. Available at SSRN: https://ssrn.com/abstract=2720386

Fumiko Hayashi (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Zach Markiewicz

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Richard Sullivan

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States
(816) 881-2372 (Phone)

HOME PAGE: http://kansascityfed.org/home/subwebnav.cfm?level=3&theID=10970&SubWeb=10782

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