Simply put, your chargeback ratio is an aggregate of your sales compared to the number of chargebacks you received in previous month.
The credit card network like American Express have different ways of calculating a vendor's chargeback ratio. However, what's uniform across the board is that your chargeback ratio is the same as your chargeback rate. Plus, your chargeback ratio can make or mar your business - and you must understand the stories they tell about your eCommerce.
This article seeks to help clear the confusion many merchants have regarding this all-important KPI and help you make the most of the data it presents.
How can I calculate my chargeback ratio?
Before we answer that question, it's crucial to point out that one primary reason for merchant confusion regarding the chargeback ratio is because it goes by various names in the industry. In some circles, it's called chargeback-to-transaction. In others, it's known as chargeback rate or chargeback-to-sales ratio.
Generally, most people call it chargeback-to-transaction ratio or ratio of chargebacks. Whatever be the case, what's straightforward is that all of those descriptions ultimately refer to the measure of your transactions that result in chargebacks.
Now, deriving the chargeback ratio is not complicated. The formula is quite straightforward.
You calculate your chargeback ratio as follows:
Number of chargebacks in a given period divided by the number of credit card transactions in the same period.
What is an acceptable chargeback ratio?
As we established earlier, every card issuer has a unique way of determining a merchant's chargeback ratio. The formula, though, is uniform, which is the number of chargebacks in a given period divided by the number of transactions in the same period or current month.
The difference is in the source of their data for the computation.
For example, Mastercard derives your chargeback rate by dividing the number of transactions processed by chargebacks filed in the current month. But over at Visa, they divide by the number of transactions a merchant processed by the number of chargebacks filed during the preceding
Discover and AmEx go the same route with Visa.
Nevertheless, because each debit card brand only uses transactions processed through their network for the computation, you'll end up with a different chargeback ratio for each network.
So, what's an acceptable chargeback rate for different credit card companies?
To a lot of e-commerce merchants, the answer is 1% as that of industry average. And that might be factual, generally speaking. But in reality, that's not a present-day reality, as you'll see in a second.
Visa and Mastercard establish their standard thresholds with several figures to serve as reference points. Case in point, in 2019 Visa pegged their acceptable chargeback threshold at 0.9% of month-on-month transactions for an average merchant account. Yet, they kept their 'Early Warning' threshold at 0.65% of month-on-month transactions and the 'Excessive Chargeback Rate' at 1.8%.
Over at Mastercard, merchants that cross the 100-chargebacks-per-month or 1% chargeback ratio threshold are classified as 'Chargeback Monitored Merchants.' And 100 chargebacks per month or a ratio of at least 1.5% for two consecutive months results in the 'Excessive Chargeback Merchant' classification. So it's not enough to say 1% is the acceptable chargeback rate, you have to look at the fine print of individual card networks.
Keep in mind that banks also influence the percentage point of the acceptable chargeback ratio.
What happens if my chargeback ratio becomes too high?
Having a high chargeback-to-transaction ratio is bad news in this high-risk industry.
First of all, you will be classified as a “high-risk merchant” and moved into a chargeback monitoring program - which is their way of forcing you to correct the issue. And entering the chargeback monitoring program means you’ll ultimately incur excessive fees for every transaction. Plus, you will get alerts and strategies to tackle credit card fraud as well.
Take Mastercard’s Excessive Chargeback Program as an example. They mandate every acquiring bank to provide monthly reports stipulating activities of any listed merchant. And they charge from $50 to $300 per bank report. Not filling the report attracts penalties of as much as $1,000/report.
And they’re not the online card brand that take such stand. Visa’s Fraud Monitoring Program charge merchants in their high-risk tier close to $100 per chargeback incurred.
Although they levy these fees to your acquiring bank, the banks automatically pass the fees on to you with considerable service fees. When you do the math, the penalties and fees for breaching the acceptable chargeback rate are humongous.
But that’s only on the economic side of things. Being a high-risk merchant could also force your acquirer to put your merchant’s account on hold. And having a merchant account reserve could lead to an ultimate termination of your account.
Without an account, you’re completely screwed. You can’t process any money. So, make sure that you look for any fraudulent chargebacks that can increase your average chargeback rate.
