by Matt Rej
Chargebacks can be costly even when they only happen occasionally. When the transaction gets forcibly reserved, you’re not getting paid for the product or service that was provided and your processor will almost always charge a separate fee on top of the lost revenue.
But the cost of an individual chargeback is just a fraction of what can become a much more expensive problem.
If you have too many chargebacks relative to your transaction volume, your chargeback ratio affects how processors, accruing banks, and card networks view your entire account.
High chargeback ratios can lead to increased processing rates, withheld funds, card-network penalties, and even account terminations. Whereas a low chargeback ratio can have the opposite effect: lower rates, more leverage, reserves eliminated, and the ability to negotiate better account terms.
What Exactly is a Chargeback Ratio?
Chargeback ratios measure the number of chargebacks a merchant receives relative to the total number of transactions processed over a specific period. The basic formula is:
Number of chargebacks ÷ number of transactions x 100
Let’s say you have 10 chargebacks in a month with 2,000 transactions. Here’s what the math would look like: 10 ÷ 2,000 x 100 = 0.50%
The concept is straightforward, but the exact calculation method can vary depending on the card network, processor, monitoring program, and period being measured.
Some calculations compare chargebacks received during the current month against transactions processed in the previous month. Other monitoring programs also incorporate fraud reports or activity behind the chargeback itself.
So the ratio shown on your processing dashboard or the one you calculate by doing quick math from your monthly statement may not be identical to the ratio used by Visa, Mastercard, or your acquiring bank when evaluating your account.
What’s a Good Chargeback Ratio?
There is no universal chargeback ratio that every merchant should be using as a benchmark.
It’s commonly said that merchants should keep their chargeback ratio below 1% of their total transaction volume. But a 1% ratio is high, and you should not treat that as an acceptable threshold.
Lower is always better.
What’s “acceptable” can depend on a range of factors, including your processor, industry, transaction volume, average ticket size, card-present vs. CNP sales, fulfillment timeline, and historical dispute trends.
A merchant with a 0.7% ratio that’s been steadily climbing while sales stay the same may receive stricter scrutiny than a merchant with a stable 0.4% ratio. Even though both are below 1%. Many processors will look beyond a single month and evaluate the direction your account is heading when they’re underwriting risk.
Why a High Chargeback Ratio Costs Merchants More
The obvious costs of a chargeback are the lost transaction amount, loss of goods or services, and the processor’s chargeback fee. But if your chargeback ratio becomes too high, there are financial consequences that can have a ripple effect across your entire merchant account.
Your Business Can Be Reclassified as “High Risk”
It’s a common misconception that only businesses in certain industries are subject to high-risk merchant accounts (online gaming, nutraceuticals, travel, adult products, etc.). But merchants outside of those categories can still get hit with a high risk tag because of their own processing history.
A high chargeback ratio tells processors and acquiring banks that a larger percentage of your sales may be reversed in the future. That creates financial exposure for the companies supporting your merchant account.
As a result, you can be subjected to the same standards as a high-risk account, which can be any combination of:
- Higher processor markups
- Additional per-transaction fees
- New monthly risk fees
- Stricter account terms
- More frequent account reviews
- Less tolerance for unusual processing activity.
You may have started with a standard merchant account. But if your chargebacks consistently rise, your account can eventually be priced and managed just like a high-risk merchant account, even if you don’t have a high-risk MCC code.
Processors May Hold Funds or Require a Reserve
Because your processor needs to account for chargebacks filed after you’ve already received and withdrawn funds, they’re on the hook for paying the issuing bank before they get the money back from you.
And if they think your rolling balance isn’t enough to cover future disputes, they can restrict access to part of your revenue in several different ways:
- Temporary funding holds
- Delayed settlements
- Rolling reserves
- Fixed reserve requirements
- Transaction limits
- Monthly processing caps
These types of clauses are written into practically 99% of merchant agreements. Those clauses give your processor the authority to impose these types of measures to protect themselves. And for you, it could mean money hits your account slower than it used to or maybe 5-10% of your sales get held in a reserve account.
