The Cost And Consequences Of High Chargeback Ratios – Part 1

For business owners, particularly in the E-Commerce sector, understanding and managing chargeback ratios is crucial. In this article, we explore the concept of chargeback ratios, their implications for businesses, and factors that contribute to excessively high ratios.

Understanding Chargeback Ratios

A chargeback ratio reflects the percentage of transactions resulting in chargebacks against the total number of transactions. Major card brands have set thresholds for acceptable chargeback ratios, and exceeding these limits can lead to enrollment in monitoring programs like Visa’s Chargeback Monitoring Program (VCMP) or MasterCard’s Excessive Chargeback Program.

Recent Changes in Visa’s Chargeback Ratio Limits

In 2019, Visa lowered their chargeback ratio limits, intensifying the need for businesses to monitor and manage their ratios more effectively.

The True Cost of High Chargeback Ratios

High chargeback ratios extend beyond just monetary loss. They can threaten the stability of your merchant account and, by extension, your entire business. The overall cost includes lost products, profit, additional fees, and the risk of account termination or being blacklisted by processors.

Monetary and Operational Impacts

For every dollar lost to a chargeback, businesses can incur an estimated cost of $2.40. This includes retrieval requests, chargeback fees, lost tax, and processing fees, plus the administrative burden involved.

Card Brands and Acquirer Responses

Card brands hold acquirers responsible for merchants’ actions, leading to a trickle-down effect where increased fees and potential termination of merchant accounts can occur.

The Broader Implications of High Chargebacks

Excessive chargebacks can lead to more merchants being classified as high-risk, with the associated costs and challenges, including potential inclusion on industry blacklists like the MATCH list.

Contributing Factors to High Chargeback Ratios

A significant portion of chargebacks, termed “friendly fraud,” results from consumer behavior, including convenience chargebacks, negligence in tracking ongoing charges, and misrecognition of charges on statements.

Understanding Friendly Fraud

Friendly fraud occurs when consumers use chargebacks as a convenient way to address issues with a transaction, often bypassing direct communication with the merchant. This phenomenon significantly contributes to a merchant’s high chargeback ratio.

Proactive Management of Chargeback Ratios

Merchants must actively engage in monitoring and managing their chargeback ratios, especially with stricter thresholds from card brands. Understanding your processor’s specific limits is also critical.

Stay Tuned for Part 2

In the upcoming Part 2, we’ll discuss strategies to combat high chargebacks and explore solutions to reduce these instances. Stay tuned for practical tips and insights from our ETA Certified payments professionals.

If you need advice on fraud prevention and chargeback management, don’t hesitate to contact our team at Bankcard International Group. Our experts are ready to assist you in finding the best solutions for your business needs.

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