Do You Know Your Chargeback Ratio?
Product category, location, business model…there are lots of reasons why your processor or card association might label your business as too risky to touch. Still, there’s one factor that tends to weigh a lot more than any other in the decision: your chargeback ratio.
Your chargeback ratio isn’t something to take lightly. Just a slight, temporary change in this number can mean higher fees and more restrictions. If you breach the chargeback threshold (the chargeback ratio limit considered acceptable by card networks), you may be forced into a chargeback monitoring program, incurring added processing fees and extremely expensive account reviews. It could even put you at risk of account termination and being blacklisted by most processors.
That’s right: merchants unable to control their chargeback ratio and keep it under the designated threshold could land on the MATCH list. That may mean losing your ability to process credit and debit cards entirely…crushing your business.
So, how do you find your chargeback ratio? How can you keep your total under control?
Understanding Your Chargeback Ratio
As its name implies, a chargeback ratio compares the number of chargebacks filed against you in a given month against your total number of transactions in the same period. That seems simple at first glance, but it gets tricky when you look at how those figures are calculated.
The standard chargeback threshold for both Visa and Mastercard is 1% of your total transaction volume. However, you don’t have just one chargeback ratio across the board; instead, you have a different figure for each individual card brand you process. It’s possible to be well-under the threshold for one network, while breaching your threshold on another.
For example, if you process 10,000 Visa transactions in one month, you could have a maximum of 100 Visa chargebacks during the same timeframe before breaching that card association’s threshold. This would not affect your Mastercard chargeback ratio…but breaching thresholds on either network could still result in cancellation of your merchant account.
To make things even more complicated, each card association employs a different formula to calculate your chargeback ratio:
If there’s a silver lining, it’s the fact that only first chargebacks count toward your total. If the issuing bank files a second dispute—also known as a pre-arbitration chargeback or dispute response—this will not count against your ratio.
Don’t get too excited, though: fighting and winning a dispute will not cause your chargeback ratio to drop, either. Every initial chargeback filed against you will count, no matter if you successfully fight it.
Am I Safe if I’m Under 1%?
Unfortunately, it’s not that simple.
Visa and Mastercard policies enforce a maximum chargeback ratio of 1% of total transactions, but acquirers and processors are free to enforce stricter rules if they want to…and most of them want to.
For example, let’s say you have a merchant account with Stripe. The company has the right to impose a maximum Stripe chargeback limit of 0.75% of monthly transactions per card brand if they want.
It makes sense from the bank’s perspective to drop businesses which are consistently near the chargeback threshold. After all, the card associations won’t deal directly with merchants whose chargeback-to-transaction ratio is too high. Instead, Visa and Mastercard hold acquirers responsible for their merchants, hitting them with fees and penalties for each account that violates the chargeback threshold each month.
The acquirer passes most of those chargeback costs on to merchants, but they might start to see those who consistently violate industry limits as more trouble than they’re worth. If this happens to you, your acquirer might cancel your account and add you to the MATCH list, effectively blacklisting you among other acquirers.
Of course, the bank also has the option to be lenient under certain circumstances. For example, if you’ve operated with a consistently-low chargeback ratio, then suddenly spike one month, the bank may be inclined to let it slide. Your processor may also be willing to forgive you if you have a low transaction volume due to your product category. But no matter who you are, if your chargeback ratio is consistently at- or near-thresholds, you’re in danger.
Is It the End of the World?
The best way to keep your chargeback ratio low is a sustained, long-term commitment to chargeback reduction and prevention.
You may be able to keep operating if your chargeback ratio climbs above the industry threshold…but the conditions won’t be great.
Visa and Mastercard maintain their own chargeback monitoring programs: the Mastercard Excessive Chargeback Program, and the Visa Chargeback Monitoring Program. Both require you to develop a detailed plan to reduce your chargebacks, and to complete and submit monthly reports with your acquirer to track your progress. There are also expensive quarterly reports involved in each program.
Another option is to work with a high-risk merchant processor. There are advantages to high-risk credit card processing, such as higher chargeback thresholds and the opportunity to expand into new markets. However, high-risk processors also charge higher fees to offset the added costs.
In the end, the best way to keep your chargeback ratio low is a sustained, long-term commitment to chargeback reduction and prevention.
The key to chargeback reduction is in identifying chargeback sources. We know that all chargebacks can be traced to one of three root causes:
- Merchant Error
- Criminal Fraud
- Friendly Fraud
You can’t rely on reason codes, because friendly fraud depends on tricking reason codes. And, even though Visa Claims Resolution promises to clear up a lot of confusion, there will still be issues with improperly-categorised disputes.
- Adopt front-end tools to intercept criminal fraud.
- Train staff in fraud prevention best practices.
- Review policies and procedures to spot errors.
- Optimise your customer service response.
- Research developing threat sources and respond quickly.
- Distinguish the characteristic signs of friendly fraud.
- Learn to compile airtight representment cases.
- Draft strong, compelling rebuttal letters.
- Study each card association’s resolution process.
- Keep up with policy changes in the industry.
Creating and implementing a strategy to reduce your chargeback ratio is a delicate task. If done improperly, you could end up losing more money, as well as alienating customers and banks. You’ll need a well-equipped, dedicated internal team if you hope to craft and deploy an effective, consistent response against chargebacks.
The problem: genuine expertise on chargebacks is hard to come-by.
The Chargeback Company® offers the benefit of expertise, along with the tools and strategies necessary to prevent, fight, and win more disputes. Don’t sit back and watch your chargeback ratio climb. Click below and start seeing results today.