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  1. #1

    Question Pleas ehelp me understand chargeback/refund ratio's.

    Dear members,

    I do plan on opening my own internet business and really want to understand the basics of internet merchant/billing accounts. What i really want to know is how the chargeback/refund ratios are calculated? For example, i have sold 100 products for the price of 50 dollars and one product for the price of 250 dollars. Later on, for example, i have recieved a chargeback for "250 dollar" payment. What will be my chargeback ratio in this situation?

    I think it should be less than 1% since generally this one chargeback is one payment among 101 others. Am i wrong?

    I would really appreciate the help from any member, but also would like to recieve some help from the companies, that provide the vendors with the merchant accounts, if it is possible ofcource.

    Thank you in advance,
    Arthur Z.

  2. #2
    Join Date
    Jul 2003
    Location
    Castle Pines, CO
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    7,189
    Welcome to the forums Arthur Z!

    I am very surprised no one has responded to your question at this time. If I did my math properly so early this morning, it looks like your chargeback ratio would be .05%. Math used to be my forte back in high school, but I let it lapse. If I hear anything before anyone confirms / denies this, I'll post back and let you know.

    Good luck with your store!

  3. #3
    Join Date
    Nov 2005
    Posts
    260
    First of all, chargeback ratio's are determined on a monthly basis.
    There are two different things the merchant banks look at (presuming you would have a direct merchant account):

    - Chargeback transaction ratio, which in your case would be 1/101*100=0.99%
    - Chargeback volume ratio, which in your case would be 250/5250*100=4.76%
    (I think the system Corey descibes works with basispoints, hence 4.76% would match 0.05 basis points, it's basically the same. Correct me if I'm wrong, Corey. )

    However, this doesn't matter as long as it is just an occassional chargeback and you did not reach the tresholds:
    For Visa, you are allowed 200 chargebacks/month and a ratio of 1%, where 200 is the trigger.
    For MasterCard, you are allowed 50 chargebacks/month and a ratio of 0.5%, where 50 is the trigger.

    Meaning: if you have 49 MasterCard chargebacks in a month and a ratio of 0.6%, usually nothing will happen, most likely only a warning from the merchant bank.
    If you have 51 MasterCard chargebacks in a month and a ratio of 0.3%, nothing will happen, most likely only a warning from the merchant bank.

    If you trigger 12 chargebacks and your ratio is 12%, you will have more problems.
    Normally, in my experience, banks usually don't bother smaller merchants with an occassional chargeback.
    (Imagine a very small merchant with 10 orders a month who received one occassional chargeback, he would immediately have a ratio of 10%; the bank will not act upon that.)

    Of course, the situation is more difficult to explain if you are using a third party processor because then you will be using one of the accounts of the processing company.

    Always ask your merchant bank what the procedures look like in case of chargebacks just to be sure.

  4. #4
    Join Date
    Jul 2003
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    4.8% is correct - I also just received confirmation. For some reason Excel 2007 won't open my spreadsheet that I created for this unfortunately so now I have to go back and re-create it at some point.

    If you run you company fine and provide excellent support - chargebacks should not be that much of a problem. Be on the lookout for high priced orders, people who need things immediately, orders consisting of the same items.

  5. #5
    Join Date
    Sep 2004
    Location
    Chicago
    Posts
    845
    Corey,

    If you created the Excel in 2003 then you will need to open it in 2003 that or I believe there is a update and or a convertor to make the 03 compatible with 07.

    Sorry for the sidetrack of this thread.
    My IP >> 127.0.0.1 Hack Away!!

  6. #6
    you dont need to worry about chargebacks if you take the right steps.

    A) always ship your items withing 7 days of the order
    B) ship with a tracking number ALWAYS!
    C) have the buyer sign for the delivery
    D) try and get the buyer to email you saying they received the item and are happy with it

    so if eveer they decide to file a chargeback you have a lot of to fight it with. chances are you will will. there are cases that you will lose outright becuase at the end of the day it is the credit card company who is the judy jury and procecuter!

  7. #7
    Join Date
    Aug 2003
    Location
    Chesapeake, VA
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    Hi ArthurZ,

    I think your question has pretty much been answered here but keep in mind the following caveat - each merchant processor sets their own internal risk tolerance for chargebacks.

    So while Visa and MasterCard mandate certain thresholds that they enforce to their acquiring Member Banks and while these are passed through to the ISO/MSP's that represent the various Members... a given merchant processor (ISO/MSP) have have a tighter -or- a more liberal stance on chargebacks.

