Chargeback Ratio: What It Is And How You Calculate It

Apr 05, 2022

One of the many challenges that merchants must face when they first open up their business is chargebacks. Given the nature of the online business structure, the higher propensity for fraud due to card-not-present transactions, and simply not having adequate systems in place to address them, chargebacks are going to be a repeat occurrence. 

The key to keeping your business out of trouble is to prevent them from happening too often. Both card networks and acquirers don’t want to do business with merchants who are plagued with fraud and a negative reputation. 

They use a merchant’s chargeback ratio as a metric to determine whether they want to end the business relationship or enforce more stringent restrictions in order to rectify this behavior.

What Is A Chargeback Ratio?

Known as a chargeback-to-transaction ratio or a CTR, a chargeback ratio is calculated by taking the number of chargebacks that the acquirer has received for a merchant in a certain month, and dividing that by the number of sales transactions processed by that merchant, the month prior. 

As a rule, most card brands require that the chargeback ratio be less than 1 percent. If merchants exceed this threshold, they will be placed in a “high-risk” or “excessive chargeback” monitoring program. Merchants do have four months to try to reduce their chargeback ratio before any additional fees and fines are charged. 

If they fail to reduce the chargeback ratio, they will incur more fees on every chargeback as well as monthly fines until they reduce their chargeback ratio back to an acceptable percentage. If the merchant is unable to fulfill this requirement, they will lose their processing privileges with that provider. 

For example, Mastercard’s Excessive Chargeback Program requires that every acquiring bank provide monthly reports, specifying all activities of any merchant that is listed. For every bank report, they charge from $50 to $300. If these reports are not filled out, penalties as high as $1,000 can be issued for every report. 

Visa’s Fraud Monitoring Program charges its merchants within the “high-risk tier” almost $100 for every chargeback incurred.

Even though these steep fees are directed toward the acquiring banks, these same banks will pass on the costs to the merchants as service fees. It won’t take long for these penalties and fees to add up to surpassing the acceptable chargeback rate. 

How To Lower The Chargeback Ratio

In order to avoid the costly consequences tied to having a high chargeback ratio, the best plan of action is to prevent them. Some of the key actions to take include having an ample refund policy, implementing a robust fraud protection program, and offering outstanding and available customer service. Chargeback alerts are a more sophisticated method that can prove vital to notify you of this suspicious activity. 

You must also ensure that you are following industry standards and the issuer’s regulations for authorization codes. The customer journey should also be carefully examined, looking to correct any roadblocks within your sales processes.

Product descriptions should be identical to the product images. Customers must have easy access to your contact details and receive helpful, timely responses when they do reach out. Customers must also be informed as to when they should expect their orders to be delivered, how to return defective products, and subsequently when to expect their refund. 

Know that when a chargeback occurs, the damage has already been done. This will continue to happen until you implement a mitigation framework.

Keep Chargebacks At Bay

It is clear that preventing chargebacks is the best line of defense for any business. Not having a way to address them will result in exorbitant costs to a damaged reputation. A merchant would do well to have a plan of action set in place to address chargebacks sooner rather than later. 

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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