Chargeback Threshold Ratio: How Many Chargebacks Are Too Many?

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Running a business in today’s world is hard enough. Whatever niche or industry you occupy, everything has its nuances. Recently, a huge number of businesses began to face chargebacks. Sometimes they occur due to misunderstandings between the seller and the buyer. Most often, the problem is that the buyer does not receive his goods within the specified time. 

However, cases of cybercrime have become more frequent. Attackers issue chargebacks simply because their goal is to steal money. This is detrimental to any business, especially small businesses and merchants who do not have much financial backing. 

However, the problem lies not only in the theft of money and frequent refunds but in the fact that this negatively affects the chargeback ratio. 

Last year, various merchants, companies, and stores operating in the e-commerce industry reached $20 billion in losses due to cybercrime. According to the forecasts of various experts, it is expected that in 8 years, the losses volume will reach almost 50 billion dollars. 

Friendly frauds are the most common type of scam merchants encounter today. Three years ago, it was only in the top five most common. 

Businesses don’t just lose huge amounts of money. In addition to all this, this leads to the fact that they begin to have problems with the card networks. Because of this, many businesses can simply close. 

We will talk about why this problem is dangerous for businesses. In addition, we will advise on what preventive measures you can take. 

Chargeback rate meaning 

Each business, as well as the merchant, deals with one of the two international payment systems to conduct transactions. Merchants can choose either Visa or MasterCard, depending on their preferences, as well as favorable business conditions. 

Each of them offers its conditions. In addition, they set certain indicators, called limits, that limit the chargeback rate. With this indication, it is easy to tell whether the number of fraudulent charges is excessive or within the regular range. How many chargebacks are you allowed, then?

The percentage difference between the total number of transactions completed within a month and the overall number of returned payments is represented by this ratio. If this figure is off the charts, then it means that sellers are losing a huge amount of money due to an excessive number of refund requests from buyers. 

Visa limits 

Every seller needs to know about this payment system’s three limit indicators. The following monthly threshold restrictions are listed:

  • Early warning. The ratio is no more than 0.65% and no more than seventy-five refunds;
  • Standard. The ratio is no more than 0.9% and no more than one hundred returned payments;
  • Excessive. The ratio is 1.8% and about a thousand refunds.

To get your ratio, divide the total number of refunds for a given month by the overall volume of payments completed during that same period. For instance, if there were 10,000 operations overall and 80 returns, you would receive 0.8%. You’ll realize that you don’t go above the allowable limit.

Mastercard limits 

This payment system has two limit indicators. Their scoring method is distinct from the previous one, though. You must divide the overall number of refunds in the current month by the entire volume of payments in the prior month to determine your percentage for the current month. As a result, we obtain the following limits:

  • Excessive. You can have from one hundred to two hundred and ninety-nine returns per month and 1.5% to 2.99% of overall transactions; 
  • High excessive. You can have three hundred or more returns per month and 3% or more of overall transactions

In general, if your ratio exceeds 1.5%, then you will have problems. For example, if you had 270 chargebacks and ten thousand transactions, then your ratio would be 2.7%, which is already a red flag.

What is the risk of exceeding the limit? 

Each payment system has its chargeback compliance program. Depending on your odds, if you exceed one of the limits, you will be closely watched. However, this is not the worst. 

In the end, everything can turn out badly for your business. Depending on the conditions, you may experience the following: 

  • Additional fees; 
  • Fines; 
  • Operational restrictions; 
  • Expensive regular checks. 

However, in addition to this, you may also encounter other more serious problems. If this rate does not decrease for a long time, then this will lead to the fact that you will either lose your banking privileges or you will no longer be able to process payments. 

What preventive measures can you follow? 

Chargebacks are, unfortunately, impossible to eliminate. However, you can use simple preventative measures to drastically lower their growth. What you can do is:

Use software 

The chargeback management software, which can significantly streamline your job, will be of the utmost value to you. Such software will track your rates, transactions, and user data, look into payments, examine past transactions, and do much more.

Provide high-quality customer service 

If you don’t want to have any misunderstandings, then you must provide your buyers with all information about both your company and the buying process. Customer service must be top-notch throughout the entire sales process. 

Inform buyers promptly 

Nobody is immune to failure. You understand this very well, but your customers may not be very happy about this. To avoid conflict situations, you need to inform your customers promptly of any delays. This can be done either through a text message, an email, or a phone call. 

Make no mistakes on your part 

Sellers occasionally commit little errors that have tragic repercussions. As a result, you should carefully verify that the data about customers and items match what you say about your company and what you offer.

Conclusion  

Returned payments are risky not simply because they cost you money as the vendor. Additionally, the payment method you utilize can stop believing in you and stop doing business with you. Exceeding your chargeback limit can result in costly charges and may result in you no longer being able to process payments. If you do not want your business to go under, you should take advantage of preventive measures.