Chargebacks are expensive. They cost your business time and money. But the goal of zero chargebacks might not be the best strategy either. Merchants trying to achieve zero chargebacks are often leaving good sales and frustrated customers in their wake. Don’t use a chainsaw, when you should use a scalpel. For each merchant, there is an optimal chargeback rate, which allows for maximizing sales while mitigating risk. Don Bush, Vice President of Marketing, Kount, explains chargebacks and examples of optimal rates.
Don Bush: Merchants with zero chargebacks are most likely leaving good sales on the table, which means your growth slows down. Your profitability is not as high as it could be.
Every merchant has a chargeback rate that's optimal for their business. For every additional transaction they take, the risk associated with that either means profitability or loss. And every merchant is a little bit different. A digital goods merchant has a higher threshold of risk. Somebody that's selling computers or luxury items has a very low threshold of risk. So to say one chargeback rate for each merchant is appropriate just isn't correct.
The proper rate for a digital goods merchant might be as high as 75 or 80 basis points. Because their cost of goods is so low, they're willing to take more risks in maximizing sales. For merchants that have shippable goods or have a high cost of goods, like luxury items or computers, things like that, their tolerance for risk is going to be much lower. 10 or 15 or 20 basis points may be all the risk they're willing to take when it comes to chargebacks.
Merchants looking for zero chargeback is an unrealistic goal. It limits your growth. It limits your profitability. It leaves good sales on the table. It means your false positive rate is probably going to be higher than it should be, and you're turning away legitimate customers. Merchants want to open that sales funnel as wide as they can at the top and accept as many of those transactions as possible, maximizing profitability, maximizing their growth, even if there is a few basis points of fraud in there. We think zero chargebacks is not a great strategy.