    For instance, let's say that you are a good merchant with a good track record and you have been processing for many months or even years. Your average monthly volume is $10,000. Your average ticket is $100. Then, out of the blue, you get a chargeback for $1,000.

    By volume, that puts your monthly CB ratio at 10%. Way above the stated "1% threshold" that most merchant processing contracts list. However, given everything else and assuming that there is a good reason behind (i.e. "oops - we allowed a fraud order") and the chargeback debit is paid, you'll be fine if your processor is reasonable.

    Merchant processors are most concerned about these situations:

    1. Brand new merchant who starts generating chargebacks quickly - this creates fear of a "bust out" merchant who is running stolen cards, getting funded and then plans to bail. Or, almost as bad - a merchant who runs their business poorly or with no fraud screening at all. Either way, these accounts often turn into losses quickly.

    2. Merchant who processes nothing or nearly nothing for many months, then suddenly starts running large sales and/or incurs chargebacks - for similar reasons to #1 above, this is also a big concern for processors. Some fraudsters have setup accounts, let them lie dormant for months, and then started running bust out operations... in the hopes that a processor will think "oh they have been a client for awhile, maybe this is nothing to worry about."

    3. Merchant who gets started and quickly exceeds ticket parameters right out of the starting gate AND doesn't have supporting financials. Example: ABC is approved for $5,000 per month; $10 average; $100 max ticket. Then on week 2 they start running $1,500 sales on their account but have only $500 in their bank account. If even one sale turns to a chargeback - they won't have cash to cover it and it will likely become a quick loss for the processor.

    The main thing is to maintain good communication with your selected processor - at the beginning and as your business evolves. That and make sure to put together a good strategy for verifying orders and managing your fraud risk.
    CDGcommerce.com - Trusted Merchant Account Solutions since 1998
    Many thousands of successful, growing businesses benefit from our expertise every day. You can, too!
    We help merchants to eliminate gateway costs, reduce & mitigate fraud and achieve streamlined PCI compliance.
    Learn more today at http://www.cdgcommerce.com - we look forward to helping your business grow!

  8. #8
    Join Date
    Dec 2004
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    Las Vegas/St. Louis
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    The question has been answered for the most part - but Im going to put the rest together.

    Visa and MC typically go by a 1% ruling. Its not the actual merchant they go after in the end, but the ISO. One of the banks that I deal with told me something that scared me half to death and I had to make a call to both Visa and MC to back it up. This is what I came up with:

    If a merchant gets 1% in chargebacks - Their ISO Gets a warning. If you signed up with a Private Labeled ISO that actually has a ISO they sign to, then that parent ISO gets the warning. If it happens again the 2nd month... Another warning.

    If it happens a third time on the same card logo, and you show a pattern of irresponsibility in the process, and the MSP allows you to process after that 3rd warning, they can fine the MSP if they continue to carry you as a customer. They will get fined per chargeback going back since the first warning.

    I personally know of 12 processors that will terminate you before that 3rd month.



    I personally think thats a little much. Makes me want to change businesses. ISP Related companies recieve more chargebacks than any other industry except online porn subscriptions, lol.

    Of the mid-high risk processors, Web Hosting is the biggest fraud target. Theres nothing shipped and requiring delivery confirmation, just a virtual service provided. The biggest he said she said on earth. Thats why the dial verification programs are popping up all over the place. But that service just cuts it down cause all it takes is a VOIP DID.

    Now once I find a company whos system can identfy the call being picked up as a VOIP did, or a non post paid cellphone, and decline them, I would promote them to death. That would be the ultimate fraud defense when it comes to verification.

    I also wish the dial verification calls were a lot cheaper if they werent international. Sheesh. pennies on the dollar to make a call in the US, Canada, Mexico, Asia, and Landlines in the UK.
    John Travis - [COLOR="Green"]The Internet Merchant Account Guru
    * Best Merchant Accounts - US Based Businesses Only * Click Here to Request Rates * Eco Friendly Hosting
    * ENZU Intelligent Cloud Hosting / VPS / * Dedicated Servers * Great Prices! *Click Here for Our VPS/Server Specials! *

  9. #9
    Join Date
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    John, I think you may be confusing a monitored/high-risk merchant with a typical merchant on a few of your comments above?

