September 4, 2003, 12:00 AM

Visa to lower fee-inducing chargeback ratio to 1% of transactions

Starting Oct. 1, Visa will impose fees after monthly chargebacks total 100 and amount to 1% of transactions for four months, compared to 50 chargebacks and 2.5% now.

Beginning Oct. 1, Visa’s merchant chargeback monitoring program will impose penalties after monthly chargebacks total 100 and equal 1% of transactions for four months, compared to the current figures of 50 chargebacks and 2.5%, InternetRetailer.com has learned. Visa says the changes simplify the chargeback program to include fewer retailers. “This will result in 45% fewer merchants impacted by the program,” a spokeswoman says.

Visa realized earlier this year that its chargeback monitoring program was too complicated and included too many merchants. “Some merchants were included for technical system issues and were in and out of the program quickly,” the spokeswoman says. “So we streamlined it.”

Nonetheless, a number of merchants fear that the program could lead to excessive fees, says Jeff Foster, executive vice president of Retail Decisions, a company that provides merchants with card processing and anti-fraud services. “Some merchants are scared to death,” he says.

Visa’s new formula favors small merchants over large ones, Foster says. “They’re letting the little guys off the hook, but tightening the reins on the bigger ones,” he says.

He notes that a merchant with 2,000 credit card transactions and 50 chargebacks per month currently falls under the monitoring program, because it would hit the limit of 50 chargebacks at 2.5% of transactions. But under the revised rules, the monitoring program doesn’t kick in until a merchant has at least 100 chargebacks at 1% of transactions.

“If a merchant is doing 10,000 transactions a month today with 200 chargebacks, it’s not in the program because 200 is not 2.5% of 10,000,” Foster notes. “But as of Oct. 1, that merchant would have to cut its number of chargebacks by more than 50%, to under 100, to stay below 1% of 10,000 transactions.”

Retailers in violation of Visa’s guidelines could be liable for fines up to $25,000 plus up to $100 per chargeback.

The chargeback monitoring program typically begins charging fees after four months of warnings that a merchant has hit the limits of monthly chargebacks, Visa says. Visa charges fees to merchant acquirers, who then typically pass on the fees to merchants. Under the current rules, merchants can be kicked out of the Visa payment system after 14 months of hitting the chargeback limit; under the new rules, merchants can be disqualified after 10 months.

By moving its chargeback limit to 1% of transactions, Visa is setting a bar that is lower than the average percentage of chargebacks realized by online merchants, experts say. Foster notes that chargeback rates for online merchants range from 1.5% to 2%, though others have put it even higher. Visa, however, says the average chargeback rate for Visa-branded transactions is lower than 1.5%.

Foster adds that some online merchants say they think Visa changed its chargeback review program as a way to induce more retailers to join the Verified by Visa program, through which merchants and consumers use a personal identification number to authenticate online card transactions. Merchants that participate in the Verified by Visa program (and a similar SecureCode program from MasterCard International) avoid liability for chargebacks, which are then absorbed by credit card issuers instead of merchants.

Visa contends that its review policy is intended to help merchants and merchant acquirers avoid chargebacks while also reducing the cost of the monitoring program. The spokeswoman notes that Visa has already reduced its number of chargebacks 21% in 2002 over 2001, and that less than 1% of the 5 million U.S. merchants that accept Visa cards have been included in the chargeback monitoring program.

But he adds that one of the more costly results of the chargeback monitoring program for merchants is that it encourages many of them to overly guard against chargebacks, in effect throwing away large amounts of good transactions to catch a small percentage of bad ones.

He notes that one retailer recently decided to reject all transactions from consumers in 14 countries to avoid what had become a 10% chargeback rate from foreign customers. “But 90% of those transactions were good, so the merchant cut a huge amount of revenue because he can’t afford the chargebacks,” Foster says.

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