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What Is A Chargeback Ratio and How Do You Calculate It?

Although chargebacks are to be an expected reality of running a business, merchants must stay vigilant to ensure they do not become an increasingly common occurrence. When they do occur often, they could put your relationships with card networks and acquirers in jeopardy as they will not continue doing business with fraudulent merchants. 

In fact, a merchant’s chargeback ratio is essential metric acquirers use to determine whether or not they choose to end their relationship or enforce more stringent policies to correct this negative occurrence. 

As a merchant, you may not even be at fault when these chargebacks occur, however, they do reflect poorly on your business. If your chargeback ratio is unusually high, it indicates that you may be doing something wrong or you are not taking the essential steps to prevent them. 

What Is A Chargeback Ratio?

In its simplest terms, a chargeback ratio is a metric that is used to compare your total sales to the number of chargebacks you get every month. If you take the time to monitor this metric, it can provide you with a wealth of information and insight. 

The actual ratio is calculated by taking the number of chargebacks a merchant receives in a month and dividing it by the total number of transactions received in a month. 

What If My Chargeback Ratio Is High?

Having a high chargeback rate can potentially impact not only your cash flow but can also significantly limit your options for accepting payments. 

One thing to keep in mind is that the maximum chargeback rate allowed by the different credit card networks varies. 

If your chargeback-to-transaction ratio happens to surpass the “acceptable threshold” you will be defined as a high-risk merchant. This category means that you will be required to join a chargeback monitoring program. And that means you will be incurring other additional fees. 

For example, Visa’s Chargeback Monitoring Program charges up to $100 per chargeback for high-risk merchants. 

These fees are first directed towards the acquiring bank, who then passes these costs to you in the form of a steep markup. Therefore, your monthly chargeback monitoring program expenses can add up fast. 

If your chargeback rate is deemed excessive, the acquiring bank may place a hold on your merchant funds. The term for this is called a merchant account reserve. This severely limits your access to operating capital. If this situation persists without improvement, the bank may simply choose to terminate your account. 

Losing your account discontinues your ability to process credit card payments, which means an inevitable loss of revenue. Your business may also be entered under the MATCH list for at least five years. The MATCH list is a record of merchants that are deemed to carry an unacceptable level of risk. 

How Can I Lower It?

The best course of action when dealing with chargebacks is prevention. Seek to implement a “comprehensive prevention strategy”. Here are a few tips you can implement:

  • Get rid of missteps: you can prevent chargebacks caused by merchant errors
  • Request authorization: observe the issuer’s regulations for authorization codes
  • Implement fraud detection rules: You can use 3D Secure, Address Verification Systems, and card security codes
  • Scrutinize transactions: stay alert and watch for potential triggers of fraud
  • Provide contact information: clearly communicate how customers can contact you
  • Clear Billing Descriptors: clearly communicate how their charge and name of the business will appear on the customer’s bank statement

Keep Your Chargebacks In Check

Chargebacks can really wreak havoc on your cash flow, your reputation, and your ability to secure a merchant processor to continue to do business. Seek to implement a comprehensive prevention strategy to stop a high chargeback ratio in its tracks. 

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