Understanding Your Chargeback Ratio as a Merchant

If you’re an eCommerce merchant then you’re probably aware that a Chargeback Ratio Threshold exists, but if you’re like the majority of your industry peers, you may not be aware of where this threshold actually sits, and how to check if you’re in the clear.

If you’ve never thought to take a look at your individual chargeback ratio, then now is the time.

Your Individual Chargeback Ratio

It’s actually very easy to calculate your individual chargeback ratio. In fact it’s simply a matter of:

Total # of chargebacks for month Previous month’s total # sales transactions

Take a moment right now to work out your chargeback rate, and maybe consider what your chargeback rate would roughly be for the last couple of months as well, to give yourself a decent idea of the average ratio.

What You Need to Consider

As mentioned, it’s pretty simple to calculate your chargeback ratio, however there is one thing to take into consideration when doing so — varying rates.

What are the varying rates? Well…Each card issuer calculates monthly chargeback rates slightly differently.

For example, Visa divides the number of chargebacks in a month by the number of transactions processed during that same month. Whilst Mastercard divides it by the number of transactions in the previous month.

Now Let’s Take a Look at the Sweet Spot

This “sweet spot” is an industry standard that is set by card associations, and the threshold they have determined is 1%.

In other words, the number of chargebacks you receive each month should not exceed 1% of your total transactions within a month, it’s best practice however to try to remain below the 0.75% mark, just to give yourself a buffer.

What Happens if I Fall Outside the Sweet Spot?

Well, if you find your chargeback ratio consistently missing the mark for a certain period of time then what it means for you, is that your store may get flagged by the major card associations, and as a result may be subjected to their chargeback monitoring programs.

If you’ve ever been enlisted into one of the programs, you’ll know they’re not a fun little getaway program, unlike your high school band camp…..

Monitoring programs require remediation from merchants, as well as some hefty fines, until merchants are able to decrease their ratio back below the threshold.

Chargeback monitoring programs are not the worst case scenario unfortunately. Another possibility, if a merchant is found to exceed the chargeback ratio threshold, is that their account could be cancelled with the bank altogether, which comes with a long list of ramifications. Sounds excessive, but it does happen.

Another possibility, if a merchant is found to exceed the chargeback ratio threshold, is that their account could be cancelled with the bank altogether

Finally, Some Good News

The good news is that there is some context taken into consideration by the banks and card associations. E.g. Small-medium merchants with fewer transactions each month might be given more flexibility than their larger counterparts, or if a merchant has a low-chargeback track record, they may be gifted with more flexibility.

Reduce your Chargeback Ratio

Introducing a tool like Disputify allows you to preemptively track and predict risky customers who are likely to have a negative effect on your chargeback ratio.

Never have to worry about fraudulent customers affecting your ratio again, try Disputify today for free.