Will Excessive Chargeback Levels Unfairly Lead to Your Business's Demise?
Even a single chargeback can negatively impact a business, but when the rate of chargebacks escalates, the business’s longevity is at risk.
Excessive chargeback levels threaten a business’s ability to process credit cards and ultimately the capability to function in the eCommerce environment.
Calculating the Chargeback Ratio
The two most popular card networks, Visa and Mastercard, have chargeback monitoring programs. They carefully scrutinize each business’s chargeback activity and take action when they consider chargeback levels to be too risky.
The State of Chargebacks 2018
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The networks use a chargeback ratio, called the chargeback-to-transaction ratio, to evaluate risk. However, each network calculates the chargeback-to-transaction ratio differently.
|The number of first chargebacks filed in the current month divided by the number of transactions made in the previous month.||The number of chargebacks filed in the current month divided by the number of transactions made in the current month.|
|100 first chargebacks in June divided by 10,000 transactions in May equals a 1% chargeback-to-transaction ratio (or 100 basis points)||100 chargebacks in June divided by 10,000 transactions in June equals a 1% chargeback-to-transaction ratio (or 100 basis points)|
What is Considered Excessive?
The card networks use the chargeback-to-transaction ratio to determine when a merchant has exceeded the acceptable level of risk.
Each network has its own strategy for evaluating chargeback threshold breaches.
|Mastercard's Excessive Chargeback Program||Visa's Chargeback Monitoring Programs|
|Chargeback Monitored Merchant||Excessive Chargeback Merchant||Global Merchant Chargeback Monitoring Program||U.S. Merchant Chargeback Monitoring Program||High Brand Risk Chargeback Monitoring Program|
The networks and acquirer carefully analyze chargeback activity and place merchants in the applicable program when thresholds are exceeded.
What Happens When a Merchant Exceeds the Chargeback Levels?
Acquirers get slapped with fees when a business has too many chargebacks. Therefore, the card networks recommend that acquirers keep a close eye on business accounts so that excessive chargeback levels can be remedied and avoided.
Unfortunately, many acquirers would rather terminate a merchant’s account than work to rectify the chargeback problems.
If the acquirer decides to terminate the merchant account, the business will lose the ability to process credit card payments. A terminated account could also land the merchant on the MATCH list.
These aggressive actions taken by the acquiring bank make it impossible for the business to obtain another traditional merchant account. The business will be forced to work with a high risk payment processor. Usually, the elevated fees associated with this type of payment processing make it difficult for the business to survive.
An Unfair Situation
Chargebacks are a much needed form of consumer protection. They offer security to consumers who are victimized by criminal fraud or unscrupulous merchants.
However, the vast majority of merchants are trying to honestly and ethically create a sustainable business. Chargebacks these merchants receives are usually due to criminal or friendly fraud.
Unless a merchant uses a fraud filter or alert system, criminals can quickly and easily drive a merchant out of business. If merchants don’t detect and prevent credit card fraud, chargeback levels will rise quickly. Just a handful of unauthorized transactions in a given month could threaten the business’s longevity.
Additionally, research conducted by Chargebacks911® has found 85% of all chargebacks are filed fraudulently; the consumer called the bank for a chargeback without trying to obtain a refund from the merchant first.
Friendly fraud accounts for the vast majority of chargebacks filed against legitimate merchants who use criminal fraud filters. It seems unfair to harshly discipline merchants who sustain excessive chargeback levels.
Even more unjust is the fact that the majority of friendly fraud punishments apply to only the merchant. Yes, the consumer eventually suffers by paying higher prices, but the repercussions aren’t proportional.
Banks that fail to properly investigate transaction disputes and perpetuate the cycle of friendly fraud should be held accountable for excessive chargeback levels too. Illegitimate chargebacks that are successfully disputed should have financial penalties for the cardholder.
Balancing the Scales of Friendly Fraud
How can merchants help tip the scales in their favor?
Disputing chargebacks is one of the best ways to effectuate long-term, industry-wide change. Many merchants feel there is little benefit to disputing chargebacks; after all, a successful representment doesn’t improve the chargeback ratio. The damage has been done.
Fighting friendly fraud is a delicate task though. If it isn’t done properly, it can end up costing more money, aggravating customers, and alienating banks.
Businesses that use a DIY chargeback management strategy in-house need to consider two things:
- Businesses need to read and review the latest regulation changes. Both Visa and Mastercard have made their publications available online.
- It is strongly recommended that at least one key employee is tasked with maintaining update releases.
Education is key. Most businesses don’t have the necessary resources to obtain a detailed understanding of how to successfully navigate the chargeback process. Chargebacks911 provides a turnkey solution that is customized to fit each merchant’s needs. If you’d like more information on how to successfully fight friendly fraud and recoup more revenue, let us know.