Understanding Chargeback Thresholds Will Protect your Merchant Accounts
The most immediate negative effect of a chargeback is the loss of revenue, but the real danger of chargebacks can be even more consequential for merchants. Card networks, acquiring banks, and payment processors all monitor the number of chargebacks each merchants get, and if their volume or ratio of chargebacks-to-transactions exceeds certain thresholds, the merchant gets penalized.
In extreme cases, you can lose your merchant account or even end up on an industry blacklist. How can merchants stay under their chargeback thresholds, and what can they do if they end up exceeding them anyway?
Chargebacks are costly and problematic for every participant in the payments ecosystem. While merchants are left holding the bag in terms of liability in most cases, disputes are costly and time-consuming for banks and card networks as well. Each dispute represents a cardholder who has been let down or defrauded in some way, reducing overall confidence in the system.
Everyone (except for fraudsters, perhaps) benefits when chargeback rates go down, so merchants who have difficulty keeping their chargeback rates at normal levels are identified and singled out for remediation programs and, ultimately, account termination.
It’s not uncommon for merchants in certain markets to land on the wrong side of their chargeback threshold on occasion. By understanding the chargeback ratios and thresholds that apply to them, figuring out where their chargebacks are coming from, and executing a plan to get their disputes under control, these merchants can avoid a worst-case scenario from coming to pass.
What are Chargeback Thresholds?
There are two key figures related to chargeback thresholds:
- Your total number of chargebacks per month
- Your monthly ratio of chargebacks to transactions
A rule of thumb for chargeback thresholds is to try to stay below 100 chargebacks per month and less than one chargeback for every 100 total transactions. However, the actual thresholds will vary by network, acquirer, merchant category code, and even by individual merchant in some cases.
The most important thresholds are the ones established by the card networks, Visa and MasterCard. Acquirers are held to the rules established by the networks, and while there may be some variance in terms of how much liability they pass on to their merchants, the card network thresholds establish a baseline for merchants to follow.
Keep in mind that the thresholds and ratios provided below may not be applicable for all regions and merchant category codes, and that acquiring banks and payment processors may impose their own fees and restrictions in addition to those mandated by the card networks.
How Does Visa Handle Excessive Chargebacks?
To figure out a merchant’s chargeback ratio, Visa divides the previous month’s Visa chargebacks by the previous month’s total Visa transactions. If a particular card number has multiple chargebacks within a single month, Visa only counts the first ten.
There are three threshold “levels” that Visa acts upon:
- Early Warning: Merchant has at least 75 chargebacks within a month and a ratio of at least 0.65%.
- Standard: Merchant has at least 100 chargebacks per month and a ratio of at least 0.9%.
- Excessive: Merchant has at least 100 chargebacks and a ratio of at least 1.8%.
At the Early Warning level, Visa will ask the acquirer and merchant to investigate the root causes of the chargebacks and develop an action plan to get them under control.
At the Standard and Excessive levels, Visa will place the merchant in the Visa Chargeback Monitoring Program. Merchants in the Standard program are given four months to bring their ration down before enforcement begins.
The enforcement period lasts for eight months. During the first three months, the merchant must pay a fee of $50 per chargeback. The fee increases to $100 for the remaining months, with a $25,000 review fee due at the end.
In the Excessive program, the fees are $100 for the entire eight month period and the $25,000 review fee is due halfway through.
Merchants can exit the program when they have maintain three months below the Standard threshold. Be warned that if you drop below the threshold for one or two months and then exceed it again, you’ll have to restart the program from month one. Merchants who are unable to extricate themselves from the program may be penalized with account termination and placement on an industry blacklist.
How Does MasterCard Handle Excessive Chargebacks?
MasterCard calculates a merchant’s chargeback ratio by dividing the number of MasterCard first chargebacks received in the current month by the total number of MasterCard transactions processed in the previous month. Second chargebacks are not counted against the merchant’s ratio.
Mastercard will place merchants in a chargeback mitigation program if they exceed the following thresholds:
- Chargeback Monitored Merchant: Merchant has at least 100 chargebacks per month and a ratio of at least 1%.
- Excessive Chargeback Merchant (Tier 1): Merchant has at least 100 chargebacks per month and a ratio of at least 1.5% for two consecutive months.
Merchants can escape the first status by bringing their chargeback ratio back below 1%. To get out of the Excessive Chargeback Merchant Program, the merchant has to keep their ratio below 1.5% for two consecutive months.
If a merchant remains in the Excessive Chargeback Merchant Program for six months, they will be placed in Tier 2 of the program, which may require the merchant to follow an action plan for dispute reduction and subject them to further risk assessment by their acquirer.
What Can I Do If I’ve Exceeded My Chargeback Threshold?
The most essential thing to do when you’ve been notified that you exceeded your chargeback threshold is to work with your acquirer and processor and follow their directives in order to maintain your relationship and reduce your dispute activity. If you are given an action plan, follow it.
The worst consequence of excessive chargebacks is to ignore the problem for too long and exhaust the opportunities for mitigation that you had. Once that happens, you can be placed on the MATCH List, an industry blacklist that prevents you from opening new merchant accounts with acquirers.
Once you’re on the MATCH List, you’re stuck there for five years.
Merchants who have been dropped by their processor due to excessive chargebacks but have not been blacklisted must obtain new accounts from “high risk” payment processors, who are considerably more expensive.
The most reliable way to lower your ratio—and keep it down—is to thoroughly analyze your chargeback data to identify the root causes of your disputes. Once you know the origins of your chargeback troubles, you can take specific actions to address those vulnerabilities and prevent similar chargebacks from happening in the future.