Chargeback Reduction Plan

Table of Contents

1. What Is a Chargeback Reduction Plan?
2. When Do Merchants Need a Chargeback Reduction Plan?
3. How Do You Make a Good Chargeback Reduction Plan?
4. Prevent Chargebacks Before They Get Out of Control

Every merchant should have a plan for dealing with the chargebacks that come their way. However, it's likely not until things get really serious that merchants will hear the phrase "chargeback reduction plan."

These plans usually come into play when a merchant's chargeback problem has gotten bad enough for their acquirer or a credit card network to take notice. When this happens it's important for merchants to know what to expect and how to create an effective chargeback reduction plan.

Chargebacks aren’t good for the payments ecosystem—they’re costly, time-consuming, and they are borne out of situations that can undermine customer confidence in online shopping.

To keep chargebacks under control, Visa and Mastercard both have chargeback mitigation programs.

Acquirers are responsible for monitoring the merchants they work with to make sure they’re staying under the card networks’ acceptable chargeback threshold, which is typically either 0.9% or 1% of total monthly transactions by volume.

Chargeback monitoring programs place additional financial burdens and scrutiny upon the merchant until they can get their chargeback ratio back under the threshold for three consecutive months. If the problem goes on for too long, the merchant may even have their merchant account terminated.

Termination will also lead to the merchant being added to the MATCH list, an industry blacklist maintained by Mastercard and used by banks and payment processors. Merchants on the MATCH list will find it difficult to open new accounts, and will typically be forced to deal with processors that specialize in working with high-risk merchants, and therefore often have significantly higher fees.

These consequences can be avoided, however, if the merchant lowers their chargeback ratio quickly and exits the chargeback monitoring program as soon as possible. The key to accomplishing this is to create and follow an effective chargeback reduction plan.

When creating a chargeback reduction plan, merchants may be provided a list of requirements that the plan must fulfill. While these requirements can vary somewhat, any chargeback reduction plan should include the following:

1. A description of your business model: what you sell, who your customers are, how you market yourself, and what billing methods you use.
2. An analysis of the chargebacks you’ve been receiving: Where are they coming from and what are their root causes? Are you struggling the most with true fraud, friendly fraud, or merchant error chargebacks?
3. An overview of your current chargeback defense strategy: What tools, resources, and processes are you utilizing to prevent and fight chargebacks right now?
4. A rundown of the next steps you’re going to take: What new methods will you be incorporating to get your chargebacks under control, and how will you be adjusting your existing strategy? You should also describe how you’re going to monitor outcomes to determine whether your plan is working or not.

In addition, the chargeback reduction plan you submit to your acquirer or payment processor should include copies of any relevant documentation that backs up your statements and plans. For example:

• Terms and conditions of purchase
• Return, refund, and cancellation policies
• Copies of the correspondence you send your customers (order confirmation emails, billing notices, etc.)

You may also wish to include documentation that supports your explanations for why your chargeback rate has been rising. The goal of a good chargeback reduction plan should be to communicate clearly that you understand why your chargeback rate has been increasing, you have formulated an effective and targeted plan for reducing your chargebacks, and you have a way to track and evaluate the success of your efforts going forward.

However, nearly all of the information required in a chargeback reduction plan should already be part of any vigilant merchant’s existing plans for chargeback management.

Even when chargebacks are well below the 0.9% threshold, they’re still costly and harmful—factor in fees and lost revenue, and each one costs as much as double the amount of the original disputed transaction. When merchants work proactively to develop effective chargeback prevention strategies, they have little reason to fear getting caught flat-footed by a formal request for a chargeback reduction plan.

Sifting through your chargeback data will reveal the root causes behind your chargebacks, and can show you where your existing defenses are falling short.

For instance, some merchants might find that their fraud prevention isn't up to snuff, and they need to invest in better anti-fraud tools. Other merchants might have very effective anti-fraud tools, but they’re getting hammered by repeated friendly fraud chargebacks from customers they haven't blacklisted.

In some cases, the problem might be internal. If a merchant uses a sub-par shipping service, hasn't properly educated employees on payment processing, or has published misleading product descriptions, they may be receiving a significant number of chargebacks due to merchant error. Analysis will reveal vulnerabilities like these.

A request for a formal chargeback reduction plan implies that your existing efforts have been falling short, so it’s important to spell out what new things you’ll be doing to mitigate chargebacks, such as working with a chargeback management firm, subscribing to chargeback alerts, or investing in new fraud prevention software.

If any of your policies or operational procedures have been leading to disputes and chargebacks, you should explain in detail how you will be changing them.

Finally, don’t neglect the part of the plan where you describe how you will track and monitor your results for the purpose of making necessary adjustments.

A plan is only as good as the results it delivers, so be sure to communicate clearly how you will be engaging in ongoing analysis and performance evaluation to determine whether or not your plan is working effectively.

Prevent Chargebacks Before They Get Out of Control

No merchant wants to end up at the point where they’re looking at enrollment into a chargeback mitigation program and having to write out a formal plan for how they’re going to bring their chargeback levels back down.

By the time the problem has reached this point, the merchant has already lost significant revenue to chargebacks, and the requirements of the mitigation program can feel like adding insult to injury. The best thing merchants can do is take action when they realize their chargeback rate is rising, but before the 0.9% threshold is crossed.

Drafting a plan to tame your chargebacks—with the help of qualified experts, if needed—can help you prepare for the possible eventuality of having to submit a formal plan, but it can also help you steer clear of that dangerous 0.9% threshold entirely.

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