Calculate Your Dispute Ratio (And Prevent Chargebacks!)

Alex ForbessChargeback Basics1 Comment

Anything can develop a risk. But the key is to know how much risk is involved, and what actions can you take in order to lower it. Real-time Resolution is a great start to reduce your risks of disputes and chargebacks. Getting some extra advice can help you reduce it even more. This article will teach you how to calculate your dispute ratio and how to conduct a dispute audit. We hope you enjoy what you’ll learn.

Lower Dispute Ratios Mean Higher Chargeback Prevention

Lowering your dispute ratio can lower your chances of receiving a chargeback. You can lower it by embracing automation wherever possible in dispute management.

Automated Dispute Management?

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

Tell Me More.

And we’re not just talking about a Chargeback Response Template that lets you know what evidence is needed for a given dispute. We’re also talking about Alerts that will notify you of incoming disputes and API-enablement that inputs transactional data, order data, and sales data into one, clear response. These tools will prevent a dispute from becoming a chargeback. Which, in turn, will put you in good standing with your acquirer and the affiliated card network. You will also protect your revenue during this process—and that’s always a plus!

What Is A Dispute Ratio?

A dispute ratio is the number of disputes-to-transactions a merchant has received within a given time period. Think of a dispute ratio as a preemptive metric to a chargeback ratio (otherwise known as a chargeback rate). A chargeback ratio helps card networks, issuers and acquirers know whether you’re a high-risk merchant. Anything above 1% will make you too risky to do business. 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.

A dispute ratio is different. There is no golden standard that indicates whether you are a high-risk or a low-risk merchant. Instead, this metric helps you understand your current rate in receiving disputes. You can significantly lower your chargeback ratio if your lower your dispute ratio. There has never been a scenario where a chargeback was initiated without a dispute.

How Can I Calculate My Dispute Ratio?

You can easily use the formula that calculates your chargeback ratio. But instead of chargebacks, you are interested in disputes.

For example, Visa calculates its chargeback ratio by adding the number of chargebacks 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 chargeback ratio in March:

Month

# of Chargebacks

# of Transactions

Formula

Visa Chargeback Ratio

March

23

12,678

(23/12,678)*100

0.18%

Let’s use that same formula to calculate your dispute ratio. The only difference is that you are the number of disputes you received in March. Keep in mind that you are still using the number of transactions you received in March.

Month

# of Disputes

# of Transactions

Formula

Visa Dispute Ratio

March

56

12,678

(56/12,678)*100

0.44%

It is common to receive more disputes than chargebacks. Don’t be alarmed when you see your dispute ratio higher than your chargeback ratio.

But the formula above is sufficient from Visa’s perspective. Let us now calculate your dispute ratio with MasterCard’s formula.

What's a Chargeback Ratio?

RELATED:

Still not sure why card networks use chargeback ratios? This article will explain everything you need to know about this metric. You’ll learn whether it affects your win rate, your standing with card networks and your future as a merchant. Read more.

How Can I Calculate MasterCard’s Dispute Ratio?

MasterCard calculates its chargeback ratio by taking the number of chargebacks you received from the current month. And they divide that by the number of transaction you received from the previous month. Here are some additional mock numbers to calculate MasterCard’s chargeback ratio. 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 Chargebacks

# of Transactions

Formula

MasterCard Chargeback Ratio

February

16

10,500

N/A

N/A

March

23

12,678

(23/10,500)*100

0.22%

Let us now calculate your MasterCard dispute ratio. Remember to replace the number of chargebacks with the number of disputes. And you are still dividing it by the number of transactions from the previous month, which is February.

Month

# of Disputes

# of Transactions

Formula

MasterCard Dispute Ratio

February

200

10,500

N/A

N/A

March

56

12,678

(56/10,500)*100

0.53%

Keep in mind that card networks, issuers and acquirers are focused on calculating your chargeback ratio, not your dispute ratio. That is because chargeback ratios help them determine whether you are too vulnerable or negligible with chargebacks. 

Dispute ratios are your own personal assessment. If anything, this helps you determine how much you in risk of receiving disputes. This does not take into account how many of those dispute actually initiated a chargeback.

What Standard Should I Set For A Dispute Ratio?

You are free to set your own standard. 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 ratio on a month-to-month basis.

A rule of thumb is to follow the card networks’ standard. That means you should initially set your dispute standard at 1%. That means anything above 1% will reveal you are in high-risk of receiving disputes. The goal is to know your dispute ratio and to take necessary action to lower it. That will inevitably lower chargeback ratio. It may even be beneficial to set your dispute ratio standard lower than the chargeback ratio standard.

For example, let’s say Merchant A sets her dispute ratio 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 ratios with Visa’s formula (and 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 ratio:

Month

# of Disputes

# of Transactions

Formula

Visa Dispute Ratio

March

150

13,500

(150/13,500)*100

1.11%

Now she wants to compare her dispute ratio with her chargeback ratio. She received 20 chargebacks in March. Here is her chargeback ratio:

Month

# of Disputes

# of Transactions

Formula

Visa Chargeback Ratio

March

20

13,500

(20/13,500)*100

0.15%

Merchant A did a great job in keeping her chargeback ratio low. But her dispute ratio standard put her at high-risk of receiving disputes. Let’s take a look at Merchant B. Here is his dispute ratio:

Month

# of Disputes

# of Transactions

Formula

Visa Dispute Ratio

March

75

11,111

(75/11,111)*100

0.68%

Now he wants to compare that to his chargeback ratio. Here is his chargeback ratio:

Month

# of Chargebacks

# of Transactions

Formula

Visa Chargeback Ratio

March

60

11,111

(60/11,111)*100

0.54%

Merchant B has a moderate-risk of chargebacks, according to Visa’s standard. And he is almost at high-risk of receiving disputes. His dispute ratio is only 0.05% below his standard. Merchant B will need to review his business proceedings and find the causes of his 75 disputes.

Merchant A and Merchant B clearly had set high standards in their dispute ratios. But that helps them become more vigilant in preventing disputes. Especially before their disputes become chargebacks.

How to Write a Chargeback Response the Right Way

RELATED:

There are other ways to lower your risk of receiving chargebacks. 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 Ratio?

Congratulations! You now know how to calculate your dispute ratio. Now what? What do you do now that your know your dispute ratio 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 ratio. 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.

You may receive the following chargebacks if you do not prevent (or manage) its dispute:

‘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 disputes can initiate the following chargebacks:

‘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 ratio. 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 ratio and chargeback ratio.

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