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What are the costs of CNP fraud?

When a legitimate cardholder disputes a credit card charge, the bank that issued the credit card will send a chargeback to the merchant to reverse the transaction and refund the cardholder. 

The merchant can attempt to dispute the chargeback, but typically this requires physical evidence that fraud didn’t occur, such as a delivery signature. It’s often difficult to obtain this evidence, so if the merchant can’t, they’ll need to absorb the full cost of the fraudulent transaction. This cost can be a significant amount, since it typically includes:

  1. Cost of goods sold. Because it’s unlikely the merchandise will be recovered, the merchant must write off the value of goods involved in a fraudulent transaction. For low-margin merchants, this hits hard. 
  2. Shipping costs. These costs are typically sunk into the value of the order, which further adds to the merchant’s out-of-pocket loss. To make matters worse, fraudsters typically request high-priority shipping for their orders to enable rapid completion of the fraud, resulting in even higher shipping costs for the merchant. 
  3. Card association fees. Visa and MasterCard have strict programs penalizing merchants that generate excessive chargebacks. Typically, if a merchant exceeds the threshold chargeback rates for any three-month period (e.g., 1% of all transactions or 2.5% of the total dollar volume), the merchant could be penalized with a fee for every chargeback. In extreme cases, the merchant’s contract to accept credit card payments could be terminated. 
  4. Merchant bank fees. In addition to paying the penalties charged by card associations, merchants must pay an additional processing fee to the acquiring bank for every chargeback. 
  5. Administrative costs. On average, each chargeback can take a merchant one to two hours to process. The merchant must receive and research the claim, contact the consumer, and respond to the acquiring bank or issuer with adequate documentation to dispute the chargeback. 
  6. Loss of reputation. Maintaining a positive reputation among customers is very important for merchants. Unfortunately, excessive chargebacks can lead merchants to implement fraud programs that are too stringent and inadvertently decline good orders. This can lead to unhappy customers who will take their complaints public via social media and negative online reviews.