    To begin with, if a given merchant simply gets 1% in chargebacks on volume in a given month, absolutely nothing formally happens and there is no notice or alert whatsoever from the Visa and MasterCard Card Associations... unless the merchant surpasses some of the thresholds mentioned earlier in this thread which include minimum volumes of both Interchange activity (sales) and chargebacks. (These specific guidelines are updated annually by the Card Associations and can be found in the 1 1/2" inch thick rule books that they distribute to their Members.)

    In addition, it isn't the ISO/MSP that is directly financially penalized... everything first goes through the Member Bank who has sponsored the ISO/MSP. That being said, you can be sure that the Member Bank will pass-through any and all fines and penalties to the ISO/MSP in question. But the action flow always proceeds as:
    Visa/MC => Member Bank => ISO/MSP => Merchant (if applicable)

    Now... you are indeed correct that if (and only if) such a merchant gets placed on one of the High Risk Monitoring Programs, this can quickly escalate to increasing fines up to and exceeding many tens of thousands of dollars. And most merchant processors will not allow such a merchant to continue even after the first month or so given the huge liability it presents to the processor and the fact that no one really wants the Card Associations unnecessarily auditing them, their portfolios and their businesses.

    However, the main point to be made here is that just because a given merchant has over a 1% chargeback rate in a given month - doesn't mean that this will result in a warning nor that all of a sudden bad things are going to happen... it all depends on the circumstances at hand of which the processing & chargeback volume are a major factor beyond the %'s.

    That being said, I've known some processors who will terminate on a 1% threshold being breached simply because they are overly conservative and entirely risk adverse, but that isn't a result of the Card Associations and instead it is a factor of their own internal risk management.

    Regarding dial verification, it is a very effective way to reduce fraud. The overwhelming majority of fraudsters do not want to provide any kind of a phone # - not even a VOIP line - that can be traced back to them in any way. I can tell you first hand that we deal with fraud on a monthly basis in terms of fraud apps and one of the few common denominators is that fraudsters really don't like any phone # that will reach them directly. They will have many phone #'s (voicemails, phone systems, etc.) but very few that reach a live person directly. It's not a perfect system - no system is - but it is definitely very effective.

    Another tool that is highly useful in reducing fraud is to use Cardholder Authentication such as Verified by Visa/MasterCard SecureCode. These technologies, which were developed by the Card Associations themselves, can eliminate 60% of the most common chargeback reason codes that take place on Internet merchant accounts and provide substantial liability protection to merchants.

    The end result is that merchants can safely accept sales that they might otherwise be concerned to accept and still have complete protection against fraud losses under most circumstances even if the cardholder is not enrolled in the program.

    Depending on how the merchant integrates VBV/MSC, they can even essentially "force" enrollment before accepting a transaction to ensure liability coverage or they can use VBV/MSC in combination with other technologies like dial verification, GEO/BIN/IP scrubs, velocity checks, negative databases, AVS (when applicable) & CVV and so forth.

    Fraud and chargebacks are not happy subjects for merchants but the good news is that there are many great technologies and methods that merchants are able to now successfully use to combat that... so there is a happy ending to the story.
    CDGcommerce.com - Trusted Merchant Account Solutions since 1998
    Many thousands of successful, growing businesses benefit from our expertise every day. You can, too!
    We help merchants to eliminate gateway costs, reduce & mitigate fraud and achieve streamlined PCI compliance.
    Learn more today at http://www.cdgcommerce.com - we look forward to helping your business grow!

  10. #10
    Join Date
    Dec 2004
    Location
    Las Vegas/St. Louis
    Posts
    175
    Its my fault on that post, I didnt go into detail with the chain since the merchant themselves dont hear about it until the MSP does. Was trying to not to sound like a preacher.

    And I should have clarified the "if" they are sited for the monitoring program. But according to the Visa, they said that any merchant, not just one thats on the high risk tier, can be sited and given a warning that they are being watched.

    I dont even read my book, even the new one I got last month is collecting dust. Im not too fond of the interchange increases in store for the rewards cards in a couple of months. But what can we do. Visa and MC arent Non-Profit anymore, so everyones gonna pay.

    Alas. and they are even changing things to allow churches to take credit cards.....
    John Travis - [COLOR="Green"]The Internet Merchant Account Guru
    * Best Merchant Accounts - US Based Businesses Only * Click Here to Request Rates * Eco Friendly Hosting
    * ENZU Intelligent Cloud Hosting / VPS / * Dedicated Servers * Great Prices! *Click Here for Our VPS/Server Specials! *

  11. #11
    Join Date
    May 2003
    Posts
    267

    Smile

    Guys, what are you talking about? Fraud... what fraud? Where?
    Amirocms.com

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