What chargeback ratio will prevent me from accepting credit cards

The chargeback ratio matters a lot for any merchant. If you exceed a certain threshold you could end up on your card network’s Terminated Merchant File, ending your ability to accept credit card transactions.

To avoid that, you need to have a clear picture of what exactly comprises your chargeback ratio. Your chargeback ratio (or chargeback-to-transaction ratio) is the number of chargeback cases you encounter in a month over the total number of transactions. However, different card networks use their own variations of this formula.

Chargeback ratios differ by card brand

The general formula for calculating chargeback ratio remains the same for Visa, American Express, Discover, and MasterCard. The only difference lies in the period used for total sales.

Visa, Discover, and American Express calculate their ratio by using the ratio of the current chargeback count for that month to the number of sales processed within the current month. Whereas MasterCard obtains the chargeback ratio by applying the chargeback count from the current month over the number of sales processed in the previous month.

Costs of exceeding thresholds

Chargeback ratios have certain thresholds that vary with every card brand. If you surpass that threshold, you face higher costs, and you could be considered a “high-risk merchant.”

A merchant should be aware of the following thresholds:

• Visa has a standard chargeback threshold at 0.9% for 100 or more chargebacks a month and an excessive chargeback threshold at 1.8% and 1,000 chargebacks with harsher accompanying conditions. Visa also provides an early warning at a chargeback ratio of 0.65% and over 75 chargebacks.
• MasterCard has a standard chargeback threshold at a ratio of at least 1% for 100 or more chargebacks a month, and an excessive chargeback threshold at 1.5% for two consecutive months.

Exceeding thresholds can mean trouble as you may have to join a chargeback monitoring system like the Visa Dispute Monitoring Program, which would cost you a considerable amount of money. Your card brand may also prevent you from processing transactions if your chargeback ratio does not improve.

How to reduce your chargeback ratio?

Consider the following tips to reduce your chargeback ratio:

• Use fraud detection tools such as 3D Secure and an address verification service (AVS) to prevent fraud chargeback scams.
• Get complete contact details for verification and validation purposes.
• Give better customer service and support by being available 24/7.
• Provide clear images or videos and detailed product information for the goods you are selling.
• Process refunds promptly in case of any returns and ensure the cardholder knows when to expect the credit.
• State clear terms of services and remind your customers about them before they place an order.
• Keep your customers updated regarding delivery or shipment schedules.

How can a pre-sale anti-fraud solution help?

A majority of chargebacks are typically caused by hard-to-detect friendly fraud, for which you may need the help of a chargeback mitigation company. Before addressing friendly fraud, though, you should filter out the true fraud before it occurs and adds to your chargeback ratio.

Pre-sale anti-fraud solutions such as ClearSale, Forter, Kount, Riskified, and several others use artificial intelligence technology to make automated real-time decisions to accept or decline transactions.

After you are confident you are catching and preventing most cases of true fraud, you can focus on ways to prevent and mitigate friendly fraud.

Chargeback ratio – what does it mean for your business?

The chargeback ratio is not only a threshold for punishment by the card brands, but can also be used as a tool to manage business risk.

You can use your chargeback ratio to deduce strategies to prevent chargebacks. If you’re facing a higher ratio in a certain location, you can avoid selling your products there. Similarly, if you are facing a high chargeback ratio when you sell a specific product, you may reconsider your decision to carry that good.

The key is to always keep track of your chargeback ratio and determine its main contributing factors and what they mean for your business’ health.