Chargeback Ratios… the Unwritten Rules

While Visa and MasterCard don’t approve merchant accounts, they do hold all the cards – pardon the pun – when it comes to setting chargeback ratios.

Chargeback ratios are calculated by dividing your monthly sales by the number of chargebacks or the total dollar amount of the total chargebacks registered in any given month – or both. You can take proactive steps towards facilitating approval of your merchant account and receiving a fair chargeback ratio – which in general is 1%.

Make sure that you provide your bank with as much detailed and specific information as possible, including:

  • How long your company has been in business and what you sell
  • If you have processed credit cards in the past
  • The dollar amount you expect to process per month

If you sell “high risk” products or services like online gambling or adult content, don’t hide it. The bank will find out and could shut down your account if you were dishonest during the application process.

And here’s something else to consider – in some cases, returns are weighted into standard chargeback ratios. Visa and MasterCard have two separate scores for determining your risk potential. One score is based on chargebacks and the other is based on returns. However, many processors combine these two scores for risk assessment.

Unfortunately, combining these two scores could get your merchant account shut down, hit with fines, or you could end up on the MATCH File. Why am I telling you this?

Many merchants consider returns as a customer service issue – it is par for the course. You want your customers to be happy, so if they’re dissatisfied with a purchase, it makes sense to offer a fair return policy. The alternative sets you up for potential chargebacks (e.g., if you don’t approve the return, customers will dispute the charge with their bank anyway).

From the bank’s point of view, you – the merchant – dropped the ball somewhere. Banks are aware that oftentimes customers simply change their mind and don’t view returns as seriously as chargebacks. But you still need to keep a close eye on your returns.

If the number of returns is alarming, processors will notice. With every return there’s a chance that you don’t have enough money available in your account. This scares processors. When they approve your merchant account, processors become financially liable for every penny they approve. If they processed $20,000 and it charges back, the processor gets the bill if you can’t pay. Processors work with hundreds, if not thousands, of companies, meaning they process millions of dollars worth of transactions – that’s a lot of money to cover if their merchants can’t come up with the money.

So guess what this means? Since returns are often weighed into the standard chargeback ratio, they can cause your business to reach the 1% mark. If you’re a small business, 1% doesn’t leave you with much wiggle room. Fortunately returns are usually weighted so that several returns equal one chargeback – but returns tend to be more common than chargebacks.

I’m not telling you this to alarm you. If you monitor your returns and amend your return policy if necessary, you can head off trouble before it hurts your bottom line. Read my posts on the chargeback process, how chargebacks work, and how to prevent chargebacks.