Last editedMar 20232 min read
Although they occur relatively infrequently, chargebacks are an inevitability of accepting card payments. Having said that, racking up too many chargebacks can get merchants into serious trouble.
As card networks and acquirers want to avoid conducting business with fraudulent merchants, they closely examine a merchant’s chargeback ratio when deciding whether to continue or terminate their relationship with a business. They can also impose restrictions and penalties on businesses that have too high a chargeback rate.
Not all chargebacks are the merchant’s fault. Nonetheless, the chargeback ratio reflects on the business and an unusually high chargeback rate indicates that you’re doing something wrong.
In this article, we’ll explain what chargeback ratios are, how they’re calculated and why it’s crucial that you work to keep your ratio as low as possible.
What is a chargeback ratio?
A chargeback ratio is the amount of chargebacks a merchant receives in a month divided by the total number of transactions that take place in that month.
How to calculate chargeback ratio
Different card networks use slightly different formulas to calculate chargeback ratio.
Visa:
No. of chargebacks in current month/No. of transactions in current month = Chargeback ratio
MasterCard:
No. of chargebacks in current month/No. of transaction in previous month = Chargeback ratio
What is an acceptable chargeback ratio?
Ideally, you should keep your chargeback to transaction ratio as low as possible. Typically, a ratio of above 0.9% can start to get you in trouble and lead to consequences. This percentage will change slightly depending on the card network.
What happens if you have a high chargeback ratio?
If you have a high chargeback ration, the chances are you’ll be put on either Visa or Mastercard’s monitoring program. These programs are in place to try and motivate merchants to take action to reduce their chargeback ratio.
Visa’s program goes by the name Visa Dispute Monitoring Program, while Mastercard’s is called the Excessive Chargeback Program.
These programs have slightly different chargeback thresholds in place for merchants. Mastercard has a 1% threshold, meaning having a ratio that exceeds 1% will put you on a monitoring programme. Having a ratio that exceeds 1.5% will likely put you on the Excessive Chargeback Program.
With Visa, meanwhile, a ratio of 0.9% or higher will be placed on the standard program, and a ratio of 1.8% or more will put you in the excessive program.
Note that card networks calculate merchant chargeback ratio based on the transactions within their own network. It’s therefore important that you check your overall ratio and your ratio with each card network separately. For example, it is possible to have an chargeback ratio of less than 0.9% overall, but a chargeback ratio of over this specifically with Visa. In this case, you would still be placed on the Visa monitoring program.
What happens to merchants on chargeback monitoring programs
If you find yourself enrolled in an excessive chargeback program due to a high chargeback ratio, you will have to pay an extra fee on each chargeback you receive. You will also have to pay an additional monthly fine. This is to incentivize you to reduce your chargeback ratio.
If you are simply on the monitoring program, you are typically given four months to get your ratio below the threshold before you have to start paying extra fines and fees. Once you get below the threshold, you have to stay there for at least 3 consecutive months before you can be removed from the program.
If you remain above the threshold chargeback ratio for too long, the card network may decide to terminate its relationship with you. As a result, you may also be added to what’s called the MATCH list, which is an industry blacklist hosted by Mastercard.
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