Your chargeback rate can enhance or harm your business. It'll depend on if your rate is near the 'high-risk merchant' benchmark, which affects how many credit card processing companies will work with you. It even impacts the charges you receive from these companies and will get worse if you don't manage chargebacks well.
One solution is equipping merchants with real-time dispute resolution. That's one of several features the Sift Dispute Management product provides to merchants. It’s also wise to know 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 chargeback rates. As a result, it can cause headaches for merchants who have a chargeback rate of over 1%. This post explains how to calculate your chargeback rate, helping you compare yours with the average rates of the businesses below.
How to 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. Learn more about the chargeback ratio here.
The industry-wide chargeback ratio maximum
A 1% chargeback rate is the industry-standard maximum, which 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 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 comes to chargeback rates and associated fees.
Chargeback ratios that are “normal” aren’t always universal
The case studies we retrieved came from merchant account forums and have been anonymized.
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%.
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.
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 of 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 informational products, including financial self-help ebooks. This person was processing fewer payments, just several hundred per month. And that's despite receiving an 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 and stringently policed individual chargebacks. He even had built-in security measures at the checkout, was active in customer engagement, and employed inbound marketing.
This good rate allowed him to shop around for payment processors. There was even room for negotiating a better per-occurrence rate. This was a much better outcome than what the gaming company 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 extreme 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, 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 Sift Dispute Management solution calculates your chargeback ratio and dispute ratio. It's one of the many perks of automated dispute management.
Sift Dispute Management 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, as time is a major factor in dispute management. That's why Sift offers an automated response generator, so you can submit your responses quicker than before. Another automated feature we offer is alerts, which notify you when a dispute is filed, so 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, depending on the software.
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 reason 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. Your marketing should be engaging, but also realistic in its description and benefits. This should be consistent across your marketing strategies, including your website, social media, online product descriptions, and 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.