Calculate Your Dispute Rate (And Protect Revenue!)

Alex ForbessChargeback Basics2 Comments

There is a lot of risk involved in commerce, let alone ecommerce. That’s why it it critical to know where the risk originates and what actions to take in order to mitigate it.

Real-time Resolution is a great start to lowering the risks involved with disputes. But providing additional information is the next-best solution. This post will teach you how to calculate your dispute rate and how to conduct a dispute audit. Both tools compliment one another by A.) knowing how much you are at risk of receiving disputes; and B.) knowing how to further analyze this risk and create effective strategies to prevent revenue loss.

Lower Dispute Rate Shows Better Health

The dispute process is becoming more automated among card networks, but most merchants are still managing disputes with manually-driven processes. This is why errors such as duplicate data and invalid formatting weaken a merchant’s response document.

Automated Dispute Management?

That's right. You can spend less time on responses and more time on your business.

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One solution to lowering your dispute rate is to have a more documented workflow. Some examples include Chargeback Response Templates that are formatted in accordance to the card networks’ rules. That way, merchants will know exactly what compelling evidence to include in their response and how to write their rebuttal. Let us first explain the dispute rate before we get to more solutions and dispute audit techniques!

What Is A Dispute Rate?

A dispute rate is the number of disputes-to-transactions a merchant has received within a given time period. A dispute rate helps card networks, issuers and acquirers know whether you are a high-risk merchant. A rate above (or even close to) 1% will put you at risk of being a ‘high-risk merchant.’

The consequences can vary. For example, MasterCard may place you on its MATCH list and Visa force acquirers to take action from the Visa Global Acquirer Risk Standards.

How Can I Calculate My Dispute Rate?

The dispute rate is the universal benchmark that card networks use, but two of them calculate it differently For example, Visa calculates their dispute rate by adding the number of disputes you received from the current month. And they divide that number by the number of transactions you received from the current month. Here are some mock numbers that will help you calculate a dispute rate in March:

Month

# of Disputes

# of Transactions

Formula

Visa Dispute Rate

March

56

12,678

(56/12,678)*100

0.44%

This shows that a merchant with these numbers are not a dispute risk. But a dispute rate of 0.44% still demands further investigation. (We will talk more about that later.)

MasterCard calculates their dispute rate in a different way.

How Can I Calculate MasterCard’s Dispute Rate?

MasterCard calculates its dispute rate by taking the number of disputes you received from the current month. And they divide that by the number of transactions you received from the previous month. Here are some additional mock numbers to calculate MasterCard’s dispute rate. It has the same numbers you received in March. But now you need to take into account the numbers you received in February.

Month

# of Disputes

# of Transactions

Formula

MasterCard Dispute Rate

February

200

10,500

N/A

N/A

March

56

12,678

(56/10,500)*100

0.53%

It seems MasterCard views you more as a dispute risk when compared to Visa. But you don’t pose too much of a risk for them to take disciplinary action.

While it is important to keep in mind how the card networks set the standard for a dispute rate, it is also important for you to set a personal standard for this metric. Surely, you have drafted some goals to lower your dispute rate. Here are some additional tips on how to set a standard in ranking yourself with this metric.

What Standard Should I Set For A Dispute Rate?

You are free to set your own standard. Just remember that whatever standard you choose, please stick to it. Do not raise or lower your standard without a legitimate reason. You want to remain consistent when you compare and analyze your dispute rate on a month-to-month basis. (Or even on a yearly basis).

It may even be beneficial to set your dispute rate standard lower than the standard set by the card networks. For example, let’s say Merchant A sets her dispute rate standard at 0.5%. And Merchant B sets his standard at 0.75%. Both merchants want to know if they are at high-risk of receiving disputes.

Merchant A and Merchant B decide to calculate their dispute rates with Visa’s formula. (It is recommended to also calculate it with MasterCard’s formula.)

Merchant A counted the number of disputes and transactions she received in March. Here is her dispute rate:

Month

# of Disputes

# of Transactions

Formula

Visa Dispute Rate

March

150

13,500

(150/13,500)*100

1.11%

Merchant A is well above her personal standard for a dispute rate. She is 0.61% above her standard and 0.11% above Visa’s standard. In short, she will most likely be labeled as a high-risk merchant.

