What is the Mastercard Chargeback Threshold?

Are you keeping track of your monthly chargeback filings? The relationship between total monthly transactions and monthly chargebacks is called your “chargeback ratio,” or alternately, your “chargeback rate.”

Of course, your chargeback rate isn’t simply a matter of curiosity. Both Visa and Mastercard impose strict limits on the number of chargebacks a merchant can receive each month. Violating these standards could have serious consequences; anything from higher fees to cancelation of your merchant account.

MASTERCARD CHARGEBACK THRESHOLDS: EXPLAINED

Of course, you don’t have one single, comprehensive chargeback rate; instead, you have a different chargeback-to-transaction ratio for each card brand you accept. Further complicating matters is the fact that Visa and Mastercard both have different methodologies for calculating your chargeback rate on their networks.

To calculate your Mastercard chargeback rate, simply divide your total number of chargebacks in the most recent month by your total number of transactions conducted in the previous month. For instance, if you experience 50 chargebacks in June, against a total of 10,000 transactions in May, you’d arrive at a chargeback rate of 0.5% of overall sales.

The purpose of monitoring your chargeback ratio is not simply for your own recordkeeping. Mastercard’s chargeback threshold sets a hard limit on the number of Mastercard chargebacks you’re allowed to receive each month. The company sets a standard chargeback threshold of 1% of monthly transactions and 100 chargebacks per month.

If a merchant exceeds these standards, they will be classified as a Chargeback-Monitored Merchant (CMM). Mastercard doesn’t require any assessments or fees for CMM merchants. The designation serves only to highlight merchants who are in danger of developing a problem with excessive chargebacks.

If, however, the merchant’s Mastercard chargeback ratio surpasses 1.5% of monthly transactions and 100 chargebacks per month, they will be classified as an Excessive Chargeback Merchant (ECM).

DIFFERENCES BETWEEN MASTERCARD CMM & ECM PROGRAMS

The Chargeback-Monitored Merchant designation is intended to give merchants a “head’s up.” If you’re close to violating chargeback thresholds, the CMM designation signals to your bank that you need help addressing the matter before it devolves further.

The Excessive Chargeback Merchant program, on the other hand, is imposed by Mastercard on merchants who already have a problem with excessive chargebacks. The intent is to help merchants develop a chargeback mitigation strategy and get their chargebacks under control.

Once entered in the ECM program, you are considered “noncompliant” with Mastercard chargeback regulations. In response, Mastercard will assess regular fees every month you remain in noncompliance. You are also required to develop an action plan to minimize your risk going forward. Your merchant acquirer will provide monthly documentation to Mastercard to verify that steps are underway to mitigate chargebacks.

You may exit the ECM program after maintaining a Mastercard chargeback ratio below 1.5% for two consecutive months. If, however, the problem remains unsolved after six months in the ECM program, you will move from ECM Tier 1 to ECM Tier 2. At the second tier (also a six-month period), you incur significantly higher monthly fees to incentivize compliance.

CONSEQUENCES OF VIOLATING MASTERCARD THRESHOLDS

If you’re unable to control chargebacks even after participating in the ECM, Mastercard will begin charging your acquirer a monthly noncompliance fee. This will likely result in the acquirer judging you to be too risky, and canceling your account. If this happens, the acquirer will most likely add you to the MATCH (Member Alert to Control High-Risk Merchants) List.

Merchants on the MATCH List are unable to find a standard merchant account with any other parties. You could be left unable to accept card payments without a merchant processor account. This often spells “doom” for a business.

Remember: while merchants ultimately endure the cost of chargebacks, they’re not the only party held accountable. When chargebacks occur, all relevant funds are first withdrawn from your acquirer. The acquirer covers these costs, then in turn, withdraws them from your account to cover their losses.

If you represent a risk to your acquirer, the bank won’t hesitate to cut your loose. That’s why it’s so important to pay attention to your chargeback-to-transaction ratio and do whatever you can to manage disputes.