Your chargeback rate can enhance or diminish your business. It'll depend if your rate is near the 'high-risk merchant' benchmark. That affects how many credit card processing companies will work with you. It even affects the charges you receive from these companies. In addition, it gets worse if you don't manage chargebacks well.
One solution is equipping merchants for real-time dispute resolution. That's one of several features the Chargeback App provides to merchants. Another solution is knowing how to analyze your data. You need to check if your chargeback rate is up to the standards of credit card processing companies. You'll face problems if your rate is over 1% of monthly transactions.
Credit card processing companies are becoming more strict with the chargeback rates. As a result, it causes headaches for merchants who have a chargeback rate of over 1%. This post explains how to calculate your chargeback rate. You'll be able to compare it with the average rates with the businesses below.
But First, Find Your Chargeback Ratio
You can calculate your chargeback rate by using a simple math equation. This equation is called the chargeback-to-transaction ratio. Basically, you divide your total chargebacks by the total number of transactions within a monthly period. That gives you your chargeback rate.
Let's say you had 100 chargebacks issued one month. But you had 10,000 transactions that same month or the next month. MasterCard calculates one month divided by the next month, while Visa calculates chargebacks divided by transactions from the same month. You’d take the 100 chargebacks divided by the 10,000 transactions and get a .01 ratio. You can learn more about the chargeback ratio right here.
The Industry-Wide Maximum
A 1% chargeback rate is the industry-standard maximum. That equates to one chargeback per 100 successful orders. And that 1% is usually the absolute maximum allowed for direct merchant accounts. Those accounts deal directly with the big boys like Visa or MasterCard. You can be in trouble if you’re caught with a chargeback rate that’s higher than 1%.
Credit card companies are looking at proportionate rates. And it sits at or below 1% for a specific timeframe, which is one month. Anything that equates to 1% or greater will dub you as a 'high-risk merchant.
As a result, merchants are commonly left with two questions:
- Your chargeback rate is floating into the danger zone. What can you expect when dealing with various credit card companies?
- Is this 1% chargeback rate a hard and fast rule. In other words, will you be immediately penalized no matter what you’re selling?
The answers to both questions are complicated. Let’s look at a few examples, so you can get a better idea of what’s “normal” when it come to chargeback rates. And its associated fees. We can't forget that.
What’s “Normal” Isn’t Always Universal
We won’t name any companies here. Courtesy of privacy is our unofficial motto. The case studies we retrieved came from merchant account forums. It wouldn’t be fair to call them out.
Subscription-Based Gaming Website
Average Chargeback Rate: 0.8%
The first company is an international subscription-based gaming website. It pushes monthly subscriptions to various countries around the world. The sales team reached out in a support forum because they were catching flak from their payment processors. Why? Because their chargeback rate periodically fluctuated as high as 2%.
Basically, the company was repeatedly warned that if they didn’t get their rates under control, the credit card company said they would face penalty fees and higher fees per chargeback occurrence. We'll rely on our imagine to understand the experience of penalty fees.
The company tried their best to keep their rate down. And they managed to reach a “safe” 0.8% for several months. But instances of credit card fraud spiked their chargebacks multiple times per year. They ended up processing far too many chargebacks that were part their monthly transactions. Sometimes they had an excess of 10,000 transactions. Now, payment processors dubbed them as high-risk. And the company was stuck with processing payments and chargebacks. In some cases, they were faced with more than 200 chargebacks per month!
Informational Products – Financial Self-Help Resources
Average Chargeback Rate: 0.5%
The second example is a sole proprietorship in which the owner/creator sold info products. An example would be a person selling financial self-help eBooks and the like. This person was processing fewer payments per month. It was just several hundred per month. And that's despite receiving a average draw per sale of (slightly) over $100. He was able to keep his chargeback rate well below 1%. In fact, he boasted that his rate rarely peaked above half a percent.
He pulled this off because he kept a close eye on things. Some examples include stringent policing of individual chargebacks. He even had built-in security measures at the checkout. And he was active in customer engagement. One fun fact was that he inherently applied inbound marketing. In other words, he effectively turned the wheels for his business.
This good rate allowed him to shop around for payment processors. There was even room for negotiating a better per-occurrence rate. That's a much better outcome than what the gaming company had experienced.
Factors Considered Alongside Chargeback Ratio
Your overall chargeback rate is important. But there are several other factors you should know. One is your overall number of transactions per month. Generally, payment processors (though not necessarily direct processors) will give smaller businesses some leeway with the 1% rule. It would be cruel to cancel your account if you received three chargebacks and 200 payments per month. They'll simply view that as one unlucky period.
What You Can Do About “Unfair” Chargeback Policies
Third-party processors generally are the better option for the vast majority of online and offline merchants. That's compared to direct merchant accounts. These third-parties give more leeway and room to buffer. Some processors allow merchants to put down deposits in order to create this buffer. Therefore, it'll temporarily provide room to improve their chargeback rate.
You can also seek out high-risk merchant accounts with foreign processing companies. But it will cost you. The average processing rates for these companies are as much as 7% to 10% per swipe. Some are even higher. You should sit down and figure out if paying more is the most cost-efficient move for your business. An even better option for you may be to decrease your chargebacks in the first place.
Know Your Ratios In Real-Time
The Chargeback App calculates your chargeback ratio and dispute ratio. It's one of many perks from automated dispute management.Tell me more.
We can help you manage the chargeback process in order to recover lost revenue. It'll keep your chargeback rate in check while saving time for other goals. Time is a factor in dispute management. That's why we offer an automated response generator, so that'll you submit your responses quicker than before. Another automated feature we offer is Chargeback Alerts. You'll be notified when a dispute was filed. And you can take the necessary action to resolve it. You'll be able to refund the cardholder and disprove a dispute all in one place. Either way, you'll have a better opportunity to put revenue back into your bank account.
The average recovered revenue divided by recovery fees will give you an ROI between 2,000 and 4,500 percent. It depends on the software. We can help with that.
How To Decrease Your Chargeback Ratio
The easiest way to decrease your chargeback rates is with iron-clad fraud prevention methods. These are available through third-party payment processors. Some examples include CVV and AVS verification and matching shipping/billing addresses. Most even offer phone verification to your checkout process.
Alternatively, chargeback prevention may be as simple as revamping your terms of service and return policy. You should make it transparent and more user-friendly for cardholders. One common reasons for non-fraudulent chargebacks is buyer’s remorse. It may be because the product wasn’t what buyers expected. Or they simply regret the purchase after clicking “buy now.” Give your customers a way to learn how they can return products for full credit. They’ll likely take you up on the offer. It'll be a lot easier than having the credit card company involved in the process.
Lastly, ensure that your products are as good as you say they are. Basically, keep your marketing engaging. But be realistic of its description and benefits. This should be spread across and your marketing strategies. This includes your website, social media posts, online product descriptions and in-store signage. Your products should be described clearly and accurately. You don’t want your customers to feel like they’ve received a bait and switch.