Will an Excessive Chargeback Level Lead to Your Business’s Demise?
Excessive chargeback levels can—and have—put merchants out of business.
Chargebacks are a huge revenue drain, with merchants losing over $3 to every dollar of a transaction. More than that, though, a high number of customer disputes will have other consequences, as well.
Even a single chargeback can negatively impact your business. Exceeding chargeback thresholds, though, can have devastating effects. Excessive chargeback levels threaten your business’s ability to process credit cards, and ultimately, your capability to function in the eCommerce environment at all.
Calculating the Chargeback Ratio
We’ve written at length about chargeback ratios, so we’ll just do a quick summary here. Each of the four major card networks has one or more chargeback monitoring programs. For illustrative purposes, we’ll focus on the two largest schemes, Visa and Mastercard. Both companies assess the financial risk posed by merchants using what’s called a chargeback-to-transaction ratio, or simply, a chargeback ratio.
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While it’s used for the same purpose, the two card brands calculate your 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)|
Even though the networks keep an eye on things, acquirers are expected to monitor chargeback rates as well and take action if you exceed (or are expected to exceed) the acceptable threshold. If the acquirer fails to act on an account the card network feels is too risky, the network itself may step in.
What is Considered Excessive?
The chargeback ratio functions as a sort of barometer that indicates when a business might be struggling with a chargeback issue or has exceeded the acceptable level of risk. The question most merchants want to know: what is the acceptable risk threshold?
Most merchants assume a chargeback ratio of 1% to be the limit, but it’s not that simple. The 1% figure represents the maximum, but the minimum threshold can vary based on the network, acquirer, type of business, historical data, and more.
Further complicating matters is the fact that each network has its own strategy for monitoring merchant chargebacks. If a merchant’s chargeback ratio exceeds—or even approaches—established chargeback thresholds, the business is typically put into a network monitoring program. Even these programs differ between card schemes.
Understanding Each Network's Chargeback Thresholds
|Read more about Mastercard's chargeback thresholds and the Excessive Chargeback Programs.|
|Read more about Visa's chargeback thresholds and the Chargeback Monitoring Programs.|
What Happens if I Exceed the Chargeback Threshold?
The networks and acquirer constantly analyze chargeback rates and will place you in an applicable chargeback monitoring program when deemed necessary. But that’s not all that happens.
Acquirers get slapped with fees when one of their merchants’ accounts receives too many chargebacks. That’s why the card networks recommend that acquirers keep a close eye on business accounts, identifying potentially-excessive chargeback levels and preemptively moving to correct issues.
Unfortunately, many acquirers decide it is more cost-effective to simply terminate an account than it is to try to rectify the chargeback problem. A terminated account means you lose the ability to process credit card payments. It will also likely land you on the MATCH list, a type of “blacklist” acquirers use when determining the risk of taking on a new merchant.
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An Unfair Situation
The chargeback system is not inherently bad. Chargebacks are a much needed form of consumer protection. They offer security to consumers who are victimized by criminal fraud or unscrupulous merchants.
What makes the situation so unfair is that only a relative handful of merchants are bad actors. The vast majority of merchants are trying to honestly and ethically create a sustainable business. Likewise, despite its high profile, criminal fraud is typically responsible for only a small portion of a business’s chargebacks. More importantly, there are effective tools available to help prevent chargebacks from these sources.
Corrupt merchants and criminal fraud are not the main causes of chargebacks. Research conducted by Chargebacks911® has found that as much as 85% of all chargebacks fall under the category of friendly fraud. This occurs when a consumer called the bank for a chargeback without trying to obtain a refund first.
Even more unjust is the fact that most of the financial fallout of friendly fraud applies to only to the merchant. Banks that fail to properly investigate transaction disputes (and thereby perpetuate the cycle of friendly fraud) should be held accountable for excessive chargeback levels. Filing illegitimate chargebacks should have financial repercussions for the cardholder, as well. The way the system is set up now, however, the burden of friendly fraud falls almost exclusively on merchants.
Balancing the Scales of Friendly Fraud
It seems unjust to harshly discipline merchants who suffer excessive chargeback levels that stem from friendly fraud. So how can you help tip the scales in your favor?
Consistently disputing illegitimate chargebacks is one of the best ways to effect long-term, industry-wide change. And yet, many merchants see little benefit to this: representment is a costly, time-consuming process, and even a successful reversal doesn’t improve the chargeback ratio. By the time the chargeback is issued, the damage has been done.
Plus, if it’s not done properly, fighting friendly fraud can end up costing more money, aggravating customers, and alienating banks. Most merchants simply don’t have the experience or expertise necessary to successfully navigate the chargeback process.
Chargebacks911 offers comprehensive, end-to-end chargeback management. We’ve spent years perfecting chargeback-fighting strategies and developing proprietary technology. Not only can we help you make a stand against friendly fraud, we can even implement tactics to prevent chargebacks from other sources. We can take the whole process off your plate, dramatically increase your ROI, and leave you with more time to concentrate on your business.
If you’re concerned about an increasing number of chargebacks and would like to tip the scales back in your favor, contact us today.