The major credit card companies watch for the number of chargebacks businesses have each month. Using this information and other data, the credit card issuers consider the level of risk that comes from doing business with each merchant. While having no chargebacks is ideal, credit card companies understand that a minimal number of chargebacks is inevitable. For high-risk merchant account holders, the key is knowing what’s an acceptable level of chargebacks and staying under that level.
Visa and MasterCard, the two largest credit card companies, each has a formula for calculating the chargeback-to-transaction ratio. At Visa, analysts take the number of chargebacks for the current month and divide that total by the number of transactions in the current month.
In contrast, MasterCard uses the number of chargebacks in the current month and divides that figure by the transactions from the previous month. In both cases, the credit card issuers want to see a chargeback-to-transaction ratio at or below 1 percent. When a merchant has chargebacks that exceed 1 percent, credit card companies get nervous.
Exceeding the chargeback-to-transaction threshold prompts Visa and MasterCard to charge the processor fees. Depending on the terms of a business owner’s high-risk merchant account agreement, that business owner may have to pay these fees as a pass-through cost. The ultimate result is suspending or terminating the merchant account.
Once a business has its account terminated, the company goes on the MasterCard MATCH list. Being on the list means business owners must get high-risk merchant account services if they want to accept credit cards.
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Both credit card companies have chargeback monitoring programs they use when a business exceeds the 1 percent threshold. For businesses with high-risk merchant accounts, the scrutiny is more intense.
With MasterCard, a business using a U.S.-based processor becomes a Chargeback Monitored Merchant after exceeding the 1 percent threshold. For companies using international processors, MasterCard labels them an Excessive Chargeback Merchant when the companies exceed the chargeback-to-transaction ratio for two consecutive months. To have the label removed, a merchant has to have chargebacks for two consecutive months that are below the 1.5 percent chargeback-to-transaction ratio.
You can find two tiers, each lasting six months. If a merchant moves into the second tier due to excessive chargebacks for six consecutive months, MasterCard can encourage the processor to start a chargeback reduction plan with the retailer. The other consequence is having the processor undergo a risk management program.
At Visa, the processor’s location impacts which monitoring program Visa uses. With processors in the United States, Visa requires merchants to stay under the 1 percent threshold. But, for foreign processors, the Global Merchant Chargeback Monitoring Program provides more latitude by setting the chargeback threshold at a chargeback-to-transaction ratio of 2 percent.
Processors must tell Visa when businesses exceed chargeback limits. Regardless of whether an account gets monitored or not, Visa requires credit card processors to send a report when a business sees a spike in sales or has a weekly gross sales volume exceeding $5,000.
While a merchant may be in a high-risk industry subject to more chargebacks, a business can take steps to tamp down on refund requests. Even low-risk businesses that are at or below the threshold should take measures to reduce chargebacks. After all, chargebacks are the same as lost revenue.
By taking simple steps, you can reduce chargebacks, increase revenue, and possibly get your business removed from the monitoring programs. Make sure you have a clear return process that’s explained in detail on your website. Also, explain shipping timelines, so customers don’t seek refunds if their goods don’t arrive within a couple of days. To avoid chargebacks, offer exceptional customer service, so dissatisfied customers are less likely to ask for chargebacks. Finally, be sure the way your business appears on your customers’ credit card statements isn’t confusing. If your business name isn’t clearly defined, customers may think their charges are in error.
Don’t be afraid to contest chargebacks that are unfair or possibly fraudulent. You have a window set by the processor handling your high-risk merchant account during which you can dispute chargebacks, which is one way to lower your chargeback-to-transaction ratio.