Chargeback Rates

Exceeding the allowable chargeback thresholds is one of the greatest dangers of chargebacks, and it’s important for every merchant to keep their chargeback rate as low as possible.

The general rule has always been to try to keep your chargeback rate below 1%, but some card networks may begin interventions even before this threshold is reached.

Complicating matters is the fact that not every acquirer or card network calculates chargeback rates in exactly the same way.

Merchants must track their chargeback metrics carefully in order to avoid being unpleasantly surprised by a chargeback mitigation program, and should implement the best preventive measures as early as they can, before they find themselves inching dangerously close to those thresholds.

How Are Chargeback Rates Calculated?

A merchant’s chargeback rate, also known as a chargeback-to-transaction ratio or a dispute-to-sales ratio, is calculated in the following manner:

• (Total number of chargebacks received) ÷ (Total number of transactions completed) x 100 = Chargeback ratio

So if a merchant processes 5,000 transactions and receives 30 chargebacks, their chargeback rate would be 0.6%.

Mastercard uses the merchant’s number of chargebacks from the current month divided by the number of transactions from the previous month. All the other card networks pull both figures from the current month.

Each card network only counts transactions carried over their own network, so merchants will have a different chargeback rate for Visa, Mastercard, and every other card brand they accept. Acquirers, however, may choose to track a merchant’s overall chargeback rate.

What Are The Chargeback Rate Thresholds?

The first threshold a merchant with a high volume of chargebacks is likely to hit is Visa’s 0.65% threshold for the “Early Warning” phase of their Visa Chargeback Monitoring Program. No fines are charged at this point, but the merchant may be required to submit a chargeback mitigation plan.

At a rate of 0.9% and 100 or more total chargebacks, the merchant will be placed in Visa’s “Standard” program, while merchants with a rate of at least 1.8% and 1,000 or more total chargebacks will end up in the “Excessive” program. At these two levels, Visa begins assessing fines.

Mastercard begins monitoring merchants for placement in their Excessive Chargeback Program once their chargeback rate hits 1%. As with Visa, no fines are charged yet, but that changes once a merchant carries a rate of 1.5% (and 100 or more total chargebacks per month) for two consecutive months. At this rate, the merchant will be categorized as an Excessive Chargeback Merchant.

Merchants with a rate of 3% or higher and more than 300 total monthly chargebacks are placed in the High Excessive Chargeback Merchant program. There are additional tiers to the program depending on how long the merchant remains in it.

What Happens When A Merchant Exceeds Their Chargeback Thresholds?

The card networks require their acquiring banks to handle the monitoring and enforcement of their chargeback mitigation programs. The fees that the network charges are actually assessed to the acquirer, who passes them along to the merchant. Because the acquirers are liable for the fees in the event that the merchant cannot cover them, they have great incentive to step in before the major thresholds are reached.

Every merchant must be aware of any chargeback thresholds specific to their acquirer that they need to stay under.

The fines and requirements of the card networks’ chargeback mitigation programs are intended to motivate merchants to take active steps to get their chargeback situation under control. When merchants are unable to do this, the acquirer may decide to terminate their merchant account.

Merchants who lose their account in this manner may end up on the MATCH List, an industry blacklist that can prevent merchants from obtaining normal merchant accounts for a period of up to five years. The only way for a merchant on such a list to process credit card transactions is to sign up with a “high risk” payment processor, which can be very expensive.

How Can Merchants Keep Their Chargeback Rate Down?

The best way for any merchant to maintain a low chargeback rate is to implement a multi-faceted chargeback prevention strategy. First, merchants must analyze their chargeback data to determine where their chargebacks are coming from and why they’re happening.

With this knowledge, merchants can address the vulnerabilities that are causing chargebacks and deploy effective, targeted solutions. For example, merchants with a high rate of true fraud chargebacks must utilize better anti-fraud tools and customer validation methods.

Merchants who experience high rates of friendly fraud or merchant error chargebacks, on the other hand, may find that improving their customer service response is the way to bring their rate down.

It’s important to note that only first chargebacks are counted against your chargeback rate. That means that if you represent a chargeback and the issuing bank upholds it, the chargeback won’t be counted twice. However, successfully fighting and representing a chargeback will not subtract that chargeback from your rate calculation. Only by preventing chargebacks from happening in the first place can you keep your rate low.

Conclusion

With your merchant account on the line, maintaining a low chargeback rate can be an existential matter for merchants. Merchants who find themselves coming close to the thresholds and unable to bring their chargeback rates down must take whatever steps are necessary to correct their course.

This might mean using anti-fraud filters and other solutions they may have avoided up to that point, or it may make more sense to hire a chargeback management firm to develop a comprehensive plan of action. Either way, a rising chargeback rate must be dealt with quickly in order to avoid significant revenue loss—or worse.

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