What is a Normal Chargeback Rate?
Your Chargeback Rate Will Impact Your Business
Payment card chargebacks were originally introduced as a form of consumer protection. When chargebacks arrived in the 1970s, a high chargeback-to-transaction ratio meant that a merchant regularly provided customers with subpar experiences, or even worse, committed merchant fraud.
This ratio—commonly referred to as a chargeback rate—remains an important indicator of merchant performance. However, the process does not account for the realities of eCommerce and other changes over the last four decades.
Why Do Chargeback Rates Matter?
Calculating your chargeback rate is important because of the chargeback thresholds created by card schemes like Visa and Mastercard.
Chargeback thresholds are like chargeback high-water marks; merchants who come close to the threshold can be marked as a risk, which can result in an acquirer canceling their merchant account. This is on-top of other negative consequences associated with chargebacks, including lose sales revenue, lost merchandise, and painful chargeback fees.
Each card scheme establishes their own threshold, and their can be variables to consider such as location, industry, or product category. As a rule of thumb, though, anything above a monthly chargeback rate of 1% of total transactions is considered high risk.
What is a “Safe” Chargeback Rate?
Calculating your chargeback rate is straightforward: simply take your total chargebacks per month, then divide that number by your total transactions. How do you determine if your chargeback rate is “safe,” though? In truth…you can’t.
There is no such thing as a “safe” chargeback ratio for many different reasons:
- Many acquirers will cancel your account before you breach the 1% chargeback rate.
- Different card schemes have different ways of calculating your monthly chargeback rate.
- Factors like average transaction and conversion will affect your chargeback rate.
- Some product categories and business models are judged by different standards.
Of course, a high chargeback rate doesn’t necessarily mean your business is doomed. Merchants branded as high-risk can enter chargeback monitoring programs administered by the card schemes. This is not ideal; these programs come with high fees, tighter restrictions, and more limitations on how your business can operate.
You want to avoid the added costs and burdens of high-risk processing. That’s why the best solution is to keep your chargeback rate as low as possible.
Adding Insult to Injury
The fact that most chargebacks are friendly fraud is the icing on the cake. Your business might be jeopardized by customers who abuse chargebacks to get something for free. Even if you dispute these chargebacks and win, they still count against you in calculating your chargeback rate. That’s why the best method to protect your business and ensure sustainability is to prevent chargebacks from happening.
This a two-part strategy. You need to apply the right tools and strategies to intercept and prevent chargebacks resulting from errors and criminal fraud, while also disputing friendly fraud chargebacks. Over time, engaging in representment will entice issuers and card schemes to conduct more due diligence in filing chargebacks against you, reducing your rates long-term.