A chargeback-to-transaction ratio compares the number of chargebacks a merchant receives to their total number of transactions in a given time period. This ratio is used by card networks to assess a merchant’s risk level and determine whether intervention is needed. In most situations, merchants are expected to keep their chargeback-to-transaction ratio below 1%. Ratios are calculated monthly and closely watched by acquiring banks. Breaching thresholds could lead to enrollment in a chargeback monitoring program.
Here’s how American Express and Discover calculate a merchant’s chargeback-to-transaction ratio.
Here’s an example:
Mastercard uses a calculation that is similar to the American Express and Discover calculation. However, Mastercard compares the current month’s chargeback count to the previous month’s transaction count.
Here’s the Mastercard chargeback-to-transaction ratio calculation:
And here’s an example:
NOTE: Visa uses a similar but different metric — the VAMP ratio. Check our VAMP guide to learn how the ratio is calculated and what the threshold is.
Staying below chargeback thresholds is critical for account stability. Maintaining a healthy ratio not only avoids fees and fines, but also signals to processors that your business is well-managed and trustworthy. A rising ratio may indicate fraud, fulfillment issues, or policy gaps — understanding the source is key.
AltoPay tracks your ratios — including VAMP — in real time so you can react before problems escalate.
6 things to know about your chargeback-to-transaction ratio
Your chargeback-to-transaction ratio holds a lot of valuable information. Here’s how to uncover insights and act on your discoveries.
Break down your ratio by MID and card brand.
Ratio thresholds are set by the card brands (Mastercard, Visa, etc.) and monitored on a per-MID basis.
As a reminder, Visa no longer calculates the chargeback-to-transaction ratio. Monitoring is done on the VAMP ratio instead.
So it’s helpful to break down your ratio data by brand and MID. Here’s a hypothetical example:
- MID 3456: VAMP = 1.6%, Mastercard = 0.7%
- MID 9877: VAMP = 2.2%, Mastercard = 1.3%
This helps you monitor threshold breaches and anticipate potential fees.
However, account terminations aren’t brand specific. Meaning, your acquirer won’t turn off Mastercard processing but let you continue processing Visa transactions.
While it’s important to monitor brands individually, you also need to keep an eye on each MID as a whole.
Maintain a high-level overview for your entire MID portfolio.
Terminations happen at the account level. So you need to know the chargeback-to-transaction ratio for each individual MID.
But you should also monitor chargeback activity for all your MIDs combined. This helps you understand the overall impact that chargebacks have on your business and how your bottom line is affected.
Calculate your ratio by chargeback amount.
Conversations about your chargeback-to-transaction ratio are nearly always focused on count — the number of transactions and the number of chargebacks.
But you also want to monitor your chargeback-to-transaction ratio by value — the amount of your chargebacks divided by the amount of all your processed transactions.
This helps you monitor net revenue — not just gross revenue. Look for unexpected spikes that can threaten profitability.
Drill down by different variables to prevent future disputes.
Analyse the different aspects of your business within the context of risk. Here’s an example of what we mean:
- Pick a transaction variable to analyse. For example, the marketing sources that generated this month’s purchases.
- Calculate the chargeback-to-transaction ratios for each contributing factor. For example, Facebook, Instagram, TikTok, and Google ads.
- Isolate the 10 contributing factors with the highest chargeback-to-transaction ratio.
- Try to determine what makes those elements risky. For example, a certain platform doesn’t offer age targeting, so all your chargebacks are coming from young shoppers who aren’t financially stable and are prone to buyer’s remorse.
- Work to reduce risk for your chosen variable. For example, pivot your budget to platforms with age targeting features so you can focus on more mature shoppers.
Repeat this process for as many variables as you can identify and monitor — such as the product name or SKU, the customer’s country, the product’s price point, the issuer’s BIN, or the corresponding subscription cycle.
Use your ratio to maintain perspective.
Correct conclusions require context. And two-factor metrics like your chargeback-to-transaction ratio often yield more accurate analysis than one-factor metrics like chargeback count or sales volume.
For example, let’s say you start selling in two new countries — Germany and Italy. Within a few months, your chargeback activity has started to creep up. You look at the numbers, and 73% of all your chargebacks have come from Germany. Based on this information alone, you might think it’s best to stop selling in Germany and do more business in Italy.
But if you look at the chargeback-to-transaction ratio for each region, you’ll uncover a different story than what you’d understand if you only looked at volume.
Germany
Italy
40 chargebacks
8,000 transactions
0.5% chargeback ratio
15 chargebacks
1,500 transactions
1% chargeback ratio
Germany
40 chargebacks
8,000 transactions
0.5% chargeback ratio
Italy
15 chargebacks
1,500 transactions
1% chargeback ratio
Understand ratio thresholds.
Each card brand sets its own thresholds for the chargeback-to-transaction (or VAMP) ratio. If you go over the limit, your business could be enrolled in a monitoring program — which comes with administrative hassles and additional fees.
If you are enrolled in the program for too long, your acquirer may choose to terminate your processing capabilities.
Thresholds are impacted by several factors — the card brand, your business type, where you sell, etc. But generally, Mastercard’s limit is 1-1.5% and Visa’s is 1.5%.
However, there is a big difference between card brand thresholds and acquirer thresholds. Mastercard might set the limit at 1.5%, but your acquirer might expect you to stay below 0.9%.
Make sure you not only understand the different card brand thresholds, but also your acquirer’s expectations.
Want help lowering your chargeback-to-transaction ratio?
If your chargeback-to-transaction ratio is higher than you’d like it to be, AltoPay can help. Our AltoShield suite of chargeback prevention solutions can lower your ratio — and keep it low. Reach out today to learn more.
