Why Processors Care About Chargeback Thresholds

January 8, 2024

Maintaining compliance with the Card Associations is not an easy task. Card-not-present (CNP) delivery, buy now, pay later (BNPL) and digital wallets have exponentially increased the odds of a payment issue. Let’s get square with what a compliance threshold is, why your Processor cares about it, and how your business can remain compliant.

What’s a Chargeback Threshold?

Your chargeback threshold is the ratio of chargebacks to the total amount of processed payments. It quantifies how many purchases are being marked as fraudulent, friendly or not, not received, broken, defective, or an incorrect product or service. Understanding your chargeback threshold and setting up systems to actively monitor chargebacks is essential.

Why Do Processors Care about My Threshold?

Processors make money on every single transaction that gets processed. But for each transaction, there is always an inherent risk of a chargeback. And every chargeback comes with a fee from the Issuer and Card Association, which the Processor pays—chargeback and service fees are later removed from the Merchant’s account.

Processors care about your chargeback threshold because if they accept too many charged back purchases, they run the risk of being heavily fined by the Card Associations. There is always a risk of the Merchant not having the funds available to pay the chargeback fees. In cases where the Merchant can’t pay for the chargeback, their Processor is responsible for covering the transaction.

What Happens If My Business Starts Slipping Out of Compliance?

Merchants usually get referred to a third-party to manage chargebacks and compliance. Third-party services help win representments, set up systems to monitor payments and track the Merchant’s health. But these services tend to charge money by transaction-volume and integrations. This can become costly and never truly uncover the root cause of the chargebacks. Chargebacks might be impossible to completely prevent, but let’s look at some easy ways to decrease the numbers.

7 Tips for Lowering Your Chargeback Ratio

Automate Refunds on Low Ticket Items
Verifi (owned by VISA) and Ethoca (owned by Mastercard) are third party services that help Merchants issue refunds on disputes before they become a chargeback. Paying out refunds might seem costly, but it can be cheaper than fighting each individual chargeback.

Capture CVV codes and use an Address Verification Service (AVS)
Winning representments for a card not present (CNP) payment requires Merchants to prove the customer is the rightful cardholder. CVV codes help prove the customer is holding the card. And AVS services compare a customer’s input address to the cardholder’s address.

Create Clear Card Descriptors
If a card holder can’t recognize the charge to their account, they may report it as fraud. Keep your descriptors clean, clear and impossible to mistake. A clean way to write descriptors is to begin with your Merchant name, followed by the service. For example: Slyce360*PaymentSoftware.

Make Customer Service Fast and Easy
If customers are inconvenienced by your customer service, there’s a higher chance that they’ll charge back the purchase. Have your Customer Service details on Google My Business, social channels, website, invoices, and receipts. Make it hard to miss.

Inform Customers of Refund, Warranty, and Shipping Policies
Include all relevant details on receipts, invoices, product pages, and FAQs. A handful of chargebacks are usually because customers prematurely charge back a purchase that’s still being shipped, or is defective or broken.

Confirm Orders for More Protections
Confirmation codes for custom orders and high-ticket items is a good practice. Not only does it give customers ease of mind, but they provide an extra layer of protection from card holder fraud.

Be Prompt
If you promise a refund, then issue it as quickly as possible. If someone calls to cancel a recurring membership, cancel it on the spot. And if someone wants to exchange a product, ship the product out while waiting for the returned item.