Each month, your bank or payment processor adds up all the chargebacks initiated toward your business’ account that month and divides it by the total of all transactions. The resulting percentage is called the “chargeback rate.” Banks set a certain level of chargebacks that it views as acceptable, typically about 3% or less. If your business’ chargeback rate exceeds that amount, your merchant account may be suspended temporarily or canceled outright. That could result is significant loss in time and money, so it’s important to think about how to reduce your chargeback rate.
Chargeback rate is one of the main factors that banks, etc., use to determine whether a business is high risk or not. That means that if your business is in a high-risk industry, you will be on an even shorter leash if a bank even opens a merchant account for you at all. The threshold for acceptable chargeback rates will be even lower than the already low 3% mentioned above.
It’s always better to prevent chargebacks than to deal with them after they occur, and the best time to do that is before a purchase is finalized. One way to do that is to have a refund and return policy that is clear and easy to understand, and to bring it to the customer’s attention early in the process, or even multiple times prior to finalizing the purchase. The customer may ultimately decide not to make the purchase, but it should decrease the risk of chargebacks and save you both time and money in the long run.
There are a number of other measures and policies that you can implement as part of your daily operations. In addition, there are various tools available to help you reduce your chargeback rate. Two of them are 3-D Secure and Rapid Dispute Resolution. Let’s take a brief look at them.
One tool that can be very useful in combating chargebacks is 3-D Secure. 3-D Secure (3DS) is a protocol that adds a layer of security for online credit card/debit card transactions. It utilizes the following three domains (the “3-D” in “3-D Secure”).
The payment information and the identity of the customer (the cardholder) must be verified before the transaction can be completed.
Because 3DS is aimed at battling fraud, it does not necessarily make a transaction “chargeback-proof.” There are a variety of reasons—both legitimate and illegitimate—for initiating a chargeback that are not related to fraud. However, chargeback fraud (including “friendly” fraud, etc.) is a serious problem that can be very damaging to a business. With 3DS, if a customer claims that a purchase was fraudulent but there is a record that 3DS was used to verify the customer’s identity, your business is protected.
To help answer the question of how to reduce your chargeback rate we need to get into some new tools which are available for you to use. In April 2021, Visa partnered with Verifi to launch Rapid Dispute Resolution (RDR), an upgrade of Visa’s original Chargeback Dispute Resolution Network. In October 2021, Visa made it mandatory for card issuers to offer the service.
The purpose of RDR is to automate dispute resolutions at the pre-dispute stage of a chargeback, making it possible to resolve disputes, avoid the dispute process, and prevent chargebacks. When a customer contacts the card issuer to request a chargeback, the information is entered into Visa’s dispute submission platform. The system then determines whether or not to authorize a refund based on rules that are predefined by the seller.
If it is authorized, your acquirer is notified through Visa’s network, and a credit is provided to the customer on behalf of the issuer. Not only does this prevent a chargeback, but since the process is automated, little extra time is required to handle the issue. Together, these factors can help significantly to minimize the loss of time and money that ordinarily results from a chargeback.
Cases that do not meet the seller’s pre-defined rules are handled in the standard chargeback process. Like 3DS, RDR is not a cure-all for chargebacks, but it can be a great tool for reducing and controlling the risk of chargebacks as well as the damage that results when chargebacks do occur.
Good high-risk payment processors have the knowledge and experience to minimize the impact that chargebacks have on your business. Most also offer a variety of chargeback protection programs that can add another layer of security. They can also help you navigate the various tools available to combat chargebacks.
High-risk payment processors operate with the knowledge that your business is likely to have a higher chargeback rate than in other industries. They can set a reasonable and realistic threshold for allowable chargeback rates that takes that fact into consideration. As a result, you can have a bit more peace of mind without being in panic mode over the smallest increase in your chargeback rate.
Be sure to ask questions and discuss any concerns, whether you’re currently looking for a high-risk payment processor or you already have one. While it is true that they specialize in these issues, there are limitations to what they can do, even in the best of circumstances. Measures against chargebacks are most effective when you and your payment processor work as partners. Don’t forget to use that valuable resource.
Our team at Zen Payments would be happy to speak with you and find ways to help your business prosper, so please don’t hesitate to contact us.