How Do I Know When I Have too Many Chargebacks?

Every chargeback represents a loss of revenue. Thus, the ideal number of chargebacks filed against a merchant is “zero.” That’s not always possible, though, as some chargebacks are unavoidable.

Most merchants can absorb the occasional dispute without much trouble. However, there is a point of critical mass for most merchants, representing a tipping point in terms of the number of chargebacks filed. Where that point is will vary depending on the circumstances.

Chargeback Ratios: Explained

First, it’s important to understand the concept of the chargeback ratio (also called a chargeback-to-transaction ratio or chargeback rate). This number gauges a merchant’s monthly chargebacks as a portion of overall transactions.

There are chargeback thresholds for an acceptable chargeback ratio, and this figure should serve as the primary indicator to determine if a merchant has too many chargebacks. Breaching these thresholds will result in the merchant being labeled as too risky for standard card processing. Typically, the merchant’s bank will freeze or even terminate the merchant’s account before this point is ever reached.

The card brands like Visa and Mastercard impose acceptable thresholds on merchants’ chargeback ratios. These thresholds are typically between 1-2% of transactions in a given month, based on the manner in which the card network calculates that figure and the specifics of the applicable chargeback program. Merchants will have a different chargeback ratio for each card brand, as the two companies calculate differently.

Visa measures the number of Visa chargebacks filed against in the most recent month against total transactions in the same period. Mastercard measures the current month’s chargebacks against the previous month’s transactions.

For more information, we have articles that going into greater depth on the Visa chargeback thresholds and the Mastercard chargeback thresholds.

Separating Chargebacks by their Source

Merchants must do whatever they can to keep their chargeback-to-transaction ratios low across card brands. Otherwise, their acquirer might regard them as too risky, and decide to cancel their account. So, where to start?

An important point to understand about chargebacks is that they have three fundamental sources:

• Merchant Error: Minor missteps and oversights that lead customers to file disputes.
• Criminal Fraud: Bad actors using stolen customer information to make unauthorized purchases.
• Friendly Fraud: A customer completes a purchase, but later files a chargeback without justification.

Merchant error and criminal fraud are both pre-transactional; the chargeback is triggered by actions that transpire before the buyer completes a purchase. As a result, it’s possible to prevent many of these chargebacks through actions the merchant can take.

With criminal fraud, it’s important to deploy a well-rounded roster of fraud tools. The complimentary tools work together to pick up on threats that might be overlooked, and also provide a more detailed impression of each customer to avoid producing false positives. This is what is meant by a dynamic fraud strategy.

Merchants should deploy:

• Address Verification Service (AVS)
• CVV Verification
• Geolocation
• Proxy Piercing
• Device Fingerprinting
• Velocity Checks
• Biometrics (when available)

For merchant error, we recommend the following practices to ensure merchants don’t find themselves accidentally causing disputes:

• Ensure all contact information is readily visible to customers.
• Don’t overlook service channels; monitor phones, email, and social media.
• Provide live, round-the-clock service across all customer service channels.
• Reply to emails within an hour; if not possible, provide an autoresponse letting the customer know when to expect an answer.
• Submit all necessary paperwork in a timely fashion.
• Grant credits and cancellations when the customer asks.
• Never accept an expired payment card.
• Make cancellations a quick, painless process.
• Notify your customer about policies and return procedures.

What about Friendly Fraud?

Unlike criminal fraud and merchant error, friendly fraud is a post-transactional threat. The chargeback is triggered after the buyer completes a purchase, only once the buyer decides to do so. This could be caused by many things, including buyer’s remorse, confusion about policies and practices, or a customer attempting to get something for free (cyber shoplifting).

Taking steps to prevent criminal fraud and merchant error can cut back on friendly fraud cases. However, the only really effective solution here is to engage friendly fraud chargebacks through the representment process.

Representment can be a difficult and time-consuming process, and there’s no guarantee of success. We recommend working with a third-party chargeback management service to see better results and return on investment.