Maintaining Your Chargeback Ratio
Chargebacks happen to every merchant at some point, but when they happen too often, you might reach a card network’s designated "threshold" and end up on their Terminated Merchant File. Yes. It's as bad as it sounds and your MIDs will be canceled.
Your chargeback ratio can say a lot about your business, as businesses that have consistently high chargeback ratios are considered too risky by card networks and processors. Understanding what chargeback ratios are and how to calculate them can help you avoid incurring high chargeback ratios. Read on to learn more about chargeback ratios and how to deal with them.
Chargeback ratios, or chargeback-to-transaction ratios, are the number of chargebacks filed against merchants against a month’s total number of transactions. Most credit card networks have a standard chargeback ratio of 1%—anything higher than that may get you flagged by the card networks to be subjected to their respective chargeback monitoring programs. These require remediation from merchants, as well as payment of any fines incurred, until merchants are able to decrease their ratio to an acceptable rate.
Mastercard, for example, has a 1% chargeback threshold. Having a 1% or higher ratio can qualify you as a chargeback monitored merchant. If you fall under the excessive chargeback merchant, it means your chargeback ratio is at 1.5% or higher.
Under 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 and have 1,000 or more chargebacks per month fall under the excessive program.
There isn't a global chargeback ratio for all the credit card brands that you process. So you;ll have to monitor your ratio with regard to each card network.
While you may have a good ratio going for Visa, you could potentially be breaching Mastercard’s chargeback ratio.
What Happens if I Exceed the 1% Threshold?
Credit card networks have databases known as Terminated Merchant Files or TMFs, which have information on merchant accounts that have been terminated for a number of reasons, including having excessive chargebacks, violation of a card network’s standards, and fraud, among others.
Being placed on a TMF can have serious repercussions on merchants. Transactions may be refused by certain agencies for businesses or merchants under the TMF list. If a merchant exceeds a card network’s designated threshold repeatedly, they may be put on a TMF or MATCH list.
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 ratios.
Processors and card networks don’t take into account how many chargebacks you’ve won.
How Do You Calculate a Chargeback Ratio?
You can use a simple formula to calculate your chargeback ratio.
Number of chargebacks ÷ Number of transactions × 100 = Your chargeback ratio
Note that the calculation for chargeback ratios may vary slightly depending on the card issuer.
Visa Chargeback Ratio Formula
Visa calculates chargeback ratios like so:
Number of chargebacks for the current month ÷ Number of transactions for the current month = Your chargeback ratio
Mastercard Chargeback Ratio Formula
Mastercard follows this formula:
Number of chargebacks for the current month ÷ The previous month’s transactions = Your chargeback ratio
It is important for merchants to note that ratios should stay well below the 1% guidelines, and taking proactive steps to avoid disputes is one way to keep your ratios at an acceptable percentage.
How Can Chargeback Ratios Be Reduced?
What can chargeback ratios tell you about your business? Apparently, a lot.
Delving into your business’ chargeback data analytics can yield surprising results.
Begin analyzing your data by breaking down your chargebacks into different categories referring to their transaction characteristics. Use your categories to calculate your chargeback ratios (e.g., calculate chargeback ratios per country).
Finding risky variables can help you eliminate or address the said variables to lower your ratios (e.g., you can take steps to eliminate any high-risk items from your catalogue, or you can focus on a new audience or those at a lower risk for chargebacks).
You can use this information to streamline your operations and take proactive steps to lessen your chargeback ratios.
Additionally, merchants can observe the following guidelines to further reduce the number of chargebacks they encounter:
- Observe the credit card processor’s protocols.
Every credit card processor 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 payment descriptors.
Clearly state your merchant name—one that’s easily recognizable— along with other identification details that may appear on a customer’s billing statement to help them 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.
- Learn how to detect 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.
- Learn how to keep records.
In the event of a dispute, having accurate records will go a long way. Keep records of information about the purchase, such as signed documents (receipts, contracts) and transaction dates, among others.
Chargeback ratios don’t necessarily have to spell disaster for merchants. They can be used as a gauge to improve your existing protocols on credit card processing and how you deal with chargebacks.