Protect your business by keeping your chargeback rates below the maximum standard rate.
As an online business processing credit card payments, you will encounter a myriad of challenges. One of the more formidable opponents to your bottom line, without question, is chargebacks. A chargeback typically takes place when a credit or debit card issuer reverses a payment back to the merchant. This occurs when the cardholder files a dispute about the charge with the card issuer. If the card issuer determines that the card was stolen, the product not delivered, or simply not what they expected, this issuer will refund the full amount to the card holder. The merchant is then charged this same amount, with additional fees.
Having too many chargebacks can really kill your revenue stream, reduce your opportunities to accept credit card payments, and take valuable time away from building your business.
What is a high chargeback rate?
Before we dive into what is considered a high chargeback rate, it is important to emphasize the severe consequences that can take place if your chargebacks surpass the standard maximum rate allowed. If this rate is exceeded, the merchant stands to not only lose goods and pay heavy fees, but the penalties can also pile up. Ultimately, the merchant will lose the ability to accept credit cards as payment.
The chargeback ratio is calculated by taking the total number of chargebacks in a month divided by the total number of transactions that have occurred in that same month. What is considered to be the “standard chargeback threshold” is 1%. However, it is not a figure that can be applied across the board. Why? The individual card issuer decides how this chargeback rate is actually calculated and they also decide just how close a merchant can get to this maximum.
For example, if Visa and Mastercard determine that your “chargeback-to-transaction ratio” is too high, be sure that they will get directly involved. This direct involvement will come in the form of labeling you as a high risk merchant and place you in a “Chargeback Monitoring Program”.
Solutions for getting your chargeback rates under control
To ensure that you don’t teeter close or surpass the 1% threshold, it’s important to have a prevention program in place to keep them from happening from the beginning. Here are some options:
- Implement fraud filters – It doesn’t have to be complicated, simply add address verification systems to ensure that both the billing and shipping information are the same. A card verification value or (CVV) can also detect differences between the CVV number on the card and the one keyed in during checkout.
- Clarify return and refund policies – Make it easy for customers to return items by providing clear and simple policies. Complicating things or being too strict will result in chargeback.
- Be clear with product descriptions – Make sure that the product is clearly represented with photos showing different angles. Be detailed in providing as much information for the customer so they know exactly what they are buying.
Make reducing your chargeback ratio an important goal in your business.
Although chargebacks will be an inevitable thorn on the side while operating your business, it should not spell the end of your operations. By implementing the aforementioned strategies and making small changes, you can be on your way to mitigating the devastating effect that chargebacks could have on your bottom line.