Can I pass on charge-back fees to my customers?


Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for

Ask Elaine a question or read her prior answers in the 'Your Business Credit' archive.

Question Dear Your Business Credit,
Are merchants charged a transaction fee when a customer returns a product purchased with a credit card and is issued a credit on the same credit card? Is it legal to pass this fee on to the customer? -- Ken

Answer Dear Ken,
I assume you're asking this because you're a merchant who has been hit by these fees -- and are ready to cry, "Uncle!" The fees you mention are commonly called charge-back fees. They occur when customers call their card issuer to dispute a charge on their statement instead of asking the merchant directly for a refund.

Can you be charged a transaction fee in such instances, when the customer is getting a credit? I ran your question past Scott C. Tivey, president of CNP-Solutions, a consultancy in Weston, Connecticut, that helps merchants improve their card processing efforts. He says that your merchant account contract determines how charge-back fees are handled. "It's all negotiated," he says. "Some are $2.50 for a charge-back. Some are $25."

Tivey warns that once a charge has been disputed with the card issuer, you should not issue a refund on your own. The issuer will issue the credit to the customer once the dispute has been investigated and the issuer finds the customer is entitled.

You also asked if it is legal to pass the costs on to the customer. Check the paperwork you received when you set up your merchant account.

"The only thing to prevent this would be something in the cardholder agreement, but the merchant's invoice for the merchandise probably expressly allows for it," said Robert Brennan at, in La Crescenta, California, in an email. "Absent a law preventing this -- and I do not know of one -- it is probably legal or can be made legal by the merchant."

However, as Brennan points out, passing along charge-back fees could seem unethical, so I would think hard about whether you want to attempt this. Competition among merchants is fierce, and customers in the U.S. expect generous refund policies. If you inadvertently shipped broken merchandise and a credit was warranted, how would the customer feel to see you pass along a charge-back fee on his next month's statement? Maybe he would dispute that charge, too, resulting in another charge-back for you.

Of course, not all charge-backs are legitimate. One growing concern is what is known as "friendly fraud" -- a phrase that sounds contradictory. This is when a customer actually receives an online purchase then disputes the purchase with the card issuer. This can happen because buyers don't recognize the name of your company or, in the worst cases, because they want to get something without paying for it or wriggle out of a purchase because they have buyer's remorse or are suddenly short of cash.

You don't have to passively allow charge-backs to happen. Tivey says that some merchants rely on outside service providers such as Verifi and Ethoca, which are networks of banks and merchants. When you join such a network and a customer calls a participating bank to complain about a charge, the network gets notified, Tivey explains. The network, in turn, tells you there is a potential charge-back pending so you have an opportunity to issue a refund, in lieu of getting a charge-back. The drawback of these services is that these networks don't include every card, he says.

Some preventive medicine can also help you. To avoid nefarious charge-backs, rigorously verify credit cards, using the procedures your merchant processor recommends or via a third-party screening service.

If you ship goods to customers, communicate your delivery policy very clearly. Shipping items all at once, instead of one-by-one as they become available to you, can help you avoid charge-backs by customers who think you have forgotten to ship something that is slated to arrive later.

It's also important to use a package-tracking system and get signature confirmation. I once disputed a credit card charge for a desk I ordered but did not receive. At the time, I lived in a city where there was a high risk of deliveries being stolen if left unattended. My UPS delivery man always rang the bell to deliver packages personally, even when it was not required.

Upon investigation with UPS, the merchant discovered the desk had been shipped to someone in my city. But she could not pinpoint the exact address. She had not asked for signature confirmation. I was issued a full refund, and my card issuer ruled I did not have to pay the $35 re-stocking fee she tried to pass along. I argued that she had nothing to re-stock, if the desk was now in someone else's hands.

Had the merchant simply required the signature confirmation, the desk would not have gotten into the wrong hands in the first place -- and she would not have had to eat the price of the desk. Sometimes paying a little extra for a secure delivery service can save you a bundle on charge-backs.

See related: Protecting your business from credit card fraud

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Published: August 25, 2014

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