Chargebacks – one of the most popular topics among merchants – but for all the wrong reasons. At this point, most of you know that сhargebacks are dreadful news for your profit and reputation. If you’re lucky enough and haven’t approached chargebacks before, we advise you to check out this Maxpay’s article on the matter.
But, in a nutshell, a chargeback is a transaction reversal, which occurs when a customer, after buying something from a merchant, but then disputes the transaction for one reason or another. In many cases, chargebacks are a result of fraud, when someone steals a cardholder’s financial data and uses it for their gain.
There are also cases when a cardholder calls off the transaction because they’re unsatisfied with the product, didn’t get the product on time, didn’t recognize the transaction later on and canceled the purchase, felt a buyer’s regret, etc.
This is how it happens: a customer contacts their issuer bank and requests a transaction dispute and voices their reasons for it. The issuer evaluates the situation and notifies the acquirer (merchant’s bank) so that it can remove the disputed amount from the customer’s account. The merchant gets notified about it as well and has a chance to fight the dispute with proof that it was valid. Unfortunately, many businesses find out about disputes weeks after they occur, which is very damaging.
With some basic information out of the way, let’s talk about the chargeback rate in more detail.
What is a chargeback rate?
A chargeback rate allows determining if you get too many chargebacks by relating the number of chargebacks to transactions. Merchants must keep an eye on this metric at all times.
You see, chargebacks are something that can happen to any business, but their abundance can lead to even more dire consequences, like getting your low-risk business to a high-risk category (unless you’re already a high-risk company because of the industry/country you work in – more on that in this article).
This means, you will have to pay more for processing services, face higher setup, monthly, annual, and termination fees, and possibly even change your payment service providers, as not all banks work with high-risk clients. That’s why the chargeback rate can’t be ignored.
Average chargeback rates
Most commonly, merchants’ chargeback rate should not cross the 1% of total transactions number. To put it simply, companies should only have one chargeback per 100 successful transactions.
Keep in mind, that the chargeback threshold is a different metric for every card brand you process (Visa, Mastercard, etc.), so you need to remember each maximum index for chargeback rate.
As the 2018 white paper on the topic showed, the chargeback ratio may vary a lot among businesses. A survey of more than 1000 merchants, primarily from online, multi-channel, and mobile commerce industries revealed, that 29% of them had a rate between 0,1% and 0,5%. Meanwhile, 18% of respondents managed to keep the rate under 0,1%, another 18% – between 0,5% and 1%. Unfortunately, 23% of companies had a 1% or higher rate, and 13% weren’t aware of their chargeback ratio status at that moment. The industries that experienced the highest level of chargeback threshold crossing, mentioned in the study, were:
- Education and training (43%);
- Banks, credit unions, lenders, and insurance (34%);
- Dating and social (32).
Chargeback ratio calculation
As was mentioned before, the acceptable chargeback rates are set by credit card companies, but they also have different ways to calculate the said ratio.
Visa, American Express, and Discover determine the chargeback ratio by dividing the number of chargebacks that occur within a calendar month by the number of transactions made the same month.
But with Mastercard it’s different: the number of chargebacks from the current month is divided by the number of transactions from the previous month.
How to reduce chargebacks
Chargeback mitigation and reduction is something Maxpay knows a lot about, as we work with high-risk businesses and offer different tools for it.
First and foremost, a good chargeback prevention strategy always starts with a merchant, as there are some must-dos for any company:
- Your website should be as clear as possible about products and services you provide: make sure the product description has all the quality and size details so that the customer won’t demand a chargeback when their purchase comes not as described;
- Establish how long does it usually take to deliver the goods, invest in a tracking app, if possible, so that your customers know where their order is at all times;
- Provide as many options of contacting customer support as possible to prevent miscommunications with clients;
- Set a comprehensive refund policy and make sure that your customers know, that it’s more effective than chargebacks;
- Use 3D Secure protocol for the cardholder verification to prevent fraudulent transactions.
Check out a very in-depth and practical article “Four tips for preventing chargebacks” written by Maxpay’s CEO Artem Tymoshenko for Forbes Finance Council.
There are also many tools which the financial industry provides for chargeback prevention. For instance, we at Maxpay offer businesses Visa Merchant Purchase Inquiry (VMPI) solution to fight friendly fraud and avoid chargebacks altogether. In case of a transaction dispute, an issuer notifies a merchant about it through Visa, and the company can provide evidence that the transaction was valid in near-real-time. This information allows detecting friendly fraud, or clear out misunderstandings between a customer and the business, which led to chargeback in the first place.
Another tool Maxpay’s clients can get is Covery anti-fraud platform, which covers lots of issues from chargeback protection and fraud prevention to risk management. Covery provides merchants with multiple instruments for risk detection and is automatized, but you can access manual reviews and post-reviews of the decision whenever necessary.
There are also Ethoca Alerts, used for fast notification about fraudulent transactions. If an issuing bank is a part of Ethoca’s global network, it will warn a merchant about a cardholder confirmed fraud in near-real-time, and the company will be able to issue a refund and prevent its products from shipping. It is a resource-saving solution, as without it the merchant would find out about chargeback weeks after it happened, and wouldn’t be able to do anything about it.