How Visa and MasterCard Manage Excessive Chargeback Levels
Visa and MasterCard monitor chargeback levels on a monthly basis. Processors are required to calculate and report the chargeback-to-transaction ratios (CTR) for each of their merchants. If a merchant reaches excessive chargeback levels, the processor is required to take remedial actions.
Although there are some minor technical differences, Visa and MasterCard consider a merchant to have reached excessive chargeback levels, if in each of two consecutive calendar months the merchant has a minimum CTR of 100 basis points (one percent) and at least 50 chargebacks in each month. The excessive chargeback designation remains in place until the CTR is kept under 100 basis points for two consecutive months.
Merchants should understand that Visa and MasterCard assess their processors fees for each report submitted for a merchant with excessive chargeback levels, providing them with yet another incentive to be tough on offenders. These fees can be substantial. For example, MasterCard assesses processors a reporting fee of $300 for each excessive chargeback merchant (ECM) report submitted.
In addition to the report fees, processors can be assessed issuer reimbursement fees and violation assessments for excessive chargebacks. To give you an idea of what these fees may look like, let’s take a look at how MasterCard calculates assessment fees for its excessive chargeback program.
MasterCard excessive chargeback program assessment calculation:
- Calculate the CTR for each calendar month that the ECM exceeded a CTR of 100 basis points.
- From the total number of chargebacks, subtract the number of chargebacks that account for the first 100 basis points of the CTR. The result is the number of chargebacks above the threshold of 100 basis points.
- Multiply the result from step 2 by $25. This is the issuer reimbursement.
- Adjust the result in step 3 to reflect the extent that the processor has exceeded the 100 basis points threshold by multiplying the value in step 3 by the CTR. Divide this result by 100. This amount is the violation assessment.
For example, let’s say that a processor has acquired sales transactions and chargebacks over a six-month period in the amounts shown in the table below:
|
Month |
January |
February |
March |
April |
May |
June |
July |
|
Sales Transaction |
95,665 |
95,460 |
95,561 |
95,867 |
95,255 |
95,889 |
95,758 |
|
Chargebacks |
720 |
1,003 |
1,301 |
1,256 |
1,175 |
923 |
824 |
|
CTR in basis points |
- |
105 |
136 |
131 |
123 |
97 |
86 |
At the end of July, the merchant was no longer an ECM, as its CTR was below 100 basis points for two consecutive months. MasterCard calculates assessments and issuer reimbursements for each ECM month (February through July). The assessment for April, (using March sales transactions and April chargeback volumes) is calculated as follows:
- The CTR = April chargebacks / March sales transactions = 1,256 / 95,561 = 0.01314 or 131 basis points (rounded).
- The number of chargebacks in excess of the 100 basis points is determined by subtracting 1% of the March sales transactions from the number of April chargebacks. One percent of the March sales transactions (95,561 x 0.01) is 956. 1256 – 956 = 300 chargebacks.
- The issuer reimbursement for April is 300 x $25 = $7,500.
- The violation assessment is ($7,500 x 131) / 100 or 985,500 / 100 = $9,825.
So for each ECM month, the issuer reimbursement fees and assessments for the processor are as follows:
|
Month |
Issuer Reimbursement |
Assessment |
Total |
| February |
$1,150 |
$1,208 |
$2,358 |
| March |
$8,650 |
$11,764 |
$20,414 |
| April |
$7,500 |
$9,825 |
$17,325 |
| May |
$5,400 |
$6,642 |
$12,042 |
| June |
$0 |
$0 |
$0 |
| July |
$0 |
$0 |
$0 |
| Total |
$22,700 |
$29,439 |
$52,139 |
As you see, processors have a real good incentive to crack down hard on high chargeback levels, which explains why they will often take drastic measures long before a merchant’s chargeback rate comes even close to one percent. There is not much merchants can do about it and anyway, it is in your own best interest to try and keep chargebacks to a minimum.
Learn how to minimize chargebacks and fraud
Learn how to minimize chargebacks and reduce your processing costs. The Chargeback Management kit contains a video and an e-book:
- E-Book – Chargeback Manual (40 pages).
- Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
The penalties being levied by processors indicate the seriousness of the problem. 1% was picked as a tolerable error rate, but it would really be better for everyone…merchants, processors, consumers…if chargebacks went to near zero.
How could this be accomplished?
There are two types of chargebacks. Legitimate chargebacks, where the consumer got charged for something they never purchased and fraudulent chargebacks, where the consumer did purchase the goods but doesn’t remember doing so or is consciously committing fraud.
Legitimate chargebacks can only be addressed by a focused continuous improvement program. A Pareto chart of the types and causes of legitimate chargebacks needs to be developed and then process improvements and error-proofing steps need to be put in place to drive those errors out of the system. Here the processor penalties can motivate action: when the cost of paying the penalty exceeds the cost of fixing the problem, merchants are likely to step up and act.
But if a merchant has good processes in place, the processor penalties for fraudulent claims are less an incentive and more just salt in the wound. For the fraudulent chargebacks, a different approach is needed: we need to put systems in place to decrease the likelihood that the consumer will commit fraud.
We don’t have to get all Freudian about consumers motivations to steal. We can just notice that chargebacks are dramatically lower in “card present” vs. “card not present” situations and try to make the card not present situations look more like the card present ones.
SecureCall allows merchants to “take” the credit card information (number, expiration date and CVV code) without the call center agent ever seeing or hearing that information. The consumers are entering their own numbers directly into the CRM through their phone. This is just like swiping the card in the “card present” situation. Before the purchase is submitted, the charges are presented back to the consumer, who has to authorize the purchase with a voice signature, by stating their name. This is the equivalent of having a consumer click “yes” on the card reader to authorize a charge and then signing their name.
The final deterrent to fraudulent consumer chargebacks occurs when the customer gets a system generated email which includes a link to their voice authorization for the purchase.
Consumers using this system know that winning a chargeback is highly unlikely. The agent could not have misused a CC number…he/she never had it. The purchase can not go through without a verbal OK from the consumer, and the consumer can clearly see the company has a record of it.
Penalties get one’s attention about a problem. But only continuous improvement programs and technology based error proofing strategies will fix that problem.
Dennis Adsit, Ph.D.
KomBea Corporation
If V/M would stop being so one sided with its chargeback regulations, and adopt a similar policy to Amex. Customers wouldn’t be filing fraudulent chargebacks as often. Thus reducing the chargeback ratio dramatically.
Merchants continuously get burned by V/M regulations, winning the first chargeback dispute then losing to a second or third.
The consumer is becoming hip to the game which is the customer is always right even when they are wrong. Until V/M ammends their regulations to be more fair to all, this game will continue to play out as it is now.
Ecommerce is a prime example. Signature on delivery is being circumvented by the delivery companies allowing anyone in the household to sign for delivery. Leaving the business owner defenseless in a dispute.
V/M regulations have not caught up to the technology era that we live in, and too many loopholes are not being filled. There is too much grey area and not enough black and white answers.