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Chargeback Rate

Chargeback Rate

Your Chargeback Rate: What’s Considered Normal & Why Does it Matter?

A high chargeback rate has the potential to upset your cash flow and limit your options for accepting payments. How do you calculate your chargeback rate, though? What constitutes a “high” chargeback rate, and what is considered normal or acceptable?

Even if we answer those questions, we’ve really only addressed part of the equation. There can be significant differences in how you calculate your ratio of chargebacks to transactions, making an apples-to-apples comparison nearly impossible. So, if everyone’s rate is calculated differently, can a “normal” rate even exist?

In this post, we’ll explore the broad scope of this subject and fill you in on everything you need to know about chargeback rates.

Chargeback Rate

[noun] / tʃɑrdʒ • bæk • reɪt /

A chargeback rate is a metric that shows the ratio between the total number of transactions a merchant processes and the total number of chargebacks the merchant receives.

How to Calculate Your Chargeback Rate

We’ll start with an equation that’s about as close to standard as we can get. It’s not exact, but your chargeback rate is generally calculated using the following equation:

That seems simple enough, but as we mentioned, there are other factors that come into play. The biggest differentiator in calculating your chargeback rate is the card brand itself.

The calculation used to determine your chargeback rate varies by the individual card brand. The same goes for the maximum chargeback rate allowed by the network. Both Mastercard and Visa use the equation shown above (total monthly chargebacks divided by total monthly transactions). There’s a catch, though: Visa divides by the number of transactions processed during the same month, while Mastercard divides by the number of transactions in the previous month. This chart helps illustrate the difference:

You’ll have a different chargeback rate for each card network because each brand only counts the transactions conducted on its own network. In other words, Visa only counts Visa transactions and chargebacks from Visa cards.

What’s an Acceptable Chargeback Rate?

Many merchants believe that a 1% chargeback rate is the standard threshold. This is an outdated rule of thumb, though.

Visa and Mastercard each set their own acceptable chargeback thresholds, and there are multiple different figures to reference. Back in 2019, for instance, Visa sets their standard threshold at 0.9% of monthly transactions using the formula outlined above. However, their “Early Warning” threshold sits at 0.65% of monthly transactions, while the “Excessive” threshold is 1.8%.

For Mastercard, their “Chargeback Monitored Merchant” status has a threshold of 100 chargebacks per month and a ratio of at least 1%. For their “Excessive Chargeback Merchant” designation, the standard is at least 100 chargebacks per month and a ratio of at least 1.5% for two consecutive months.

You must remember, though: Visa and Mastercard aren’t the only parties involved here. Banks can influence what’s considered an “acceptable” chargeback rate, too.

Chargeback Rate

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The 2021 Chargeback Field Report is now available. Based on a survey of over 400 US and UK merchants, the report presents a comprehensive, cross-vertical look at the current state of chargebacks and chargeback management.

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Acquirers Play a Role, too

Your acquiring bank serves as your representative to the card networks. The acquirer can process payment card transactions on your behalf, but unfortunately, it can also be penalized for your chargeback if the situation gets out of hand.

Acquirers are ultimately liable for every merchant with whom they do business. So, if your merchant chargeback liabilities exceed the amount available in your account, the acquirer would be liable to cover the shortfall. Also, card networks carefully monitor chargeback activity for all merchants that accept their payment cards. If a merchant accrues too many chargebacks, the network could find the merchant’s acquirer.

Each network outlines its own rules on this matter:

Mastercard

The Mastercard network rules outline your acquirer’s liabilities if you get hit with too many chargebacks:

8.6.2.2.2 Late Submission of Excessive Chargeback Merchant Report

If the acquirer … fails to submit a timely ECM [Excessive Chargeback Merchant] report to Mastercard for that ECM, Mastercard may assess the acquirer up to USD $500 per day for each of the first 15 days …and up to USD $1,000 per day thereafter until the delinquent ECM report is submitted.

Mastercard determines the acquirer’s liability for monthly issuer reimbursement fees and assessments stemming from all merchants with excessive chargeback rates according to the thresholds they set. Here’s a sample illustration of the fees an acquirer could be expected to pay in one quarter, due to one merchant’s poor Mastercard chargeback management:

Visa

Visa’s response is similar to that of Mastercard:

Merchant Chargeback Monitoring Program (MCMP)

First notification of excessive chargebacks for a specific merchant is considered a warning. If actions are not taken … Visa may impose financial penalties on acquirers that fail to reduce excessive merchant chargeback rates.

These penalties can be assessed at Visa’s discretion. But, given that the point of the fee is to encourage compliance, acquirers will likely be very proactive on these matters.

