For banking professionals, it’s important to recognize the severe impact of high chargeback levels on merchants, a challenge that continues to escalate. In 2021, global chargeback volume exceeded 600 million cases. And, disputes are anticipated to result in almost $117 billion in annual losses in 2023.

This trend poses significant risks to the stability of merchant businesses. The question then becomes: how can financial institutions assist merchant clients in effectively addressing the surge in chargebacks to safeguard their operations? And, what indicators can one use to determine how many chargebacks are “too many?”

This points to one of the most important indicators regarding chargebacks: the chargeback thresholds established by card networks.

What is a Chargeback Threshold?

Chargeback thresholds refer to the monthly chargeback limits established by Visa and Mastercard. These figures define the maximum number of chargebacks a merchant can incur within a month before being classified as “non-compliant.”

Both card networks have set specific benchmarks to gauge the acceptable levels of a merchant’s chargeback rate. This rate, also known as the chargeback ratio, is a crucial metric that calculates the proportion of chargebacks in relation to total transactions.

One’s chargeback ratio is indicative of a merchant’s relative risk level. They show the bank and the card network of a merchant’s potential chargeback issues and whether they have crossed the permissible risk threshold.

Why Do Chargeback Thresholds Exist?

Chargeback thresholds are not arbitrary limits. They play an important role in preserving the integrity and security of the payment system.

These markers are instrumental in reducing fraud, enhancing customer satisfaction, and upholding the financial stability of both businesses and financial institutions. Acting as a protective measure, they alert card networks and financial institutions to potential issues in a merchant’s operations. For example, substandard product quality or inadequate customer service, which could be reflected in increased chargeback activity.

Chargeback thresholds help banks ensure card network compliance and also help clients recognize the underlying causes of chargebacks and address them effectively. This approach minimizes financial risks and enhances the overall health and reputation of the businesses involved.

What are the Visa & Mastercard Chargeback Thresholds?

Banks need to be aware of the specific chargeback thresholds set by Visa and Mastercard in order to appropriately advise and guide their merchant clients.

These parameters may vary depending on factors like the merchant’s business size, industry sector, and the volume of transactions they handle. For clarity, here is how the card networks breakdown their thresholds:

Visa Chargeback Thresholds

Visa has established a tiered system for its chargeback thresholds based on the extent to which monthly chargebacks exceed certain limits:

• VDMP Early Warning: Activated at a 0.65% chargeback ratio and 75 chargebacks.
• VDMP Standard: Triggered at a 0.9% chargeback ratio and 100 chargebacks.
• VDMP Excessive: Reached at a 1.8% chargeback ratio and 1,000 chargebacks.

Entry into the Visa Dispute Monitoring Program (VDMP) is automatic if a merchant crosses the Early Warning Threshold.

Mastercard Chargeback Thresholds

Similarly, Mastercard has implemented a multi-tier system for its chargeback thresholds, which are based on the merchant’s existing risk level:

• Excessive Chargeback Merchant Program: Applies to merchants with 100-299 chargebacks or 1.5-2.99% of all transactions per month.
• High Excessive Chargeback Merchant Program: Targets merchants with 300 or more chargebacks or over 3% of all transactions per month.

Merchants exceeding these thresholds are automatically enrolled in Mastercard’s Excessive Chargeback Merchant (ECM) program.

Surpassing these thresholds can have serious implications for merchant clients. Consequences include potential fines, heightened monitoring, and possibly the revocation of the merchant’s ability to process card payments.

Banks can help improve the overall payment landscape by encouraging their clients to keep their chargeback issuances low and maintain a positive relationship with card networks. This proactive approach is essential in maintaining compliance and ensuring smooth financial operations.

What if a Merchant Fails to Get Chargebacks Under Control?

Many acquirers often find it more economically viable to close accounts of high-risk merchants rather than address ongoing chargeback issues. As a result, these merchants face the loss of their ability to process credit card transactions through conventional means.

Merchants whose accounts are terminated due to excessive chargebacks are placed on the MATCH list. This list functions as an industry-wide risk indicator used by acquirers to identify and avoid merchants with a history of high chargebacks and disputes. Inclusion on this list can significantly impact a merchant’s operations, as it bars them from qualifying for a standard merchant account for a minimum duration of five years.

Banks and FIs are in a unique position to help guide merchants in their inclusion on the MATCH list. This guidance can include advising on best practices for transaction processing, dispute resolution, and proactive fraud prevention measures.