Chargeback Thresholds: How Many is Too Many Chargebacks?
Regarding chargebacks, how many is too many? No doubt, that’s a question that can keep you up at night…and for good reason.
Excessive chargeback levels can—and have—put merchants out of business. It’s already a huge problem, and it shows no signs of slowing down.
Global chargeback volume reached over 600 million cases in 2021. It’s projected to surpass nearly $117 billion in losses by 2023. These figures reflect a growing problem in an industry rife with challenges. So, how do you combat a rising number of chargebacks without putting your business at risk?
In this article, we’ll explain why too many chargebacks are a big deal. We’ll see what that means, how it affects your business, and give you some steps to prevent it from happening.
- Merchant Account Reserves: What You Need to Know in 2022
- Visa Dispute Monitoring Program: What is the VDMP?
- Closed Merchant Account? Here's What to Do.
- Mastercard Excessive Fraud Merchant Program, Explained
- What is a Mastercard Excessive Chargeback Merchant?
- The Chargeback MATCH List: How to Avoid Being Blackisted
Visa & Mastercard Chargeback Thresholds: Explained
The key figure to keep in mind here is your chargeback rate (also called a chargeback ratio). This number measures the chargebacks you receive as a share of your total transactions. Your chargeback rate indicates to your bank, and to the card network, whether or not you’re struggling with a chargeback problem. It also lets them determine whether you’ve gone over the acceptable limit of risk allowed for each institution.Learn about your chargeback rate
That all seems simple so far, right? Well, it gets confusing when you learn that Visa and Mastercard set different chargeback thresholds. They also calculate your chargeback rate differently, and will set different thresholds for different businesses.
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Visa Chargeback Thresholds
There are three tiers of the Visa chargeback threshold. The tier that applies to you is based on whether your monthly chargebacks exceed a predetermined limit:Learn about Visa chargeback limits
The number of chargebacks filed in the current month is divided by the number of transactions made in the current month. For example, if you receive 100 chargebacks in June, and process 10,000 transactions during the same period, you will have a 1% chargeback rate in June. This will put you over the limit for the VDMP Standard chargeback threshold (more on this later).
Mastercard Chargeback Thresholds
Like Visa, Mastercard has multiple tiers to their chargeback threshold. Determining how many is too many chargebacks depends on your pre-existing merchant risk level:Learn about Mastercard chargeback limits
For Mastercard, the number of first chargebacks filed in the current month is divided by the number of transactions made in the previous month. So, for example, if you receive 100 chargebacks in June, and process 10,000 transactions during the month of May, you will have a 1% chargeback rate in June. This will put you close to, but still under the limit for the ECM chargeback threshold (more on this later).
What Happens if You Have Too Many Chargebacks?
A majority of merchants think that maintaining a chargeback rate under 1% of transactions is fine. However, that is simply not the case. The truth is that, even if you’re technically under one of the chargeback thresholds outlined above, you could still face added fees and penalties.
Visa and Mastercard have each established their own compliance programs: the Visa Dispute Monitoring Program, and the Mastercard Excessive Chargeback Merchant Program. Each program comes with its own requirements…and its own limitations.
What if You Can't Reduce Your Chargeback Rate?
In short: you might lose your banking privileges.
A lot of acquirers find it more cost-effective to terminate high-risk merchant accounts than to work with the merchant to rectify chargeback issues. These high-risk merchants will lose the ability to process credit card payments through regular channels.
If you lose your account due to breaching the chargeback threshold, you’ll have to seek processing elsewhere. Best-case scenario, you sign on with a provider that specializes in high-risk processing, which will mean incurring higher costs. You'll also have to maintain a larger account reserve in most cases, meaning some of your money will always be inaccessible.Learn about high-risk processing
Worst-case scenario? You’re unable to process card payments entirely.
Accounts that are terminated due to chargebacks get added to the MATCH list. This is a sort of industry blacklist which acquirers use to determine which merchants represent a higher risk for chargebacks and disputes. And, if you make it to the MATCH list, you’ll be unable to qualify for a standard merchant account for at least 5 years.Learn more about the MATCH List
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Avoid Having Too Many Chargebacks With Basic Chargeback Prevention
It’s frankly impossible to eliminate all chargebacks and disputes. Even if you abide by all rules and best practices, you may still see the occasional dispute. However, you can eliminate excess chargebacks and stay well-below the chargeback threshold by adopting a comprehensive chargeback prevention strategy.
A “one-size-fits-all” stratagem does not exist. Instead, you should employ tools to identify your chargeback sources and deploy solutions based on each circumstance.
The best approach to criminal fraud, for instance, is a multilayered strategy to single out and block fraud attacks. Using a variety of fraud tools, each of which targets a unique risk factor or contact point, can provide you with a wider and more dynamic view of potential red flags.
Combining these tools with dynamic fraud scoring creates a better framework for deciding whether to accept—or decline—a transaction. These efforts can, in turn, be augmented by optimizing your processes and policies. For example, a comprehensive merchant compliance overview can help identify:
- Ineffective return rules and procedures
- Oversights in order fulfillment
- Customer service shortcomings
- Faults in merchandise or product presentation
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