Chargeback Prevention

Maintaining Your Chargeback Ratio

Chargeback Ratio

Table of Contents

  1. What is a chargeback ratio?
  2. What are the consequences of having a high chargeback ratio?
  3. What happens if I exceed a chargeback threshold?
  4. What factors impact my chargeback ratio?
  5. How does Visa calculate chargeback ratios?
  6. How does Mastercard calculate chargeback ratios?
  7. How can I lower my chargeback ratio?
  8. What is a good chargeback rate?
  9. How do you manage chargebacks?
  10. Is a chargeback an expense?

Chargebacks happen to every merchant at some point, but when they happen too often, they can land a merchant in serious hot water. Both card networks and acquirers want to avoid doing business with disreputable or fraudulent merchants, and a merchant's chargeback ratio is one of the metrics they look at to decide when they want to terminate their relationship or impose restrictions to correct bad behavior.

While not all chargebacks are the merchant's fault, your chargeback ratio can say a lot about your business. If your ratio is unusually high, it probably means you're either doing something wrong or simply not putting enough effort into preventing chargebacks.

Understanding chargeback ratios, how they're calculated, and what consequences merchants might face if theirs climbs too high is crucial for any merchant who faces chargebacks regularly. If you ignore your chargeback ratio for too long, you might be out of business before you know it.

What is a chargeback ratio?

A chargeback ratio is the number of chargebacks a merchant received in a month divided by the total number of transactions received in a month. A chargeback ratio above 0.9% can lead to fees and other consequences.

What are the consequences of having a high chargeback ratio?

Both Visa and Mastercard have programs for monitoring merchants with high chargeback ratios and incentivizing them to take measures to reduce the number of chargebacks they receive.

Visa's is called the Visa Dispute Monitoring Program, and Mastercard's is called the Excessive Chargeback Program.

These programs have different thresholds for merchants. Mastercard, for example, has a 1% chargeback threshold. Having a 1% or higher ratio can qualify you as a chargeback monitored merchant. If your chargeback ratio exceeds 1.5%, you might be categorized as an excessive chargeback merchant, the second tier of the program.

With Visa, merchants who have 0.9% or higher chargeback ratios fall under its standard program, while merchants with a ratio of 1.8% or higher fall under the excessive program.

Both networks also have a minimum number of total chargebacks per month that must be reached to be enrolled in these programs, preventing smaller merchants from being added on the basis of only a handful of chargebacks.

Each card network calculates a merchant's chargeback ratio based solely on the transactions on its network, so merchants should keep track of both their overall chargeback ratio and their ratio for each individual network. While rare, it's possible to exceed a card network's threshold without being anywhere near 1% when all chargebacks are considered.

What happens if I exceed a chargeback threshold?

Merchants who find themselves enrolled in a chargeback monitoring program due to a high chargeback ratio may be charged an additional fee on each chargeback as well as a large monthly fine that increases over time.

New call-to-actionIf you've exceeded the 0.9% or 1% thresholds, you generally have four months to get your ratio back down before the fees and fines start rolling in. Merchants with an MCC categorized as high-risk, however, won't be afforded this luxury. Keep in mind that while going below the threshold will prevent any consequences for that month, merchants must stay below the threshold for three consecutive months to be removed from the program.

If a merchant maintains a high chargeback ratio for too long, their acquirer may terminate their merchant account. This can also result in the merchant being added to the MATCH list, an industry blacklist maintained by Mastercard.

What factors impact my chargeback ratio?

When it comes to your chargeback ratio, card networks only care about how many chargebacks you are receiving.

While having a good track record for winning chargebacks may look good, these numbers don’t affect your chargeback ratio.

Processors and card networks don’t take into account how many chargebacks you’ve won.

How does Visa calculate chargeback ratios?

Visa calculates chargeback ratios using this formula:
Number of chargebacks for the current month ÷ Number of transactions for the current month = Your chargeback ratio

How does Mastercard calculate chargeback ratios?

Mastercard calculates chargeback ratios using this formula:
Number of chargebacks for the current month ÷ The previous month’s transactions = Your chargeback ratio

How can I lower my chargeback ratio?

The only way to lower your chargeback ratio is by preventing chargebacks. Providing excellent and available customer service, having a generous refund policy, and using effective fraud prevention are a few basic methods. More advanced methods involve tools like chargeback alerts.

Delving into your business’ chargeback data analytics can yield surprising results. Begin analyzing your data by breaking down your chargebacks into different categories based on their transaction characteristics.

Download the eGuide, 4 Reasons to Hire a Chargeback Management CompanyFinding specific variables that many chargebacks have in common can help you eliminate or address these risks to prevent further chargebacks. For example, if a particular item in your catalog is often involved in chargebacks, you can eliminate that product or take steps to address possible reasons for those chargebacks.

You can use this information to streamline your operations and take proactive steps to lower your chargeback ratio. Additionally, merchants can observe the following guidelines to further reduce the number of chargebacks they encounter:

Observe the credit card networks' protocols

Every credit card network has different protocols for processing card-based transactions. Familiarizing yourself with the protocols for the card brands that you process can save you from chargebacks.

Utilize clear merchant descriptors

A merchant descriptor (or billing descriptor) should include a business name your customers will recognize along with other identification details to help customers recall or identify a purchase in the event of a dispute. Failure to recognize a merchant’s business name can lead to a costly misunderstanding. If customers see a name they don’t recognize on their statement, they’ll tend to question the validity of the transaction.

Communicate with clients clearly and promptly

Dealing with your customers’ inquiries and concerns promptly can help you avoid chargebacks. If a customer is dissatisfied with your product or service, reach out to them immediately to address the issue. Make sure that your customers are able to reach you using any platform at any given time by offering 24/7 customer support.

Take measures to prevent fraud

Fraudulent transactions are one of the leading causes of chargebacks. Criminals use stolen credit cards to purchase goods, which the customer doesn’t recognize once they receive their billing statement. Establish protocols and standards that will help you detect fraud early on, such as coming up with steps to verify credit card information.

FAQ

What is a good chargeback rate?

Below 0.65% is considered a good chargeback rate. Anything above 0.9% could result in penalties from credit card networks.

How do you manage chargebacks?

Merchants can manage chargebacks with a combination of prevention through customer service and fraud prevention and solid recovery practices in place, including alerts, documentation, and working with a chargeback management service.

Is a chargeback an expense?

No. Often businesses consider chargebacks a cost of doing business, but they are straight losses and fraudulent chargebacks should be disputed at all times.


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Get the guide, Chargebacks 101: Understanding Chargebacks & Their Root Causes