8 Things Payment Processors Want You to Know About Chargebacks

Every merchant will incur chargebacks at some point. It is not necessarily a reflection of bad business practices on your part, and it does not indicate that your customer is trying to steal money from you. In addition, changing processors will not remedy and prevent the occasional chargeback from coming in.

The key is to find a processor or service provider that will assist in properly explaining the chargeback and make their best attempt to remedy the chargeback, if possible. In addition, a quality processor/service provider will take the time to thoroughly explain if a chargeback cannot be remedied, help prevent a similar chargeback in the future, and be a partner with you in fighting and preventing chargebacks.

I think it’s important for you to know that fighting a chargeback is only half the battle. Understanding why you received a chargeback and what you can do to prevent chargebacks is critical to your business and accepting credit card payments. Having a strong analytics tool, understanding your sales life cycle, and monitoring customer engagements are all critical to your overall success.

The single most important thing for you to do regarding disputes is to engage. Depending on your business’s size, industry, and likelihood of disputes, engagement may be as simple as responding to chargebacks or could be as in-depth as developing a multi-step strategy with your merchant service provider to ensure you are preventing disputes in the most effective way possible.

One key factor that we often see merchants overlook is this: why are your customers charging back? It’s important to review your chargeback data and understand what led to the chargeback. Sometimes, the answer is right there and is a quick fix.

In the past, merchants have been able to hide and talk their way past bad behavior. Now, with information being shared at so many levels, it is unlikely for a merchant to just run away from past performance. Being straightforward with underwriting personnel allows them to deal with previous issues and not waste your time.

Even though the associations (Visa, Mastercard) have a chargeback-to-transaction limit of 1%, most processors have a lower limit when evaluating merchants. The conservative processing limits can range from 0.6% to 0.8% (much lower than the 1% threshold set by Visa and Mastercard). It’s important for you to understand this when applying to a processor.

Some merchants understand their chargeback ratios and can throttle transactions to ensure they are never over the 1% limit. But knowing what the processor deems as high, and using that number as the metric, will help keep you off the ‘questionable or bad merchant list’ (in the eyes of the processor). Being on the ‘bad’ list can mean surcharges, extra fees, and even termination in some cases.

The processor threshold is a key variable to understand.

What we have seen in the payments space in the last 5-10 years is technology companies entering the space with automated approval processes for underwriting. While this might work for some business models, internet companies usually have complexities that warrant a full underwriting.

We have seen the negative impact of automation when merchants are not fully underwritten. Businesses end up with an account closure or, worse yet, on the TMF/MATCH list.

Managing risk exposure and working with the right acquiring solution are critical for the success of companies today and are often overlooked.

EMV (EuroPay, Mastercard, and Visa) is a global standard for payment cards that uses computer chips to authenticate transactions. The most important thing that you should know about EMV is the accompanying liability shift.

This liability shift means that merchants using non-EMV-compliant devices to accept transactions made with EMV-compliant cards assume liability for any and all transactions that are found to be fraudulent. There is no recourse in these situations.