The Consequences of High Chargeback Rates

[This article was written by Juli Richardson.]

Chargebacks are basically kryptonite for a small business owner. This intrusive issue takes money away from your business in more ways than one.

If you have yet to deal with this issue, consider yourself lucky. But now is the time to prepare because, eventually, it happens to everyone.

The Basics

If you’re not already familiar with chargebacks, there are a few things you need to know.

Basically, customers are protected to a much higher degree than you are when it comes to a transaction. If you choose to dispute the chargeback claim, you’ll bear the burden of proof. That means you’ll need the necessary paperwork to prove the transaction was authorized and fulfilled successfully.

There are a wide variety of reasons why a cardholder might initiate a chargeback. And—in many circumstances—this request will be granted. That means the customer will get their money back, but your time and money will never be refunded.

When It Gets Too High

Already this is a big enough issue to cause major concerns, but it actually gets worse. The more chargebacks you encounter, the bigger this issue becomes.

First of all, you’ll get hit with fees. This will start from the first chargeback you encounter, and get worse over time. As you deal with more chargebacks, you’ll begin to deal with higher fees.

Also, banks don’t like to do business with companies that receive a lot of chargebacks. If you start receiving too many chargebacks, there may be negative consequences on your account.

How Chargebacks Are Measured

There are several ways in which your chargebacks will be monitored and deemed to be within or outside of acceptable levels. It’s a good idea to understand these methods.

Sometimes, the Excessive Chargeback Program, or ECP, is used to see if you have too many chargebacks. This works by giving you a monthly quota that you are not to exceed.

To understand the issue better, you’ll need to understand the Chargeback to Transaction Ratio, or CTR. To find this ratio, you simply divide the number of chargebacks you’ve had in the current month by the number of overall transactions you’ve had during the previous month. Say you have one chargeback in August and 100 total transactions in July. That would mean you have a CTR of 1%.

You could potentially be labeled as an Excessive Chargeback Merchant, or ECM. If your CTR reaches 1%, and you’ve dealt with 50 or more chargebacks in the last two months, you’ll acquire this label. It takes at least two months to have this tag removed.

Some measurements aren’t even that forgiving. For example, you can become a Chargeback Monitored Merchant, or CMM, at a mere .5% CTR, with 50 chargebacks in a single month.

The Worst List of All

What you really want to avoid doing is getting yourself on the MATCH list. This list was created and is maintained by MasterCard, and used by Visa and American Express. The list helps them identify businesses and business owners who have had their credit card processing accounts closed.

MATCH stands for Member Alert to Control High Risk Merchants, and if you find yourself on this list, it’s going to be much harder for you to open new accounts. It’s almost like a blacklist, though it’s not necessary grounds for an automatic exclusion.

Too many chargebacks can easily get you placed on this list. As you acquire more chargebacks and your account is viewed as a risk, you’re likely to have it terminated altogether.

Educate yourself about what exactly causes a merchant to get placed on the MATCH list and the warning signs of such a detrimental blow to your business.

What If I’m Already on the MATCH List?

The good news is that you can have your name removed from this list. The bad news is that it will take a while.

In fact, it’s possible that your business will remain on this list for as long as five years. If you manage to keep in good standing for that period of time, however, you will be in the clear.

What Should I Do?

The lesson in all this is that you need to put some effort into chargeback prevention. It’s unfortunate that many instances of chargebacks are actually fraudulent on the part of the consumer, but that doesn’t mean there aren’t steps you can take to reduce your overall number of chargebacks.

The first thing you need to do is make sure you have a good refund policy. Often times, chargebacks are the result of a consumer throwing their hands up when they’re having a difficult time dealing with a merchant.

The next thing you need to do is ensure your product descriptions are accurate. If you lead your customer to believe your product or service is going to bring greater benefits than it will, you’re asking for trouble. Would you roll over for a company that knowingly deceived you?

Also, find out how your business appears on your customer’s credit card activity reports. If the name that appears is unfamiliar to your customers, they may end up asking for a chargeback because they believe the charge to be a mistake.

Conclusion

Do your best to stay away from chargebacks. They can easily cost your business an excessive amount of money, and no one wants that.

Take a proactive approach to chargebacks. Prevent the ones you can. If chargebacks get out of control and you are in danger of getting MATCHed, consider consulting a professional chargeback manager.

About the Author

Juli Richardson works for Chargebacks911, educating business owners about the dangers of chargebacks. She also helps them identify ways to reduce the risk of this financial setback.