Did you know, refunds are calculated into your chargeback ratio?

Visa and MasterCard have two scores used to help calculate how risky a business is that processes with them. Of these scores, one is based on chargebacks, and one is based on returns. Now, two scores may make the title of this seem misleading, but for reasons of simplicity, many processors combine these into a single number for risk assessment.

What this means:
This essentially means that a business’s merchant account can be shut down, the business can be penalized, or they can even be placed on the TMF (Match File) for having too many chargebacks or ‘too many returns’.

You’ve got to be kidding me:
Most of us view returns as taking a proactive approach at customer service, so naturally we don’t associate returns with risk. You are making your customer happy, because you failed to deliver them what was owed, and were making due. Or, because they were complaining a lot, and refunding them was the easiest way to make them happy. Or, simply because something got a little messed up and a refund was the appropriate action at the time. Whatever the case, you fixed the problem before it escalated to a chargeback. Good service right?…

Not everyone sees it the same way. When taking a look into risk assessment, there are a few flags that immediately alert that something is wrong. First off, chargebacks are the obvious one. Apart from the occasional, non-recognized name on a statement, or some other frivolous reason, a chargeback usually means your business failed to provide the service agreed upon, and you failed to make your customer happy afterwards. It is not a good thing, and should not be taken lightly, not by the customer making it, and especially not by the business receiving it. Your customer is essentially saying that you failed, and they need a higher power to correct the situation. Getting a lot of chargebacks is very bad!

Now a return, while not as severe as a chargeback, is also an indicator that you, as a business, are not living up to your end of the deal. Businesses will always have returns, customers return merchandise, customers buy the wrong products, and processors know this. But, when returns go up a lot in the dollar amount, or start becoming very frequent, Visa and MasterCard see it. Your processor sees it too, and can take action to protect their investment in you. With each return, there is a chance that you don’t have the money available in your account. Since the processing system does not check the balance in your bank account before you make a return, the processor risks paying the bill every time. As silly as it sounds, this scares processors, a lot.

What investment do they have in you?
When your processor approves your merchant account, they are taking responsibility for all of the money you process. They are financially liable for every penny. If you were to process a million dollars and have it all charged back to you, they get the bill when you cant pay. For thousands of businesses, processing millions or billions of dollars, that is a lot of money to be liable for.

How returns can tip the scale:
Since returns are often weighed into the standard chargeback ratio on the processor’s level, they can easily cause your business to break the dreaded 1% mark. For a small business, 1% is not a lot of room. Luckily, returns are usually weighted so that several returns equals one chargeback, but then again returns are far more common that chargebacks.

Conclusion:
This is not meant to scare anyone, but is it definitely something to think about especially during the post-holiday season. It would be extremely rare for a business to have any repercussion against them for slightly breaking the 1% mark once, but repeatedly breaking it will most definitely cause some negative reactions.

It is also a good idea to look at your current return policy and amend it if necessary. Things like only returning to the same card that made the purchase are not just a good idea, they will help protect you from loosing to fraud. Check out this recent post about return fraud. There are some ideas on how to handle return fraud and some good general ideas on how to handle returns.