Merchants and acquirers have a unique relationship that is paramount to the foundation of their success. Merchants must be able to accept and process credit card payments and for this they need an acquirer. However, acquirers are expected by the credit card companies, with which they have contracts, to enforce chargeback rules and regulations.
The acquirer is expected to enforce chargeback rules, to monitor chargeback thresholds, and to hold merchants accountable to credit card company-defined business rules. When a merchant meets or exceeds defined Visa chargeback rules (or other credit card company chargeback rules), the relationship with the acquirer can become contentious and costly.
Examples of these rules include specifying how the refund/return policy is communicated to customers, how purchase receipts should be tracked and maintained, and specific chargeback threshold rules and regulations.
The more time and effort the acquirer must spend on enforcing these guidelines and in monitoring merchant chargebacks, the costlier it is for the merchant to do business with the acquirer.
Chargeback Rules Enforcement
Every major credit card company has a chargeback monitoring program, which it uses to hold merchants and acquirers accountable to their business expectations. Depending on the credit card company, there are different types of merchant monitoring and levels of chargeback rule enforcement. (Merchants should review and be aware of these programs.)
For example, to enforce Visa chargeback rules, the credit card company has instituted the Visa Chargeback Monitoring Program. This program is used to monitor merchant chargeback activity monthly, and should the merchant reach defined chargeback thresholds, the merchant’s acquirer is notified of this violation with a written warning. The responsibility for adhering to these Visa chargeback rules then falls to the acquirer.
Visa states in its Chargeback Management Guidelines for Visa Merchants guide, “Merchants should work with their acquirer to develop a detailed chargeback-reduction plan which identifies the root cause of the chargeback issue and an appropriate remediation action(s).”
To help merchants adhere to Visa chargeback rules and thresholds, Visa does include some general recommendations on how to monitor chargebacks, including:
- Track chargebacks based on reason codes
- Track chargeback activity as part of the overall sales
- Track card-present and card-not-present chargeback data separately
These recommendations highlight why it pays for merchants to have a solution in place that allows monitoring and tracking of customer data, sales statistics measurement, and effective chargeback representment.
Visa Chargeback Rules Enforcement
To ensure merchants are adhering to Visa chargeback rules, the company has three programs within its umbrella Visa Chargeback Monitoring Program:
- Visa Merchant Fraud Program: Per monthly monitoring, the acquirer is notified with a written warning when merchants reach chargeback thresholds. The acquirer and merchant have a defined amount of time to bring chargeback numbers in line, after which time Visa will assess fees and penalties on the acquirer.
- High Brand Risk Chargeback Monitoring Program: Targeted specifically to high-risk merchants. There is not a notification or workout period for merchants upon reaching chargeback thresholds; the merchant’s acquirer is immediately fee-eligible for its high-risk merchants.
- Global Merchant Chargeback Monitoring Program: Applies to international merchants. Merchants are monitored monthly with acquirers receiving a written warning when a merchant meets chargeback thresholds. The acquirer and merchant have a defined amount of time to bring chargeback numbers in line, after which time Visa will assess fees and penalties on the acquirer.
Read the Visa Core Rules and Visa Product and Services Rules for explicit details on the time periods, penalties, and thresholds that Visa has defined for merchants and acquirers.
High or Low-Risk Merchant?
When it comes to working with acquirers (and credit card companies), merchants do not want to be labeled as high-risk. Most acquirers and credit card companies have low tolerance for high-risk merchants, and as a result they hold such merchants to strict chargeback rules enforcement and monitoring.
A merchant can be labeled as high-risk for several reasons, with the principal factors being:
- Risky niche business—such as direct marketing, adult content, nutraceuticals, or travel services
- Terminated Merchant File. A file that’s similar to the MasterCard Member Alert to Control High Risk Merchants (MATCH) list that is used to track merchants who have had their merchant accounts closed.
- Minimal credit card processing history or bad credit history
- History of high chargeback ratios
- Failure to improve chargeback management practices.
Merchants labeled as high-risk, along with being held to stricter credit card monitoring programs, experience a higher cost of doing business. Every merchant, regardless of risk level, pays fees to acquirers to process credit card payments. For high-risk merchants, these fees are much higher than those of low-risk merchants. Additionally, these high-risk merchants are assessed additional acquirer penalties for chargeback occurrences.
Managing Merchant Risk
Risk management is a major determinant of merchant success. Along with knowing the market and business space, merchants must manage their own risk factor to ensure they can maintain an affordable business relationship with acquirers.
The higher the risk, the more costly it is to succeed. As Visa and the other major credit card companies highlight, merchants are expected to self-monitor and track their chargebacks. This requires intelligent solutions such as Verifi’s Order Insight or Chargeback Revenue Recovery Service.
Knowing where your risks are before they damage your acquirer and credit card company relationships, you can protect your business and maintain your low-risk status. Don’t leave this risk management to chance – contact Verifi, your trusted team of chargeback experts to help keep your risk low and your business costs affordable.