News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Do You Know Your Chargeback Ratio?

Do You Know Your Chargeback Ratio?

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Product category, location, business model…there are many reasons for your processor or card association to label your business as risky. Still, there’s one controllable factor that carries a lot of weight: chargeback ratio.

Your chargeback ratio should be taken seriously. Even a minor, temporary change in this number can push you over your chargeback threshold, which is the highest chargeback-to-transaction ratio considered acceptable by the card network. Breaching the threshold often leads to higher fees, more restrictions, and the risk of being blacklisted by processors.

So, how do you find your chargeback ratio? And how can you keep your total under control?

Calculating Your Chargeback Ratio

As its full name implies, a chargeback-to-transaction ratio compares the number of chargebacks filed against you in a given month against the total number of transactions you had. That seems simple at first glance, but it gets tricky when you look at how those figures are calculated.

The standard chargeback threshold for both Visa and Mastercard is 1 percent of your total transaction volume—but only for the volume associated with that particular card network. In other words, instead of having just one chargeback ratio across the board, you have a different figure for each individual card brand you process. And yes, it’s quite possible to be well under the threshold for one network, while breaching your threshold on another.

To make things even more complicated, each company employs a different formula to calculate your chargeback ratio. For example, Visa takes the number of chargebacks and divides it by the total number of transactions in the same month, whereas Mastercard takes the number of chargebacks and divides it by the total number of transactions from the previous month.

To put that in context, let’s say you own an electronics store with 8,500 transactions in April, and 10,000 in May. You received no chargebacks in April, but received 90 May. Here’s how it would come out:

Chargebacks911 Infographic

Same numbers, but completely different outcomes. See why it’s confusing?

“But I’m Safe if I’m Under 1%, Right?”

Unfortunately, it’s not that simple.

True, Visa and Mastercard policies enforce a maximum chargeback ratio of 1 percent. Acquiring and issuing banks, on the other hand, are free to enforce stricter rules if they want to…and most of them want to.

It makes sense from the bank’s perspective: both Visa and Mastercard hold acquirers responsible for merchants’ threshold breaches, hitting the banks with monthly penalties for each offending account. To avoid the fines, the banks simply drop the merchant, rationalizing that the network will drop the business eventually, anyway.

Of course, the bank also has the option to be lenient under certain circumstances. Nevertheless, if your chargeback ratio is consistently at or near the thresholds, you’re in danger.

Is It the End of the World?

You may be able to keep operating if your chargeback ratio climbs above the threshold, but the conditions won’t be great.

Visa and Mastercard maintain chargeback monitoring programs which require merchants to develop and submit a detailed chargeback reduction plan along with expensive quarterly reports.

You could also choose to work with a high-risk merchant processor, but you’ll pay significantly higher fees. Only you can decide if it’s worth the price.

A Long-Term Strategy is Needed

In the end, the best way to keep your chargeback ratio low is a sustained commitment to chargeback reduction and prevention.

Creating and implementing a strategy to reduce your chargeback ratio is a delicate task. If done improperly, you could end up losing more money, as well as alienating customers and banks. Luckily, you have experts to turn to.

Chargebacks911® offers the benefit of expertise, along with exclusive tools and technique to prevent, fight, and win more disputes. Don’t play Russian roulette with your chargeback ratio: contact us today.

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