A chargeback ratio is calculated by comparing the total sales by a merchant processed within a given month against the number of chargebacks that were lodged against that merchant within a specific period. Sometimes the chargeback ratio is referred to as the chargeback rate.
The card networks calculate the chargeback ratio in order to keep tabs on merchants. After all, the card networks want customers to be comfortable using their credit cards, and they want to avoid doing business with disreputable merchants. They also want to incentivize merchants to implement measures to reduce the number of chargebacks they receive.
Chargebacks are an unfortunate fact of life for any merchant who accepts credit card payments, either in store or online. But too many chargebacks can land you in trouble. If the card networks find your chargeback ratio to be unacceptably high, you may find your business is re-classified as high risk with higher processing fees. In a worst case scenario you may even have your processing services revoked entirely. And obviously that’s not good for business.
Your chargeback ratio can say quite a lot about your business, and you should not ignore it. If your chargeback ratio is creeping up or is constantly high, then you need to have a good look at your business processes and determine how you can reduce your chargebacks. The important thing to remember is that it is not about the value of the chargebacks, it’s about how many there were lodged in the period.
So how is the ratio calculated? In very simple terms the calculation would be like this:
Total chargeback cases per month ÷ total transactions per month = chargeback ratio
100 chargeback cases per month ÷ 10,000 transactions per month = 1% chargeback ratio
The card networks set a limit for chargebacks, known as the threshold. Mastercard, for example, has a threshold of 1%, while Visa has a threshold of 0.9%. Once you hit the threshold or exceed it, various things could happen, depending on the particular card network. You could be placed in a remedial monitoring program, where you need to reduce your ratio within a given period. This incurs higher processing costs. Or you could lose your processing privileges all together. It all depends on the tiering system within the network.
It is the card networks who make these calculations, and they have differences in the way that they do it. Visa calculates it by dividing the number of chargebacks by transactions in the same month. However, Mastercard calculates it by dividing the chargebacks for the current month by the transactions for the previous month. So you could have different ratios from different card networks within the same reporting period. Similarly, you could be over the threshold for one network yet under for another within a period. The card networks may also take other factors into consideration, such as geographical location, when calculating chargeback ratios .
It’s not just the card networks that have an interest in your chargeback ratio, your acquiring bank is also watching you. Banks are ultimately liable for the merchants they do business with. If your chargeback liability exceeds the funds available in your account, your acquiring bank is liable for the shortfall. In addition to this the bank could be fined by the card network. The fine, of course, would be passed along to you, the merchant, with a considerable markup. If your chargeback ratio remains high your bank could simply decide to cut its losses and terminate your bank account.
Merchants must dispute chargebacks wherever possible to protect revenues. But it is important to understand that the card networks do not care about your win rate. It does not matter if you win the dispute – that chargeback will not be removed from your chargeback ratio calculation. They only consider the fact that it was lodged in the first place.
It is clear that merchants must do all they can to reduce their incidence of chargebacks and therefore reduce their chargeback ratio. While it is highly unlikely that a merchant will ever eradicate chargebacks completely, there are many measures that can be implemented to decrease them. Here are some important practices to implement in your business to help reduce chargebacks:
- Eliminate avoidable merchant errors
- Use fraud detection tools
- Use clear billing descriptors
- Implement multi-factor authentication
- Send confirmation emails to customers
- Use shipping partners with tracking capabilities
- Advise customers on unexpected delays
- Have clear and accurate product information on your website
- Process refunds swiftly
- Have excellent customer service
- Have clear refunds and returns policies, and make them easy to find
- Make it easy for your customers to contact you
- Communicate with your customers promptly
- Watch for red flags
- Ensure advertising is accurate
- Choose partners with excellent security practices
At Baer’s Crest we know how problematic chargebacks are for businesses, and we know the importance of maintaining a good chargeback ratio. We also know how overwhelming payment processing and all its associated systems and procedures can be for small or new businesses. Talk to us about the products and services we offer to take care of your payment needs, while you get on with doing business.