DirectPayNet often gets questions on merchant accounts and payment processing in general from many entrepreneurs of all stripes. This includes business owners we have never actually worked with.

We get numerous inquiries about offshore payments, chargeback rates, high-risk management and more (sometimes the same ones in a given week). So, we’ve created FAQ Fridays to address your concerns.

Every Friday we will answer frequently asked questions about payment processing. Send your questions to our sales department and you’ll get free advice to resolve your issue.

That said, let’s get to our first question and answer.

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Q: We are a US-based digital marketing agency. Our July 2020 merchant account statement shows we have an 8% chargeback rate. Will our payments get shut down?

A. According to new credit card rules you could be well over the limit for an acceptable chargeback rate. However, being shut down for high chargebacks is a complex matter that really depends on a few factors.

For instance, it’s important to note who is providing your payment processing. If it’s a third-party platform like Stripe or PayPal, chances are your could be terminated without question. If you have a payment provider that is more familiar with your type of risk, they may offer a grace period.

Another area to exam is your total number of chargebacks for Visa vs. Mastercard in a calendar month. Visa implemented a new threshold for high-risk merchants that cites you should not have more than 50 chargebacks in one month. That’s just for Visa alone. So, if you have 50 chargebacks for Visa cards, that doesn’t take into account Mastercard.

However, your payment gateway and merchant account providers will be alarmed if they see 50 chargebacks regardless of the card type. Don’t assume that because you have 50 Visa chargebacks, 30 Mastercard chargebacks and one Discover chargeback that you won’t get a warning.

On another note, there are two monthly chargeback rates you need to pay attention to:

1. Chargeback-to-sale count ratio (e.g. 8 chargebacks / 100 sales x 100 = 8%)
2. Chargeback-to-sale amount ratio (e.g. $500 total chargeback amount / $15,000 total sale amount x 100 = 3.33%)

Stay below 1% for both the chargeback count and amount

Don’t make it a habit of going over a 1% chargeback rate threshold for more than 3 months in a row. Your provider’s appetite for risk may differ compared to another providers. There are several factors your merchant bank looks at before deciding whether to keep you on board. Keep lines of communication open if you’re experiencing an issue in your business.

Sometimes merchants with more than one merchant account think if they get away with 5% chargeback-to-sale amount rates with one merchant account, they can do the same with another account. That’s definitely not the case and you should not be that confident that your processing is safe.

We’ve written extensively about chargeback rates and new Visa rules. So, we encourage you to visit our blog posts for more advice.

In the meantime here are some recommendations

If you have the budget, add anti-fraud software to your shopping cart so you can set intelligent rules to reduce incidents of fraud. Use the fraud tools available in your payment gateway to add another layer of security. Consider using 3DS2 to authenticate transactions (read more here).

For example, set a limit on the number of times the same credit card is used in a month or longer time frame. Or, ban transactions that are missing the security code. If a potential customer is not entering this information at checkout, block the order. Chances are they’re using a stolen card.

Plan for the future if chargebacks go from bad to worse

Prepare a fraud reduction plan so you can show how you intend to reduce fraud. Show your merchant bank or payment gateway provider why you had high chargebacks in the first place. This will take some investigating on your part.

Perform an audit on your sales up to 90 days. Find out why chargebacks occurred. It could be that you have poor affiliates that sent terrible traffic your way.

Perhaps your media buying campaign is the culprit and the conversion rates are poor because of overpromising and underdelivering. Maybe there was an issue with order fulfillment and your products were delayed due to supply chain issues. Whatever the reasons for the fraud, outline it in your fraud reduction plan.

Implement ways to resolve these problems

This might include ending relationships with affiliates and media buyers. And, with these chances you can probably forecast how much it will improve your e-commerce business and online offers. Will it reduce your fraud-to-sale ratios by 5% in 30 or 60 days?

Whatever your strategy, it’s key to document this in your fraud plan. Without a doubt, your payment provider will ask you these questions.

Finally, the Coronavirus pandemic has created a lot of delays with payment providers. Just because your merchant account isn’t terminated, that doesn’t mean you’re in the clear. You could be on the chopping block next month.

So, use this time to improve your merchant account performance. All payment providers perform seasonal compliance checks on all merchants. Don’t get caught with your pants down. Clean up your chargebacks as soon as you can.

Got a question for our FAQ Fridays segment? Do you need help reducing your chargebacks? Trying to get approved for a merchant account? Email us with your questions and concerns.