What a dispute actually costs

Hey, if you’re new here, I’m Anthony Ross. I’ve spent the last 10+ years working in fintech (Brex + Braintree/Venmo). In my last post I walked through what happens the moment you tap dispute including the five parties involved. This post is more targeted on what happens once a dispute lands, who pays for it, and why.

tldr - it’s typically whoever has the weaker evidence or tech, that loses the dispute.

Proof of delivery

An “I never received the goods” dispute is very common, especially for e-commerce companies and the dispute is extra costly because there’s no liability-shift rule for it. If you can’t prove delivery, you lose, full stop, regardless of whether the customer is telling the truth or not.

Here’s what that actually costs. Say you sold a pair of shoes for $129, shipping costs you $11, and your card processing fee was 3%, $3.87. If that sale goes through without a dispute, your profit would look like this:

revenue                                   $129.00
cost of the shoes                         -$70.00
shipping                                  -$11.00
card processing fee                        -$3.87
------------------------------------------------
profit                                     $44.13

Now a dispute comes in, and you don’t have satisfactory delivery evidence, so you lose. The chargeback claws back the full $129, not the $125.13 you actually netted, the processor doesn’t hand back their cut either. You already spent the shipping, you never get the shoes back, and there’s a flat dispute fee on top of all of it:

cost of the shoes, gone                   -$70.00
shipping, already spent                   -$11.00
card processing fee, not refunded          -$3.87
flat dispute fee, charged either way      -$15.00
------------------------------------------------
net loss                                  -$99.87

The number that actually matters is the swing between those two outcomes, what the dispute cost you relative to the sale just working, $144.00. That’s more than the sale price itself.

Correction: an earlier version of this post added the cost of the shoes on top of the reversed sale price and put the total loss at $228.87. That’s wrong, I had miscalculated it.

With enough of these, your acquirer will put you into a monitoring program that can raise your processing rate and dispute fees on top of everything else. The dispute fee itself is worth calling out, it’s non-refundable even if the merchant fights the dispute and wins later. Winning gets you your $129 back. It does not get you your $15 back, and on some smaller transactions, $15 might be more than your entire margin.

Card-present fraud: the EMV liability shift

Ok, so if you compare that to card-present fraud, the networks actually did engineer a more obvious answer. If you’ve ever wondered why every card terminal on earth suddenly wanted you to insert your chip instead of swipe, this is why. EMV stands for Europay, Mastercard, and Visa, the three companies that created the chip standard, and the rule, in plain terms, is that liability falls on whichever side is using the weaker technology.

• When a Merchant doesn’t support a chip reader, or has a chip reader but processes it as a swipe anyway, and the transaction turns out fraudulent, the merchant eats it - everytime.
• When a Merchant has a chip-enabled terminal, but the card itself is an old mag-stripe-only card with no chip to insert, so it gets swiped instead, the issuer eats it (usually).
• Both sides are chip-compliant and the transaction still turns out to be counterfeit fraud (the chip got cloned some other way), the issuer is typically still on the hook. Neither party did anything wrong, so the loss falls back to whoever’s supposed to be backstopping fraud in the first place.

Nobody has to figure out who’s actually at fault, Visa and Mastercard just push the cost back to whoever’s using the weaker technology and let the incentive to upgrade do the rest. Once EMV adoption crossed a threshold, this stopped being a live problem for most merchants.

Why non-delivery is the one that stays expensive

The EMV shift is a policy lever, upgrade your tech and the risk moves off you. Non-delivery disputes don’t have that lever. The only thing standing between you and that $144 swing is whether you can produce a delivery confirmation, a signature, tracking that actually shows it arrived, something. Without it, it doesn’t matter that you actually shipped the shoes.

Merchants aren’t defenseless here, they can fight back with evidence, and what actually counts as evidence, what doesn’t, and why most merchants don’t bother even when they have a winning case, is where representment comes in which I’ll cover in my next post.