How Your Chargeback Rate Affects Your Business’s Longevity
How do Mastercard and Visa determine a business’s chargeback rate? What affect does the chargeback rate have on the business’s cash flow and processing fees? And most importantly, how does this statistic influence overall business sustainability?
Who Calculates Chargeback Rates and What are They Used For?
Acquiring banks are part of the card networks’ associations (Visa, Mastercard). As an association member, an acquiring bank is able to process payment card transactions on the merchants’ behalf. However, the bank must adhere to the networks’ guidelines and regulations.
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Because it is the merchant’s representative in the association, the acquirer can be penalized for the merchant’s actions. This disciplinary action usually comes in the form of extra fees, which are then passed along to the merchant. One reason acquirers are regularly fined is because of merchants’ chargeback rates.
The card networks carefully monitor chargeback activity for all merchants that accept their payment cards. If rates become excessive, the networks expect the acquirer to take action.
Each card network determines chargeback rates differently and takes retaliatory action at different stages.
Mastercard Chargeback Rates
Chargeback rates are used to determine excessive chargeback thresholds. The rate is calculated using a simple math equation. Mastercard calls this equation the chargeback-to-transaction ratio.
To calculate the chargeback rate, the network takes the monthly number of Mastercard chargebacks received and divides it by the total number of Mastercard transactions processed in the preceding month.
For example, 100 chargebacks issued in May would be divided by 10,000 transactions in April to produce a chargeback-to-transaction ratio of 1% or 100 basis points.
It should be noted that only first chargebacks affect the chargeback rate. Second chargebacks (or pre-arbitration chargebacks) won't be included in the ratio calculations.
If the chargeback-to-transaction ratio reveals a chargeback rate that is unacceptably high, Mastercard will add the merchant to its Excessive Chargeback Program (ECP).
|Mastercard's Excessive Chargeback Program (ECP)|
|Chargeback Monitored Merchant (CMM)||A Chargeback Monitored Merchant has a chargeback-to-transaction ratio that exceeds 100 basis points and at least 100 chargebacks in a calendar month.|
|Excessive Chargeback Merchant (ECM)||For two consecutive months (“trigger months”), the merchant has a chargeback-to-transaction ratio of 150 basis points or higher and at least 100 chargebacks each month. The merchant remains an ECM until the chargeback-to-transaction ratio drops below 150 basis points for at least two consecutive months.|
Mastercard requires each acquiring bank to submit a monthly report to the network, outlining the Excessive Chargeback Program merchant’s activity. Mastercard charges $50 for each monthly CMM report and $300 for each ECM report.
The acquiring bank will pass these fees along to the merchant. Once the fees pass through the traditional markup phase, the merchant’s monthly Excessive Chargeback Program fees will be quite expensive.
Visa Chargeback Rates
Visa also calculates the chargeback rate by analyzing the chargeback-to-transaction ratio. However, Visa's calculations are slightly different from Mastercard's.
Visa divides the number of chargebacks sustained in the current month by the number of Visa transactions in the current month (not the previous month like Mastercard).
For example, 100 chargebacks issued in May would be divided by 10,000 transactions in May to produce a chargeback-to-transaction ratio of 1% or 100 basis points.
If the chargeback-to-transaction ratio escalates, Visa will put the merchant in its chargeback monitoring program.
|Visa's Chargeback Monitoring Programs|
|Global Merchant Chargeback Monitoring Program(GMCMP)||Categorization as GMCMP involves 200 international chargebacks, 200 international transactions, and a 2% ratio of international chargebacks to international transactions during any month.|
|U.S. Merchant Chargeback Monitoring Program (MCMP)||Categorization as MCMP involves 100 or more transactions, 100 or more chargebacks, and a 1% or higher chargeback-to-transaction ratio during any month.|
|High Brand Risk Chargeback Monitoring Program (HBRCMP)||Categorization as HBRCMP involves high-brand risk merchants who have 100 or more transactions, 100 or more chargebacks, and 1% or higher chargeback-to-transaction ratio during any month.|
Visa issues a warning to acquirers when merchants approach the Global and US Merchant Chargeback Monitoring Program threshold. To avoid fees, banks must take action against the offending merchant right away.
The High Brank Risk Chargeback Monitoring Program helps high risk merchants keep chargebacks in check. Visa maintains a list of businesses that are considered high risk based on their MCCs (merchant category code).
HBRCMP merchants don’t receive a warning or workout period for their increased chargeback fees. These merchants are immediately eligible for additional fees, usually an extra $100 per chargeback.
Visa can also accelerate a merchant from the US Merchant Chargeback Monitoring Program to the High Brand Risk Chargeback Monitoring Program if chargeback rates become excessive.
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When Chargeback Rates Become Excessive
Chargeback management is a time consuming and expensive process for everyone involved, including the banks and networks. Therefore, the chargeback monitoring programs implemented by Mastercard and Visa were intended as a chargeback determent for merchants.
Not only are networks interested in ensuring consumer satisfaction with the buying experience, the networks also hope to reduce their own administrative responsibilities.
Networks require acquirers to closely monitor the behavior of their merchants with excessive chargebacks and report back on a monthly basis. Failing to notify the networks of the merchant’s activity can result in major fines.
For example, Mastercard implements the following fines to any acquirer who fails to send the paperwork requested by the network.
Mastercard also calculates the acquirer’s liability for monthly issuer reimbursement fees and assessments that result from merchants with excessive chargebacks.
Here is one hypothetical example of fees an acquirer is expected to pay because of a merchant’s poor chargeback management.
Visa takes a similar stance:
Acquiring banks will try to pass these fees along to the merchant. However, if the merchant is struggling to stay afloat because of extreme chargebacks and decreased revenue, it’s not likely the bank will be able to recoup its chargeback losses.
As you can see, it is usually easier (and less expensive) for acquirers to simply terminate the merchant account for any business that is experiencing high chargeback rates. Once a merchant is perceived as a threat, the account is closed.
If a merchant’s bank account is closed, the business loses the ability to process credit card transactions and is placed on the MATCH list for five years. If a high chargeback rate damages the merchant’s reputation in this way, the only other alternative is to secure a high risk merchant account.
Even without a high risk merchant account, an excessive chargeback rate will incentivize the acquirer to place a hold on the merchant’s funds. A merchant account reserve can severely restrict the business’s access to needed funds.
The Importance of Prevention
Even if the merchant is able to successfully dispute a chargeback and recoup the original profits, the damage has been done. The chargeback rate is calculated using the total number of chargebacks, not just the ones unsuccessfully disputed. That’s why chargeback prevention is so important.
Acquirers might be a little lenient, letting chargeback rates fluctuate month to month, but their patience probably won’t last long. Merchants need to implement a detailed prevention strategy that addresses the top three chargeback reasons: merchant error, criminal fraud, and chargeback fraud.
If you’d like help managing chargebacks, let us know. Chargebacks911® specializes in serving merchants with elevated chargeback rates who are in danger of losing the ability to process credit card transactions.
Visa and Mastercard regulations current as of 2015.