Fraud & compliance

What happens if I get too many chargebacks?

Getting a chargeback might not seem like a big deal, but excessive chargeback levels can be absolutely devastating to your business. 

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When you get a chargeback, you lose a lot more than just the transaction amount. Eventually, your company’s ability to process credit cards might be put at risk. 

Here’s what might happen if you get too many chargebacks (and why it’s a good reason to try to prevent them). 

Why chargebacks happen 

Every business can and likely will get hit with chargebacks. It’s just a part of doing business. Someone might make a purchase from your store using a stolen credit card. It happens. And that’s why the chargeback process exists. When this occurs, the transaction amount is taken out of your merchant account and the charge is withdrawn from the customer’s credit card statement.  

Unfortunately, people have started to take advantage of the chargeback process and claim fraudulent charges when no fraud exists. For example, they might file a chargeback against you because their merchandise was never delivered, because they didn’t like the quality of your products but didn’t want to go through the returns protocol, or they didn’t recognize your business name on their card statement. There are many chargeback reason codes. 

A high chargeback ratio 

With each chargeback you get, you lose out on the transaction amount (if you lose the case or choose not to dispute the charge). You also get hit with fees. This is money out of your pocket. 

But the real risk occurs when your chargeback ratio gets too highThis is calculated as the number of chargebacks you get in relation to the number of transactions you process. 

Visa and Mastercard both have chargeback monitoring programs that keep track of merchants’ activity. The more chargebacks you receive, the higher your ratio becomes.  

The industry maximum ratio is 1%. If your rate hovers near this number, it’s bad for business. Really bad.  

You might be deemed a high-risk merchant. What happens then? 

Rolling reserves 

Your acquiring bank might decide your risk is too high. It might decide to protect itself with rolling reserves. 

This means the bank will set aside 5 to 15% of your transaction volumes to reduce its risk (and your risk) of potential losses due to chargebacks. Eventually, the funds that aren’t needed to pay for chargebacks are then released back to you.  

Rolling reserves hurt your cash flow.  

Loss of payment processing privileges  

If your acquirer decides that your business is just too risky, they might close your account altogether. This means you won’t be able to process credit card payments at all.  

Of course, this can seriously affect your business considering credit cards make up the bulk of payments these days. Credit card processing is essential today. Customers might choose to work with your competitor if they can’t pay with their preferred payment method. 

MATCH list 

If your acquirer decides to shut down your account, you’ll be placed on the MATCH listThis is the Member Alert to Control High Risk Merchants list.  

It warns all other acquiring banks that they shouldn’t do business with you either, so it’s going to become pretty much impossible for you to get another traditional merchant account for five years.  

Higher merchant fees 

At this point, you’ll need to apply for a high-risk merchant account instead of a traditional account if you want to continue processing card payments. A high-risk account comes with higher fees and might put your profitability at risk.  

Unfortunately, some industries are simply at a higher chargeback risk than others. These include the auto industry, tobacco and vaping, travel, medical cannabis, and nutraceuticals. If you're in one of these industries or have a history of excessive chargebacks, you should expect to pay higher fees. 


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Ben Smith

Ben brings 20 years of experience to his role as IT Director for BNA Smart Payment Systems. Among his many directorial duties, he is responsible for the selection, acquisition, development, installation, maintenance, and support of IT infrastructure. Ben also establishes and leads a cross-functional architectural committee, acts as a technical expert and a critical technical resource across multiple disciplines, and consults on all system implementation, modification and integration activities. He graduated with Honours from Durham Collage in Computer Programming, and takes yearly training courses for security and development technologies to remain up-to-date. Outside of work, he loves playing hockey and skating with his family, and also enjoys gardening and cooking.

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