How can I keep my chargeback rate low?
Even though some merchants think that chargebacks are a cost of doing business, the actual cost of a chargeback is enormous. We've done the math and risk of chargeback is mammoth. For every $1 of chargeback, you lose close $3. Statistically, 60% to 80% of all chargebacks are potential cases of friendly fraud. And as we noted earlier, exceeding the acceptable chargeback rate puts your business in a difficult situation.
Although you might be able to operate with a high-risk merchant account, it won’t be a ride in the park due to hefty processing fees and penalties. Hence, it makes absolute sense always to track your chargeback rate and do everything you can to thwart potential chargebacks in their tracks.
For starters, do your due diligence and stop chargebacks arising from avoidable merchant errors. Play by industry standards and be guided by the issuer’s regulations on authorization codes. Use fraud detection protocols like identifying fraudulent transactions on credit card payments while evaluating every payment for fraud. Don’t stop there. Evaluate the entire customer journey as well, and be sure your sales process isn’t a roadblock. Also, write a comprehensive refund policy to end friendly fraud activities.
Does your product description say the same thing as the product images? Can customers easily find your contact details and get helpful, timely response when they reach out? Do customers know when their orders will arrive, how to return any faulty product, and when to expect their refund? Do you ensure quality checks to avoid sending wrong products to customers?
With all the boxes ticked you will observe a significant reduction in chargeback claims and chargeback frauds. It will eventually improve your chargeback win rate and stabilize your credit score.
Once in a while, be the customer and buy from your store to experience things for yourself. For instance, confirm that the price at checkout is similar to that on the product purchase page.
If you want to move a step above the basic requirements (with 50% more success rate), here it is: automate your chargeback process. Utilizing Chargeflow's dispute automation advanced technology will save you all the nightmare of fighting to maintain the status quo.
As you already know, once a chargeback happens, the damage is done. And if you don’t have accurate data and an informed mitigation framework to stop the cycle, they’ll keep happening. With Chargeflow’s expertise and proven methodologies, you can stop and recover chargebacks on autopilot with amply fraud prevention strategies. With Chargeflow, you can quickly break the variables in your chargeback rate, get automated chargeback management, leverage Ai-powered technology and see how to close the loopholes that cost you money, better forecast your revenue, and grow your eCommerce with ease!
Join 500+ leading eCommerce brands in our exclusive early access program here.
What factors can contribute to a high chargeback rate in an e-commerce business?
A high chargeback rate occurs when a high percentage of transactions are disputed and reversed by customers. This can happen due to merchant errors, customer dissatisfaction, technical issues, lack of proper policies, and lack of fraud prevention measures. A high chargeback rate can be prevented by using a chargeback prevention solution like Chargeflow that has proven success.
How can a merchant monitor their chargeback ratio?
A merchant can monitor their chargeback ratio by regularly checking their chargeback reports provided by their acquiring bank or payment processor. Additionally, merchants can also set up notifications or alerts when their chargeback ratio exceeds a certain threshold, which can help them take action early to prevent the ratio from getting worse.
Does chargeback ratio affect merchant financial stability?
Yes, a high chargeback ratio can affect a merchant's financial stability. Chargebacks result in lost revenue and increased costs, including chargeback fees and potential penalties from the acquiring bank or payment processor. Additionally, a high chargeback ratio can also lead to merchant account closures, which can make it difficult for a business to process credit card payments in the future, which can have a severe impact on the merchant's financial stability.
Can I maintain a good chargeback ratio by eliminating chargeback?
It is not possible to completely eliminate chargebacks, but a merchant can prevent and manage them by communicating their return/refund policy, verifying customer identity, implementing fraud detection measures. Merchants can also use tools such as Chargeflow to prevent and manage chargebacks. Chargeflow helps merchants to minimize chargebacks by identifying and preventing fraudulent chargebacks.
What are the chargeback thresholds (%) for Visa and Mastercard?
The chargeback threshold for Visa is typically 1% of total transactions and for Mastercard it is typically 0.9% of total transactions. However, it's worth noting that these thresholds may vary depending on the merchant's industry and the acquiring bank's policies.