Let us take a look at Merchant B. Here is his dispute rate:

Month

# of Disputes

# of Transactions

Formula

Visa Dispute Rate

March

75

11,111

(75/11,111)*100

0.68%

Merchant B  has a moderate risk of receiving disputes, according to Visa’s standard. But he managed to keep his dispute rate below his personal standard. below his standard. This is a great sign, but he will still to find the causes of those 75 disputes.

How to Write a Chargeback Response the Right Way

RELATED:

There are other ways to lower your risk of receiving disputes. One of them is writing the right kind of response. Who would’ve thought the pen (along with some evidence and a well-organized table of contents) is mightier than the sword? Read More.

What Happens Now That I Know My Dispute Rate?

Congratulations! You now know how to calculate your dispute rate. Now what? What do you do now that your know your dispute rate is, let’s say, 0.68%? You will need to conduct a dispute audit and find the root of your problem.

What Is A Dispute Audit?

A dispute audit is an audit that helps you identify business proceedings that provokes disputes. You will able to know what proceedings you should audit by the inquiries and reason codes that belong to said disputes.

How Can I Save Money?

Conduct this audit in-house. Choose the supervisors, managers and employees who do a great job in assessing deficiencies within workflows.

How Can I Save Time?

Make this a group effort. Don’t let decision-making be consolidated to one or two people. The goal of the dispute audit is to understand why these disputes are occurring, and what actions should you take to lower your dispute rate. It may be beneficial to invite people outside of a department or team to uncover why you are receiving disputes.

Can You Describe a Dispute Audit in Motion?

You instruct an analyst to perform a content analysis on the your disputes. It turns out 60% of your disputes were filed as consumer disputes. Another 30% were filed as authorization disputes and the final 10% were filed as processing error disputes.

Your analyst put in extra effort and categorized each dispute. Most of your consumer disputes were mainly categorized as ‘Not As Described and/or Defective’ or ‘Misrepresented’. Your authorization disputes were categorized as ‘No Authorization’ reason codes, and your processing error disputes were categorized as ‘Incorrect Charge Amount.’

You then present the analyst’s findings to the heads of marketing and product development in order to find the causes of ‘Not As Described and/or Defective’ and ‘Misrepresented’ disputes. You also do the same thing to the department (or team) responsible for payment processing.

How Should I Frame My Dispute Audit Objectives?

Your marketing and product development teams should focus on achieving an objective similar to the one below. You may also have your logistics involved if there are ‘Defective’ disputes:

Problem: Your business is receiving disputes that claim your products are ‘not as described’, ‘defective’, and/or ‘misrepresented’.

Marketing Objective: Review the text and images of the dispute products. Find out whether there is one person that created said content or if there are several people who are provoking this dispute.

Product Development Objective: Perform inventory checks and A/B tests in order to identify defective products. Take necessary action to fix the deficiency.

Logistics Objective: Assess how the disputed products are handled, packaged and delivered to customers. Inform the product development team if the products are found to be defective prior to shipping.

The department or team that handles payment processing should create an objective similar to this one:

Problem: Your business is receiving disputes that claim you are authorizing transactions without the customer’s permission. You may be also charging them the wrong amount.

Objective: Make sure all POS terminals, payment gateways and processors are properly authorizing and processing transactions. Make sure your systems are up-to-date. Also, make sure that your API-enablement is properly retrieving transactional data that is agreed upon during a transaction.

Here are some reason codes that may be responsible for consumer disputes:

‘Not As Described and/or Defective’ and ‘Misrepresentation’

American Express

Discover

MasterCard

Visa

C31 Goods/Services Not As Described

RM Cardholder Disputes Quality of Goods or Services

4853 Cardholder Dispute

13.3 Not As Described or Defective Merchandise/Services

C32 Goods/Services Damaged or Defective

13.5 Misrepresentation

No Authorization reason codes can issue the following disputes:

‘No Authorization’

American Express

Discover

MasterCard

Visa

A02 No Valid Authorization

AT Authorization Noncompliance

4808 Authorization-Related Chargeback

11.3 No Authorization

And Incorrect Charge Amount disputes can initiate the following chargebacks:

‘Incorrect Charge Amount’

American Express

Discover

MasterCard

Visa

P05 Incorrect Charge Amount

DC Dispute Compliance

4853 Cardholder Dispute

12.5 Incorrect Amount

You won’t have to worry about these reason codes as long as you take action to lower your dispute rate. Feel free to learn more tips from the articles below or by visiting our blog. You can also contact us and request a demo if you want to know how Automated Dispute Management and Real-time Resolution can help lower your dispute rate.

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