You Could Trigger Card-Network Monitoring Penalties
In addition to your processor, the card networks also monitor merchant fraud and dispute activity.
For example, Visa has an acquirer monitoring program (commonly known as VAMP) that combines fraud and disputes into a single ratio. This means that VAMP is more than just your chargeback ratio, but your chargebacks still contribute to your overall exposure under the program.
Merchants with a VAMP ratio exceeding 1.5% can face an $8 penalty for each fraud case or disputed transaction (not just the ones that put them over the limit).
Visa also monitors acquirers based on fraud and dispute activity across their entire merchant portfolio, which gives processors an incentive to identify problematic merchant accounts early. Meaning your provider may impose its own fees before the network penalties apply.
Higher Processing Rates at Renewal
If your processor doesn’t raise your rates immediately while your chargeback ratio climbs, they almost certainly will when your contract expires.
This is standard industry practice even for merchants who never get a single chargeback. So merchants with a high chargeback ratio can expect these increases to be even higher, as your processor has the justification they need to do so.
The worst part about this is that the increase often comes from multiple angles.
Your standard discount rate may climb from 15 bps to 30 bps, while your per-transaction rate jumps from $0.10 to $0.25. On top of that, you may get a risk assessment fee of 0.30% applied to your entire volume and another compliance fee charged at a fixed rate of $400 per month.
Collectively, these types of increases can literally cost you thousands of dollars more every month. All because your chargeback ratio was deemed unacceptably high.
Your Merchant Account Could Be Terminated
Account terminations are the worst-case scenario of a high chargeback ratio.
It doesn’t happen often, and it’s typically reserved for the worst offenders. But if your chargeback ratio is consistently 3% or 5% then it may no longer be worth it for your processor to manage that type of risk. No matter how much they want to charge you.
What’s worse is that getting a new merchant account at a reasonable rate will be almost impossible, as there’s a good chance your previous processor will add you to the TMF/MATCH list.
So no matter where you go for your next account, your new processor will know how risky you are and will price your fees accordingly.
How a Low Chargeback Ratio Can Work in Your Favor
Most of the information you’ll find online about chargeback ratios focuses exclusively on penalties, costs, and account termination. But the same risk assessment criteria that can hurt you can actually benefit you when you maintain a consistently low chargeback ratio.
If you have a clean processing history, it means your processor earns good money from your account without taking on a significant dispute liability. This is valuable leverage when you ask for better rates or account terms.
Reserves or Holds Can Be Released
Certain merchant accounts have reserves baked in from day one. This could be due to your MCC code, processor-specific standards, or something else that triggered your account had added risk during the initial underwriting.
It’s actually fairly common for new merchants to have reserves because the processor doesn’t have enough history to determine how many of your transactions could be disputed.
But those initial assumptions don’t have to dictate your account terms forever.
If you have a low chargeback ratio for years while your sales remain the same or continue to rise, you can contact your processor to negotiate:
- Complete removal of the reserve
- Lower percentage held in reserve
- Shorter hold periods
- Release of holder funds
- Higher processing limits
These adjustments typically don’t happen automatically. Meaning you’ll need to contact your processor to request a formal review.
Come to that conversation prepared, and specifically mention your chargeback ratio. While your processor will obviously have that data internally, it shows them that you know what you’re talking about and you’re not just blindly asking for something without justification.
High-Risk Merchants May Qualify for Lower Rates
Some businesses will always be classified as high risk because of their industry, business model, or fulfillment structure. And even if you never have a single chargeback, that “high risk” tag will still be attached to your account.
That said, there’s a huge difference between operating in a high-risk industry and being a high-risk merchant in practice.
High-risk accounts are always underwritten at higher rates. But if you’re processing millions of dollars for several years and your chargeback ratio sits consistently around 0.3%, it’s a good enough reason to tell your processor that you’re not as risky as they assumed.
