A chargeback rate is a metric used by payment networks. This metric tells payment networks the number of customers that are requesting their money back from a specific business. It is a ratio between the total number of chargebacks a business receives and the number of transactions they process.
Major cardholders, such as Visa and Mastercard, calculate your chargeback rate by dividing the number of chargebacks you had in the current month by the total number of transactions you processed in a month and multiplying that number by 100. That said, chargeback rate calculations can vary based on the industry.
Maintaining an acceptable chargeback rate is very important for businesses. The card networks use this rate as one way to assess the reliability of your business. If your chargeback rate sinks below a specific number, you can face potential fees as well as lose your ability to accept payments through the network.
What is an acceptable chargeback rate?
What is an acceptable chargeback rate? A healthy rate is 0.5% and below. If you’re consistently above that, you’ll need to do something to bring your number down, such as signing up for chargeback prevention alerts.
How do chargeback rates vary by industry?
Acceptable chargeback rates can vary by industry and business. Some businesses are more likely to be targeted by fraudsters while others have business models where customers have higher expectations. For instance, industries such as the retail and hospitality industries are more vulnerable due to a high level of transactions.
Retail industry
The retail industry is very susceptible to chargebacks. They process a larger volume of transactions and through countless payment methods. They experience a high level of card-not-present (CNP) fraud and chargeback fraud also known as friendly fraud.
If you’re an online retailer, you likely process payments through Stripe and Shopify. Stripe does not specify a specific chargeback rate at which point your business gets penalized, however, each chargeback does incur a $15 fine. Meanwhile, Shopify also charges a $15 chargeback fee, and they do have a stricter set of policies around merchants’ chargeback rates. Merchants must maintain a chargeback rate of under 1% over a 30 day period. If they pass this threshold, Shopify may hang on to 25 percent of the merchants’ earnings over a 120 period as insurance.
Hospitality industry
The hospitality industry has a high susceptibility to fraud due to its use of online payments and booking systems as well as the high volume of transactions. It’s also easy to enjoy this service quickly before the cardholder notices the fraudulent transaction. A bad actor can test the validity of stolen credit card credentials through small payments, use those credentials to go on vacation, book a hotel, dine, and shop, and then move on before the legitimate cardholder receives their statement.
Educational industry
Chargeback rates are higher in the educational industry, particularly when it comes to online course content. Educational content is intangible, making it hard to prove that a customer enjoyed the product or service. Moreover, the value someone derives from educational content can be highly subjective. It’s based on how much effort they put into the course, what outcomes they get out of the course, and which outcomes they deem to be a return on investment. A customer can pay for a course, get what they need from it, and then file a chargeback claiming that the provider didn’t keep its promises.
Health and wellness industry
There are high chargeback rates in the health and wellness industry. Similar to the educational industry, it is hard to prove that a customer received tangible benefits. There is also a high standard of proof when it comes to proving the efficacy of a medical or wellness product.
Gaming industry
The gaming industry experiences a high level of unauthorized purchases. This could be fraudulent activity, such as someone using stolen credentials to buy a subscription, or it could simply be an unauthorized use of the card, such as a child making in-app purchases.
Subscription as a Service (SaaS) industry
Cancellations and billing disputes are a major cause of chargebacks for SaaS providers. It could be as simple as someone missing the cancellation deadline and having their card billed even though they don’t want to use the software anymore or someone believing they would be charged one rate and getting billed another.
Check out the chart below from Swipesum for an overview of chargeback rates by industry.
Why do chargeback rates matter?
A high chargeback rate can impact a merchant’s relationship with payment processors and their acquiring banks. These financial institutions operate on trust, and one of the ways they maintain this trust is by doing everything possible to keep their cardholders and users happy. As a result, they are more likely to side with customers in disputes by returning the money. If they feel like the cost of keeping a specific merchant on their network leads to higher costs, they will mitigate their risk by either raising the cost of doing business with them or removing the merchant from the platform altogether.
One way that card networks proactively mitigate this risk is by using the TMF Match List. The TMF Match List is a database of high-risk merchants. Payment processors use this to screen merchants.
How do you calculate your chargeback rate?
You can calculate your chargeback rate (also known as your chargeback-to-sales ratio) by using the following formula.
Your current month’s chargeback rate / The current month’s transactions x 100.
Calculating your chargeback rate is important, but it’s also time consuming. Investing in a chargeback management solution can help cut down on the amount of time you spend not only calculating your chargeback rate but also keeping up with and preparing proof for chargeback disputes as well.
What are some strategies to reduce your chargeback rates?
Signing up for chargeback prevention alerts
The best way to keep your chargeback rate down is to deal with disputes before they become a chargeback. For instance, if a customer files a dispute and you’re aware of it and don’t have much proof to combat it, you can simply refund their money. A chargeback management platform like ChargebackStop can send you alerts, so you can instantly go in and issue a refund if you believe the chargeback is justified.
Improving your customer service
One way to reduce your chargeback rate – and also grow your business! – is to resolve disputes before they escalate. It is easy for individuals to start an online business using all of the website building, marketing, and shipping tools available. It is not as easy to make customers feel heard, valued, and respected. This takes time and effort – and money. As a result, many online businesses have made it next to impossible for customers to reach them if they have a question and concern. In response, customers have decided to forgo direct dispute resolution altogether and take their issues straight to their bank.
Investing in fraud detection tools
Another way to prevent unauthorized transactions is to purchase fraud detection tools. These tools use algorithms to detect anomalous activity and alert businesses to potential issues. This allows businesses to spot bad actors early, cancel these orders before they are fulfilled, and report the anomalous activity to their bank.
Writing clear policies
It’s also important to write clear return, refund, and shipping policies. Even if a customer tries to file a chargeback later, you can win the chargeback case if you can prove that they agreed to your policies and that you have honoured your end of the agreement.
Understanding chargeback success rates and win rates
According to one survey, the chargeback win rate is about 45%, on average, for merchants. To increase your odds of winning – or just hit that average – consider implementing or strengthening the following:
Gather compelling evidence
If your customer is claiming that they didn’t receive the item they ordered, find the proof of delivery email or notification. If your customer is taking issue with your service, find the terms and conditions that they agreed to. This can be time consuming to do, so if you manage a high volume of orders, it’s a good idea to invest in a chargeback management solution that can help you fight chargebacks intelligently and efficiently by automatically putting together a representation package and asking for any missing information.
Write a concise but powerful chargeback rebuttal letter
Your chargeback rebuttal letter provides context for the bank that’s reviewing your dispute. Write a clear and concise rebuttal letter that focuses on the facts.
The best way to stay within acceptable chargeback rate limits is to purchase chargeback management software. This tool is an upfront cost that will save you money on chargeback fees and returned money, maintain your standing with your payment network, and help you expand your business with confidence.
If you’d like to learn more, book a call with a member of the ChargebackStop team to get a tour of our platform.