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Other Factors Influencing Your Chargeback Rate

As we’ve noted, card network rules can impact what’s considered “acceptable,” as can your acquirer. There are also other variables to consider, though.

The number of transactions you process each month can impact your chargeback rate. The same goes for the average dollar value of your transactions; for example, a small business with a small number of sales each month may get a bit more leeway than a large operation in a high-risk vertical. However, this can actually work against you when calculating your chargeback rate.

You may have less flexibility if you already have a history of receiving chargebacks. However, your acquirer may be more inclined to cut you some slack if you have a better record of avoiding chargebacks.

Finally, it’s important to note that only the first chargebacks count. So-called “second chargebacks” (referred to as “arbitration chargebacks” by Mastercard and “dispute response reversals” by Visa) won’t impact your chargeback rate.

What Happens if My Chargeback Rate is too High?

If your chargeback-to-transaction ratio sits above the acceptable threshold, you’ll be labeled a “high-risk merchant” and required to join a chargeback monitoring program. This means you’ll incur other added fees.

Mastercard’s 2-tiered Excessive Chargeback Program, for instance, requires each acquiring bank to submit a monthly report that outlines the activity of a listed merchant. The network charges between US $50 and $300 for each report the bank is required to send. The cost of not filing the reports is even worse, with penalties running as high as US $1,000 per day, per report. Visa’s Chargeback Monitoring Program is similar, with Visa charging up to US $100 per chargeback for high-risk merchants.

These fees are levied against the acquiring bank, who, once again, will pass the costs on to you (along with a healthy markup). Your monthly chargeback monitoring program expenses can add up in a hurry.

An excessive chargeback rate may prompt the acquirer to place a hold on your merchant’s funds. This is called a merchant account reserve, and it can severely restrict the business’s access to needed operating capital. If the situation persists without any sign of improvement, though, the bank may simply cut their losses and terminate your account.

Without an account, you lose the ability to process credit card transactions altogether. Your business will also be listed on the MATCH List for a minimum of five years. At this point, your only alternative would be to secure a high-risk merchant account, which may involve even higher fees that will add to your cash flow problems.

Chargeback Rate

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The Importance of Prevention

Of course, it’s important to remember that many chargebacks—between 60% and 80%—are potential cases of friendly fraud. These are invalid chargeback scams, and you have the right to challenge them through the representment process. If you challenge a customer dispute and win, you can recapture a portion of the amount disputed.

Unfortunately, this is a time-consuming and expensive process for everyone involved, and it will not undo the damage regarding your chargeback rate. This is because chargeback rates are calculated using the total number of chargebacks issued, regardless of whether they get reversed later.

It’s crucial that you do everything in your power to prevent chargebacks before they happen. To keep a lower chargeback rate, you must implement a comprehensive prevention strategy that addresses the top three chargeback sources: merchant error, criminal fraud, and friendly fraud. Among other things, you should:

Eliminate Missteps

Prevent chargebacks that stem from avoidable merchant errors.

Always Request Authorization

Follow the issuer’s regulations for all authorization codes.

Use Fraud Detection Tools

Card security codes, 3D Secure, Address Verification System, etc.

Watch for Red Flags

Scrutinize transactions for potential fraud triggers.

Prioritize Contact Information

Make sure it’s clear how customers can contact you.

Use Clear Billing Descriptors

Include contact information in the descriptor if possible.

Check Your Advertising

Double-check all product descriptions and photos for accuracy.

Be Available

Answer the phone. Reply to emails. Check social media accounts.

Process Refunds Promptly

Let cardholders know when to expect the credit on their account.

Keep Customers in the Loop

Communicate shipping dates, estimated arrival, and so on.

Worried about your chargeback rate? We’re here to help. Chargebacks911® specializes in assisting merchants who are in danger of losing their credit card processing ability due to excessive chargebacks.


FAQS

What is a chargeback rate?

A chargeback rate is a metric that shows the ratio between the total number of transactions a merchant processes and the total number of chargebacks the merchant receives.

What is a normal chargeback rate?

Generally speaking, a rate above 1% is deemed unacceptable. The exact allowable rate, however, often varies depending on factors in including the card brand, business vertical, and chargeback history.

How is my chargeback rate calculated?

The number of chargebacks in a month is divided by either the number of transactions processed during that same month (Visa) or by the number of transactions in the previous month (Mastercard).

What variables can impact my allowable chargeback rate?

Your allowable chargeback rate can be influenced by any number of factors, including your business type, your chargeback history, the card brand, the acquirer, and more.


Prevent Chargebacks.

Fight Fraud.

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