While the high risk classification may technically stay in place, it doesn’t mean you have to continue paying high-risk processing fees.
If you fall into this category, I have a separate guide on what to do when you’re no longer a high-risk merchant, and how to get lower rates without switching providers.
Standard Merchants Can Leverage This During Rate Negotiations
The same concept applies to merchants who aren’t in a high-risk category. Anyone can leverage their chargeback ratio when negotiating with their payment processor.
Calling your processor and saying, “can you reduce my rate?” is practically guaranteed to be stonewalled with a firm no.
But building a case using real numbers based on your actual processing history can result in a completely different outcome. And your chargeback ratio is one of several different figures you can use to your advantage when you’re negotiating a rate reduction.
“We process consistent volume, our chargeback ratio is low, and our account creates minimal risk. Our processor makeup should reflect that.”
That’s the approach you should take. A low chargeback ratio becomes even more persuasive when combined with:
- Several years of a clean processing history
- Increasing transaction volume
- Low refund and fraud rates
- Mostly card-present transactions
- No major account violations
This is a highly profitable account for any processor, and they’ll be willing to work with you to keep your business. But you have to be the one initiating the conversation.
Faster Access to Funds
Standard funding on most merchant accounts is 1 to 3 business days. It depends on things like the processor, acquiring bank, cutoff times for deposits, and other similar banking infrastructure-related factors.
Some processors are on the longer end of that timeline intentionally because releasing funds immediately increases their risk exposure for chargebacks and returns. So even if your processor offers funding in 1-3 days, you may be consistently seeing those funds hit your account on day three.
But a low chargeback ratio can be used to argue your case for same-day or next-day funding.
You shouldn’t have to pay extra for this. It’s common for processors to charge you a fee for faster funding. But that can be waived if you negotiate properly.
How to Use Your Chargeback Ratio to Lower Your Credit Card Processing Costs
Don’t wait until your processor sends you a warning letter about having too many chargebacks before you start reviewing chargeback activity.
You should be monitoring your ratio regularly as part of your normal processing audits. Just like you do with your effective rate, monthly volume, and processing fees.
Here are some tips to keep you on track:
- Calculate your chargeback ratio every month.
- Watch the trend over time, instead of just focusing on one good month or one bad month.
- Separate chargebacks, fraud reports, inquiries, refunds, and pre-dispute resolutions into different categories.
- Keep at least 12 to 24 months of records.
- Ask your processor directly how they calculate risk during their underwriting.
- Request a formal underwriting review, in which you can specifically cite your low ratio, stable volume, and how long you’ve maintained that performance.
- Ask for specific concessions: lower rates, reserve removals, faster funding, higher limits, better contract terms, etc.
Most importantly, continue monitoring your statements and chargeback ratio even after you’ve negotiated better terms. We see this all the time, where a processor removes one “risk” fee and then just replaces it with something else that’s been renamed to keep their margin the same.
A Low Chargeback Ratios Doesn’t Eliminate Every Risk
I also want to be clear that your chargeback ratio isn’t the only thing that’s used when processors are reviewing your account. So while it’s important, you need to pay attention to other factors that can help you or work against you during negotiations and underwriting.
Other factors include:
- Your industry and MCC code
- Average ticket size
- Monthly sales volume
- Sudden processing spikes
- Card-present vs. card-not-present transactions
- Time between payment and fulfillment
- Subscription or recurring billing practices
- Business and personal credit history
- Overall financial stability
For example, a travel merchant may have a low chargeback ratio today but still presents future exposure to the processor because customers pay months ahead of receiving the service.
Similarly, a business that suddenly processes 5x its normal monthly volume can trigger an account revenue or funding hold even when its chargeback ratio has historically been low.
That’s why it helps to have a merchant consultant on your side during negotiations with your processor. As a payments expert will know which strings to pull on depending on your specific situation.
So whether your chargeback ratio is low, high, or somewhere in between, our team here at MCC can help you find the leverage you need to negotiate better rates with your processor. Just contact us today for a free audit to find out how much you can save.