Chargeback Ratio

What is a Chargeback Ratio?

A chargeback ratio is the percentage of a business’s total transactions that customers issued chargebacks against within a given time period.

It can be calculated as either:

• Chargeback by count: The number of disputed transactions divided by the total number of transactions within a given time period.
• Chargeback by volume: The total disputed sale amount over the total sales amount processed in a given time period.

Understanding Chargeback Ratios

How your chargeback ratio is calculated (by count or by volume) and how concerning your chargeback ratio is depends on who’s calculating it.

Credit card brands have concrete formulas for defining chargeback ratios and the thresholds merchants must stay within. These thresholds, used for XYZ , help the credit card brands curb large-scale, systemic problems caused by credit fraud.

See: Chargeback monitoring programs

Credit card processors – also known as ISOs – each have their own chargeback ratio thresholds, designed to mitigate their risk in working with individual merchants (or category of merchants, like a specific industry).

When a merchant crosses this threshold, their ISO may relegate them to an excessive chargeback or high-risk monitoring program - or even close the account.

How Credit Card Brands Calculate Chargeback Ratios

The four major credit card brands – Visa, MasterCard, Discover, and Amex – all calculate chargeback ratios by count. They differ, however, in the time periods they identify dispute and transaction counts from, and the chargeback ratio thresholds they set.

Visa, Discover, and Amex calculate a merchant’s chargeback ratio by dividing the total number of chargebacks in the current month by the total number of transactions processed within that same month.

MasterCard, however, divides the total number of chargebacks from the current month by the total number of transactions processed in the previous month.

Visa places any merchant who exceeds their chargeback ratio threshold of 0.9% in a chargeback monitoring program. Discover and Amex set their chargeback ratios at 1%, while MasterCard expects merchants to remain below 1.5%

Chargeback Ratio Example

Consider a business with the following transaction history:

• Number of transactions processed: 400
• Total sales processed: $1000 USD
• Number of chargebacks: 2
• Total amount disputed: $20 USD

By count, this business’s chargeback ratio for the current month is 0.5% (2 chargebacks divided by 400 total transactions processed). By volume, however, their chargeback ratio is 2% ($20 disputed divided by $1000 processed).

In this example, it’s easy to see how different a business’s chargeback ratio can be, depending on how it’s calculated.

None of the major credit card brands would place this business in a chargeback monitoring program, as the chargeback ratio by count (0.5%) is well below their thresholds. On the other hand, any ISO that calculates chargeback ratios by volume may consider a 2% chargeback ratio excessive, and identify this business as high risk.