Understanding Chargeback Ratio & How to Work it Out?

Did you know that chargeback ratio plays a significant role in determining whether an e-commerce store will survive? It is one of the most important metrics for any online business.

If the chargeback percentage is higher than the industry average, merchants could face the risk of getting suspended from their chosen payment processor.

Understanding Chargeback Ratio?

Chargeback ratio is a term used in the credit card industry. It refers to the number of chargebacks a business has compared to its total sales volumes. A chargeback is an event where a customer disputes a purchase and requests their money back.

Here’s how to work it out:

Chargeback ratio = number of chargebacks / number of transactions

A high chargeback ratio indicates that customers are not satisfied with the service they received and are disputing payments. Chargeback ratios are important because they can affect your business’ ability to obtain credit.

A high chargeback ratio may make lenders less likely to extend you additional credit if you need it, and it could lower your chances of being approved for merchant services in general.

What is a Normal Chargeback Ratio?

The average chargeback ratio hovers around 4 percent, while some processors have ratios as low as 0.3 percent or even lower. If your business uses a payment gateway, it will likely have a much higher ratio than this, but you can expect to stay at or below 4 percent if you’re working directly with your processor.

In fact, some processors set minimums—for example, 2 percent—and terminate contracts with clients who exceed that threshold consistently over time.

That said, an occasional chargeback is not necessarily a cause for concern if it’s within your expected range and if it doesn’t represent a sudden increase in overall volume for your business. Always monitor both of these factors carefully before deciding to end your processing.

What Triggers Chargebacks?

Chargebacks can occur for several reasons.

1.    Fraud

Fraud is when a cardholder’s identity is stolen and used for fraudulent purchases. The customer will dispute the purchase with their issuing bank. Once the customer files this dispute with their issuing bank, the issuer will take it up with the merchant’s acquiring bank.

2.    Customer Dispute

A customer dispute chargeback is when a customer disputes a purchase for other reasons than fraud. This could be due to defective merchandise or that they did not authorize the transaction in the first place.

3.    Merchant Dispute

This type of chargeback occurs when the credit card processor makes a mistake (for example, incorrect processing fees or an error on your end). This can be very costly because you will have to pay penalties and fees each time this happens.

Last Advice on Chargebacks

To prevent them, merchants must respond quickly and accurately to customers who file chargebacks.

Credit card processors have different guidelines regarding acceptable levels of chargebacks, and they periodically review those standards to ensure that all merchants comply with payment card industry regulations.

Merchants who fail to meet these guidelines risk being barred from accepting credit cards, which can have a devastating effect on their businesses.

Author Bio:- Bliar Thomas has been a music producer, bouncer, screenwriter, and for over a decade, has been the proud Co-Founder of eMerchantBroker, the highest-rated high-risk merchant account provider in the country. He has climbed in the Himalayas, survived a hurricane, and lived on a gold mine in the Yukon. He currently calls Thailand his home with a lifetime collection of his favourite books.

Jakari Misael
the authorJakari Misael