As a business owner accepting payments you have probably heard the term “chargeback ratio” and may even be aware of what it means for your business. IF you happen to be operating in the Ecommerce realm you are most likely highly aware of the dreaded chargeback and the ramifications a high ratio can have on your business. Today we are going to talk about just exactly what a chargeback ratio is, what it means for your business, and what types of things can contribute to a merchant’s ratios being higher than they should be.
What exactly is a chargeback ratio?
A businesses chargeback ratio is the number of chargebacks-to-transactions that a merchant has earned. It is a percentage calculated by dividing the total number of chargebacks in a given month by the total number of transactions, resulting in the percentage of transactions that were charged back to the card issuer.
Every major card brand has a limit or threshold for the amount of chargebacks they will tolerate before admitting a merchant into one of their monitoring programs. For Visa that program is the Visa Chargeback Monitoring Program or VCMP, MasterCard has coined their program the MasterCard Excessive Chargeback Program. It has always been important for businesses to mind these ratios and take steps to keep them in check, but with rising card-not-present fraud in recent years, the card brands are cracking down on merchants and acquirers alike. In April, Visa announced it will be lowering the allowed chargeback ratios for both their regular monitoring program and the high risk program beginning Oct 1, 2019. The currently accepted ratio for merchants of 100 disputes and a ratio of 1% will soon be decreased to 0.9% Disputes-to-Sales Transaction count, and for businesses that are already considered high risk, the threshold will lower from 2% to 1.8 percent of Disputes-to-Sales Transaction count and 1,000 total disputes, also effective Oct 1, 2019.
Once a business has ratios that exceed these new lowered thresholds, Visa will enter them into their Visa Chargeback Monitoring Program (VCMP). Once a business is being monitored by Visa within its program they may Assess a non-compliance assessment per merchant per month to the acquirer and Permanently disqualify the merchant and its principals from participating in the Visa Program if they are unable to get their chargebacks in check.
Some of the consequences of having a high chargeback ratio:
There are many “costs” involved with having large amounts of chargebacks for a business. Monetary costs are the first thing we think of, but high chargebacks can actually pose a serious threat to your merchant account and subsequently put your whole business at risk. First and most obvious is the loss of the product itself as well as the cost and profit that should have come with the sale. But that is the least of the incurred damages for both the merchant and the card issuer.
For merchants, it can be said that for every dollar lost to a chargeback it will cost an estimated $2.40. In other words, a $100 chargeback fee will cost the merchant about $240. Merchants incur significant fees and penalties associated with processing and fighting chargebacks, such as retrieval requests ($5-15) and chargeback fees ($15-$50), not to mention the time and man power involved with monitoring and processing the paperwork.
With lower thresholds on the horizon, more merchants than ever before may find themselves entered into one of Visa or MasterCard’s risk monitoring programs. This is not a club that merchants want to be a part of.
Merchants who are made to enter either the Mastercard Excessive Chargeback Program or Visa Chargeback Monitoring Program will find themselves stuck with more added processing fees and will also be subject to potentially expensive account reviews. It could even put you at risk of account termination and being blacklisted by most processors.
The major card brands, Visa and Mastercard etc., hold the acquirers responsible for their merchants actions. For each merchant account that violates the chargeback threshold, acquirers are assessed fees and penalties every month. This creates a trickle down effect where the acquirer will raise the costs to the merchant or could possibly lead to them being dropped by the processor if they decide servicing them is no longer worth the risk.
This will in turn just lead to more merchants being put in the “high risk” category with more expensive “high risk merchant accounts”. Shut downs increase the number of merchants who are added to the Terminated Merchant File (TMF)or to the MATCH list (Member Alert to Control High Risk). This being the industry “blacklist” and it doesn’t matter if a business was put on the list for money laundering, illegal transactions, or a high number chargebacks – being on it makes it nearly impossible to accept credit cards again.
It is actually almost impossible to truly predict the cost of high chargebacks, given that the costs roll over from actual penalties and fees and lost revenue to losing the privilege to accept cards as a payment form, to affecting a business’s brand loyalty and customer retention to overall increased costs for the payments industry altogether.
Just about ⅓ of all card fraud can be attributed to what is referred to as “friendly fraud” and 28% of all Ecommerce revenue is lost to this type of chargeback.
Why do we call this type of chargeback friendly fraud? For the most part, consumers don’t mean to steal from you, mostly. Except for when they kind of do mean to. You see, the problem is that consumers on the whole just don’t want to deal with situations, they don’t want to create a stir. There is also this ‘i’m protected by my credit card company’ mentality where consumers know that they carry no liability if there were a fraudulent charge on their card, but this carries over into their lives and their actual real charges. Consumers can tend to become less diligent about keeping track of charges, auto renewals, and recurring subscriptions. Rather than dealing with the merchant it is easier to call the credit card company and dispute a payment when they forget to cancel. Occasionally, there is a situation when a consumer doesn’t realize someone in the household made a purchase so they dispute it as fraud. Many times though, friendly fraud occurs when a consumer knowingly makes a purchase but is unhappy with the product. Rather than calling the company and dealing with returns and refunds, they find it less friction to call their card company and dispute the charge. Other times, the consumer does not recognize the charge by the way it is listed on their statement and assumes it is fraud. These are all examples of common friendly, or not so friendly, fraud. Unfortunately, this is a huge contributor to a merchants chargeback ratio. For a perfect example of how badly friendly fraud can affect a company’s ratios take a look at Google. Of Google’s total chargebacks, 82% are attributed to friendly fraud. Can you imagine?
So as you can see, where your ratios stand is not a thing to gloss over, especially with the new thresholds looming over us. It’s also important to remember that the chargeback ratio limits we have been talking about here are set by Visa/MasterCard. However, processors and acquiring banks are allowed to set even stricter limits and many of them do. For example, stripe may decide to only allow a chargeback limit of .75% of total transactions per month. It is imperative that you understand the actual limits associated with the processor you are working with.
Read more about Friendly Fraud and how to fight it here and tune in next week when we talk about easy changes merchants can make right now to help reduce their incidence of chargebacks as well as how to fight the ones they do get.