Chargeback Rate

What Is the Chargeback Rate?

Chargeback rate is a metric that retailers use. It compares the total number of transactions that a retailer processes with the total number of chargebacks that the retailer receives. Retailers monitor their chargeback rate to understand their business fully in financial terms, to support the quality control analysis and as a means of identifying return fraud.

A chargeback rate is not the same as a refund rate. A retailer’s refund rate concerns refunds that consumers request directly from the retailer. A chargeback rate, on the other hand, relates to refunds that consumers request from their bank or card issuer. It is then up to the card issuer to liaise with the retailer’s bank in order to attempt to recover the funds and return them to the customer.

The retailer is liable for the fees that are incurred as part of this process, meaning that chargebacks cost retailers more dearly than direct refunds do.

How Does the Chargeback Rate Work?

The chargeback rate works by informing retailers and credit card companies about what percentage of a retailer’s transactions result in a chargeback.

It is easy to calculate a retailer’s chargeback rate. You simply divide the total number of chargebacks by the total number of transactions, then multiply the resulting figure by 100.

As an example, a retailer that processed 200 transactions and received one chargeback would have a chargeback rate of 0.5%.

What You Need to Do to Lower Your Chargeback Rate and Why

There are various ways that retailers can keep their chargeback rate down. The first and most obvious is to produce high-quality goods. Paired with attentive customer service and detailed, accurate product descriptions, this sets the scene for happy customers and, as such, a lower chargeback rate. A direct and easy-to-follow returns and refunds policy can also help to reduce chargebacks to a minimum.

That said, the nature of ecommerce means that retailers who sell products online are more likely to end up having to deal with returns, refunds and chargebacks. According to Investp, shoppers return a staggering 30% of the products that they purchase online, while brick and mortar stores have a much lower return rate of 8.89%. The higher return rate for ecommerce stores means that such retailers need robust processes in place for handling chargebacks.

Retailers also need top notch fraud transaction monitoring in place if they want to lower their chargeback rate. Many fraudsters carry out chargebacks as part of double dipping scams. This is where the fraudster buys an item, then requests a refund from the retailer and a chargeback from the bank, often while also failing to return the goods. According to MidMetrics, around 10% of all chargebacks are connected to double dipping.

Retailers not only need to keep their chargeback rates low as part of their fraud prevention strategies, but also in order to avoid being flagged as high risk accounts with their banking partners. Chargeback rates that are too high mean that credit card companies may raise the amount they charge in fees for processing each chargeback. They may also issue penalty fees.

As well as costing retailers money in terms of fees, chargebacks also have a cost implication in terms of the staff time that is spent dealing with them – another reason why it’s important to maintain a low chargeback rate.

Examples of Chargeback Rates

Understanding how to calculate your chargeback rate is essential. It’s also important to appreciate what constitutes a good chargeback rate, so that you can ensure you stay within that range.

Obviously, the ideal chargeback rate is 0% but very few retailers are able to attain that lofty goal. Instead, the two examples below look at what is likely to be considered acceptable in terms of chargebacks.

Industry Standard

According to Midigator, chargeback rates have been falling in recent years, largely driven by decreases in Mastercard and Visa chargebacks. The overall chargeback-to-transaction ratio in the firm’s annual study stood at 3.76% back in 2017, but by 2021 it had dropped to just 1.52%.

In terms of what to aim for, a chargeback rate of 1% is a healthy goal. That means aiming for just one chargeback for every 100 transactions. Maintaining a rate of 1% or lower should be sufficient to keep most card issuers happy and avoid retailers having to pay penalty fees or excessive fees for each transaction.

High Chargeback Rates

Using an example of a retailer with a high chargeback rate, it’s easy to see the related issues. The retailer will have to devote time and effort to processing chargebacks, while also paying additional fees to the card issuer. This is why it is so key for retailers to keep their chargeback rates low.

While there may be some flexibility if the rate goes higher than around 1% for just one month, then comes down the next month – after all, blips do occur – any retailer with a chargeback rate that is consistently above this level is likely to be deemed high risk by the credit card company.

Why Is the Chargeback Rate Critical?

The chargeback rate is critical because monitoring it can help a business to understand its profitability. It can also help a business to identify issues with its quality control procedures and instances of fraudulent activity taking place. Keeping the rate low is also critical to reducing unnecessary expenditure (on fees and/or penalties) and avoiding staff time being wasted on the administration of chargebacks.

Is This an Indicator of Friendly Fraud?

A high chargeback rate can be an indicator of friendly fraud. This means the retailer may attempt a chargeback recovery, where it asks for the chargeback to be repaid.

Friendly fraud is one of three types of chargeback fraud and is the most common of the three – the other two being criminal fraud and triangulation fraud. Friendly fraudsters are cardholders who request chargebacks from their bank with the goal of abusing the retailer’s policy and keeping the goods they purchased, all while also receiving their money back.

A retailer with a high or increasing chargeback rate should investigate this, keeping the likelihood of friendly fraud firmly in mind.