Payment Processing can become risky with an increase in refund rates.
One of the many obstacles that high risk merchants have come to acknowledge is chargebacks. Chargebacks can lead to the termination of their merchant account. However, this is not the only menace that can threaten a high risk merchant’s position with acquirers. Another threat that can jeopardize their status with their merchant account is the refund rate.
What Is A Refund Rate?
The refund rate is calculated by the total number of items refunded which is then divided by the number of items bought. A safe and acceptable range would fall between 7% and 15%. Online merchants in the e-commerce sector are the prime targets for refunds. A recent study conducted by Invesp showed that online products experienced a return rate of 30% compared to only 8.89% in brick-and-mortar stores.
Refunds in themselves can be damaging for the retailer as the loss is two-fold, the loss of both the product and the sale. This means that margins, profits, and revenue can be undermined.
If merchants want to bring in profit, they must carefully examine their refund rate. Furthermore, they must take note that merchant account providers are also keeping a careful eye on the refund rate. The primary reason for that is risk.
How Are Refund Rates Risky For Providers?
When acquiring banks and payment providers assess the risk of merchants, they look at two metrics when it comes to returns. The first one is refund-to-sale count and the second one is refund-to-sale amount.
The refund-to-sale count relates to the “ratio of refunds to the number of sales”. As an example, if your returns amount to one for every 20 sales, the refund-to-sale will be 5%. On the other hand, your refund-to-sale amount ratio measures the “monetary value of the sales.” For instance, if you were refunded one dollar for every ten dollars of sales, the refund-to-sale amount will be 10%.
Another way that providers discourage high refund rates is by not returning any return payment processing fees. They simply add a fee for either a return or a refund.
The bottom line is that high refund rates will make your providers uneasy. So much that they could take immediate action such as “probationary measures” or the outright suspension of the entire payment processing service. Many of these suspensions are not likely to be temporary.
How To Lower Refund Rates
If you are a high risk merchant that has been plagued by high refund rates, there are actions you can take now to lower them. Let’s take a look at a few ideas.
- Examine your product descriptions: Customers are highly dependent on clear and informative product descriptions to make their final decision to purchase. The marketing language and the product descriptions must communicate clearly what the product entails without setting too high of expectations.
- Assess your suppliers and order fulfillment partners: It is critical that you work with order fulfillment partners that will deliver your products on time. By providing trackable and “signed for” deliveries, you will greatly reduce any attempts at fraud.
- Boost customer support: A customer must be able to receive quick answers to any questions they have about the product, service, or shipping. Refunds and returns can be avoided if customers can have easy access to live agents, such as found on live chats.
Don’t Neglect High Refund Rates
As stated, chargebacks are no longer the only nemesis lurking in the shadows for high risk merchants. High refund rates are quickly becoming another arch enemy that needs to be eradicated before it overpowers your bottom line. It also has the serious potential to strain your relationship with your current merchant account provider.