Why You Should Avoid Processors’ Chargeback Programs
By KEN MUSANTE
Chargebacks are the waste product of e-commerce. They harm you not only because you lose the sales price of the item, but also because you often fail to see the product returned by the consumer. Moreover, card processors typically charge $25 to $35 for each chargeback. Further harming merchants are the fees and fines from the card networks should you exceed their chargeback volume and threshold standards and potentially eliminate your ability to maintain your merchant account. Though there are many programs and suggestions to mitigate chargebacks, this article deals with a welcome change from MasterCard that lessens the parameters at which fees and fines are imposed on internet merchants.
Both MasterCard and Visa have many and specific fraud and chargeback programs that are targeted at differing infractions such as reported fraud, international chargebacks, international merchants and high-risk merchants. Those programs are much less common and outside the scope of this article. A merchant can, however, be in multiple programs with both card networks, and the chargeback monitoring program is not the only program an e-commerce merchant need concern itself with. Further, although there are clear standards for both Visa and MasterCard, both card networks will evaluate activity individually depending on the circumstance and may increase fines and penalties if specific actions were taken to circumvent the monitoring programs or suspend or reduce the fees and fines if circumstances warrant. This is based on individual review and is subject to individuals at Visa and MasterCard.
MasterCard’s program defines a merchant by a distinct billing descriptor, or DBA name. Visa may or may not combine the activity of a merchant. Typically, the activity is dependent upon the billing descriptor as well, but Visa reserves the right to group the activity from different acquirers and billing descriptors. This is typically reserved for situations when Visa believes the various accounts and names are only in place to circumvent the chargeback monitoring rules. Both card networks define the chargeback percentage by dividing the number of chargebacks in a given month by the number of transactions in that same month. Obviously during a period of declining sales, this formula works against you.
Ostensibly you could have three different merchant processors, but if the billing descriptors used is the same, MasterCard and Visa may aggregate the transaction count and chargeback numbers for purposes of defining whether the merchant is in the chargeback program. Both Visa and MasterCard have minimum transactions and chargebacks before a merchant may enter their fine program and be subject to fees. The thresholds are as follows:
Min Tran #
Min # C/Bs
Min C/B %
Visa
100
100
1.00%
MC
N/A
50
1.00%
MC (effective 8/15)
N/A
100
1.50%
As you can see, MasterCard is significantly relaxing its threshold for the point where fees and fines are assessed.
Visa and MasterCard have very serious penalties for exceeding the thresholds and require the merchant and the merchant bank to fulfill reporting requirements and to provide a chargeback mitigation plan. Both organizations have a percentage of the penalty paid to the issuing bank and a percentage going to the card networks themselves. While this is not critical, it is helpful to be aware of this, as the card networks will typically not reduce the amount paid to the issuing institution as they have undergone the hardship of the chargeback, regardless of the reason. For most merchant types, Visa allows for a three-month grace period under which the merchant must provide and follow a chargeback mitigation plan. High-risk categories as defined by MCCs* do not get such a grace period.
In months four to six, Visa will assess a $50 fee for every chargeback. In months seven to 10, that fee increases to $100 per chargeback plus a $25,000 review fee in month nine. Even worse, in month 10, Visa may disqualify a merchant and its principles from ever accepting Visa transactions again; a death sentence to any e-commerce merchant. Even if the merchant closes, Visa may choose to continue assessing fees and fines for an additional 120 days beyond the closure date.
MasterCard allows a one-month grace period for all merchants. After the first month, MasterCard has a two-point fine system. The first is the issuer reimbursement, which is calculated by taking the number of chargebacks in excess of 1.50 percent (or 1.00 percent until August 15th) times $25. The second is the violation assessment and is arrived at by taking the issuer reimbursement and multiplying it times the actual chargeback ratio for the month.
To be removed from the program, a merchant must be below the threshold for two of three consecutive months. Certainly no merchant wants to be in the chargeback programs. There are many and varied programs to assist merchants with avoiding or minimizing their chargebacks, but if you do find yourself in one of the programs it behooves you to understand the ramifications.
*Visa defines the following Merchant Category Codes as high-risk:
• 5962, “Direct Marketing-Travel-Related Arrangement Services”
• 5966, “Direct Marketing-Outbound Telemarketing Merchants”
• 5967, “Direct Marketing-Inbound Telemarketing Merchants”
• 7995, “Betting, including Lottery Tickets, Casino Gaming Chips, Off-Track Betting, and Wagers at Race Tracks”
• 5912, “Drug Stores, Pharmacies”
• 5122, “Drugs, Drug Proprietaries, Druggist Sundries”
Ken Musante is president of Eureka Payments LLC. Reach him at (707) 476-0573 or email kenm@eurekapayments.com.