How Visa and MasterCard Manage Excessive Chargeback Levels

How Visa and MasterCard Manage Excessive Chargeback Levels


Visa and MasterCard monitor chargeback levels on a monthly basis. Their acquirers — the banks which maintain direct processing relationships with the merchants — 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 acquirer is required to take remedial actions to bring those down.


Crucially, acquirers pay heavy fines for each merchant deemed to have reached excessive chargeback levels, which makes them extremely sensitive toward anything remotely approaching such ratios. In practice, this attitude means that an acquirer is much more likely to terminate a merchant account, which is approaching “excessive” levels than it is to start working with the merchant toward bringing those levels down, as Visa and MasterCard suggest that they do. So, needless to say, “excessive” is a very bad word indeed when it is applied to chargebacks. Let’s take a look at how the whole process works.

Getting the Terms Right


Here is what the terms used in the Excessive Chargeback Program (ECP) mean:

  • The chargeback-to-transaction ratio (CTR) is the number of chargebacks received by a given acquirer for a merchant in a calendar month, divided by the number of that merchant’s sales transactions in the preceding month. The transaction amount is not considered for chargeback purposes, it is the number that counts. So, if you had processed 1,000 transactions in the month of January and received 5 chargebacks in February, your CTR would be 0.5 percent (50 basis points).
  • A Chargeback-Monitored Merchant (CMM) is one whose CTR is greater than 50 basis points and who has at least 50 chargebacks in a calendar month.
  • An Excessive Chargeback Merchant (ECM) is one who, in each of two consecutive calendar months (called the “trigger months”), has had a minimum CTR of 100 basis points and at least 50 chargebacks in each of these months. The ECM designation is maintained until the the merchant’s CTR falls below 100 basis points and remains there for two consecutive months.
  • The ECM Claim Period begins on the first day of the first trigger month and ends when the merchant no longer is an ECM, as defined above.


Now let’s take a look at how the reporting process works.

Chargeback-Monitored Merchant Reporting Requirements


Each calendar month, your acquirer submits a separate CMM report for each of its merchants which qualify as a CMM for the previous calendar month. When determining if it is required to submit a CMM report for a given merchant, the acquirer calculates the CTR as explained above.


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 acquirers a reporting fee of $50 for each CMM report submitted. The CMM report contains the following information about the merchant:

  • Name and location of the CMM.
  • Calendar month of CMM qualification being reported.
  • The CMM’s CTR for the reported calendar month.
  • The merchant category code (MCC) assigned to the CMM and a description of the nature of the CMM’s business.
  • The number and gross dollar volume (GDV) of the CMM’s sales transactions for the reported month and for the preceding month.
  • The number and GDV of chargebacks of the CMM’s sales transactions for the reported month.


And just so that you get a sense of why banks take those reports seriously, consider that if an acquirers fails to submit to MasterCard a CMM report within the specified time frame, MasterCard can fine them for up to $5,000 per month for each month that the CMM report is overdue.

Excessive Chargeback Merchant Reporting Requirements


The acquirer is required to submit a separate ECM report for each of its ECMs (instead of a CMM report) within 30 days of the end of the second trigger month (see definition above) and on a monthly basis thereafter, until that ECM’s CTR falls under 100 basis points and remains there for two months in a row. The acquirer is also required to provide a copy of the ECM report and the Excessive Chargeback Program Standards to each ECM merchant. MasterCard’s reporting fee is $300 for each ECM report submitted.


Each ECM includes all of the information required for the CMM report (see above) and the following additional information:

  • A description of the acquirer’s chargeback controls in place for monitoring the ECM’s activities.
  • An examination of the practices that caused the ECM to be in violation of the ECP Standard.
  • An acquirer action plan for reducing the ECM’s CTR.
  • An electronic file with the transaction details for each chargeback received by the acquirer for the ECM in the calendar month.


So all that and the $300 fee on top of it! Oh, and If the acquirer fails to submit an ECM report within the stated time frame, it can be fined up to $500 per day for each of the first 15 days that the ECM report is overdue and up to $1,000 per day thereafter until the delinquent ECM report is submitted. So, you can see why most acquirers would rather not deal with chargeback-prone merchants at all.

Excessive Chargeback Program Assessment


And if that weren’t enough, in addition to the reporting fees, acquirers can be assessed issuer reimbursement fees and violation assessments for excessive chargebacks arising from an ECM. 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 determines an acquirer’s fine for the monthly issuer reimbursement fees and the assessments for each ECM as shown below:

  1. Calculate the CTR for each calendar month that the ECM exceeded a CTR of 100 basis points.
  2. 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.
  3. Multiply the result from step 2 by $25. This is the issuer reimbursement.
  4. 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).?áThe assessment for April, (using March sales transactions and April chargeback volumes) is calculated as follows:

  1. The CTR = April chargebacks / March sales transactions = 1,256 / 95,561 = 0.01314 or 131 basis points (rounded).
  2. 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.
  3. The issuer reimbursement for April is 300 x $25 = $7,500.
  4. 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


And these fees can add up!

The Takeaway


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.


Image credit: Engage.acma.gov.au.

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