Chargebacks Explained

What Is A Chargeback?

A chargeback is an event where a merchant is forced to return funds received from a credit card payment back to the customer when the customer disputes the charge on his credit card statement with his bank.

It's important to note that, even if the merchant wins the dispute and is credited back the funds, he's already lost! The simple fact that the customer disputed the charge will count as a chargeback with the credit card processor and an excessive volume of chargebacks can result in having a merchant account terminated, or worse. The only real consolation to winning a chargeback dispute is that the merchant isn't out the cost of the sale in addition to the negative impact of the chargeback!

Whatever business you are in, you're bound to have some level of chargebacks, however, it's always good practice to do everything reasonable to keep chargebacks to a minimum.

See our list of Chargeback Reason Codes for MasterCard, Visa, Amex, and Discover to understand the causes of chargebacks and how they are reported with the different credit card companies.

How Many Chargebacks Is Too Many?

While there is no one short, easy answer to how many chargebacks are too many, there are some general points to consider. First is whether or not you're working with a high risk merchant account provider.

Any industry that is prone to high rates of chargebacks is considered to be a high risk industry and the primary difference between a low risk merchant provider and a high risk merchant provider is their tolerance for chargebacks.

While considerable discretion is in the hands of the merchant processor, even if the processor doesn't want to terminate your merchant account, if chargeback levels are high enough for a long enough period, they may not have any choice.

Visa Merchant Chargeback Monitoring Program (MCMP)

Visa has a Merchant Chargeback Monitoring Program (MCMP). To be placed in the MCMP, a merchants must have 100 or more transactions, 100 or more chargebacks and a 1% or greater chargeback ratio. When a merchant is placed in the MCMP program, Visa immediately notifies the merchant's bank who then notifies the acquirer and/or the merchant. The bank must submit a chargeback reduction plan back to Visa within ten days or face possible fines of $5,000 in the first month and $10,000 in the second month.

Merchants placed in the MCMP program have three months to reduce chargebacks before significant chargeback fines kick in. During the first three months, there is an initial notice for the first trigger month and a two-month resolution period. Beginning in the third month a merchant is in the program, fines of $50 per chargeback are assessed, in month six fines jump to $100 per chargeback, and in months eight and nine, in addition to the $100 per chargeback fine, the merchant is fined a $25,000 per month review fee! If the merchant exceeds the program's limits for more than nine months, the merchant may be forever prohibited from accepting Visa transactions.

Visa High-Risk Chargeback Monitoring Program (HRCMP)

The Visa High-Risk Chargeback Monitoring Program (HRCMP) is specfically for merchants with a merchant category code of 5962, 5966, 5967 or 7995. This program is similar to the MCMP only the fines and review fees are higher and start in the first month a merchant is placed in the program with NO resolution period.

Fines of $100 per chargeback begin in the first month and increase to $150 in the fourth month. Review Fees of $5,000 are assessed in the first month and $25,000 in the sixth month. Visa reserves the right to disqualify high risk merchants after the sixth month. Additionally, acquirers who make the mistake of boarding high-risk merchants without proper documentation are subject a $25,000 per-merchant fine.

In both the MCMP and the HRCMP, merchants remain in the monitoring program until chargebacks are under the threshold for three consecutive months.

Risk Identification Service (RIS) & Excessive Chargeback Program (ECP)

Visa also monitors reported fraud transactions through its Risk Identification Service (RIS) since levels of chargebacks are often directly proportional to the levels of reported fraud.

The RIS program identifies merchants with more than $25,000 in reported fraud, more than 100 fraud transactions, and fraud transactions of 1 percent or more. The second month in this program, a fraud reduction plan needs to be submitted with follow-up plans required throughout the term of the program. Additionally, beginning in month five of the program, the merchant becomes subject to fines of $10,000 to $100,000 per month and may be disqualified from accepting Visa at month ten.

MasterCard's Excessive Chargeback Program (ECP) applies to all merchants with no distinction made between high risk and low risk merchants. The ECP has two tiers, Chargeback Monitored Merchants (CMMs) and Excessive Chargeback Merchants (ECMs).

To be placed in the CMM program, in a single calendar month a merchant must have 50 or more chargbacks and a 0.50% or greater chargeback to transaction ratio. This ratio is calculated by dividing the number of chargebacks in a given month by the number of transactions in the preceding month. The monthly merchant fines are $50 per merchant per month.

The second classification, ECM, is more severe. It is applied to merchants who, in a single calendar month have at least 50 chargebacks and a 1.0% or greater chargeback to transaction ratio. .

A $500 reporting fee is assessed each month a merchant triggers the ECM. MasterCard also assesses an issuer recovery fine and a violation fine. MasterCard's fee schedule is a bit more complex. Like Visa, MasterCard requires a chargeback reduction plan with fees escalating to $1,000 per day for late submittal.

Unlike Visa, MasterCard relies on self-reporting by the acquirer. Because MasterCard reserves the right to audit, acquirers would be shortsighted if they failed to report their violators.

Merchants are classified as an ECM until they drop below the threshold for two consecutive months.

Visa and MasterCard enforce these rules rigorously, and the credit card processors know this. Protecting their brands is more important to Visa & MasterCard than any individual merchant and they apply these rules consistently regardless of the size of the merchant or perceived level of fairness.

The reality is that most merchants will never face these fines because most processors/acquirers will terminate the merchant account as soon as they recognize Visa threshholds are about to be exceeded.

CyoGate offers numerous tools and techniques to keep chargeback ratios under control including full chargeback prevention services. If you need help managing chargebacks, please contact us today!

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