The issue of chargebacks for online retailers has been contentious, with retailers looking for ways to make themselves less vulnerable to customers who disavow their transactions and the banks looking to protect themselves from what they see as a high-risk environment. Thus it was no surprise that merchants were on the defensive when Visa announced it is reducing the level of chargebacks at which it would impose fines on retailers.
Beginning Oct. 1, Visa’s merchant chargeback monitoring program imposes penalties after monthly chargebacks total 100 and equal 1% of transactions for four months. That is a change from 50 chargebacks and 2.5% that previously held. Visa was quick to note that the changes simplify the chargeback program to include fewer retailers. “This will result in 45% fewer merchants impacted by the program,” a spokeswoman says.
But some retailers were skeptical. A number feared the program would 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. And others feared that previous levels of chargebacks that kept them out of the program would now draw them in. “Some merchants are scared to death,” Foster says.
Visa says the change is not designed to snare more merchants, but to keep some from bouncing in and out of a program that 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.”
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 could incur fines up to $25,000 plus up to $100 per chargeback.
Four-month grace period
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. 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 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 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 monitoring program. She was unable to break out how many online merchants are in the monitoring program.
But Foster adds that one of the more costly results of the chargeback monitoring program for merchants is that it encourages many to overly guard against chargebacks, in effect throwing away many good transactions to catch a small percentage of bad ones. m
Taking on the risk of online debit cards
Some consumers are skittish about using their credit cards online because they fear unauthorized charges to their credit accounts. Other consumers are so fearless, they use their debit cards-which link directly into their checking accounts-for online purchases.
Visa reports that during the first six months of this year, consumers used Visa debit cards to spend $8.9 billion on the Internet. “With the growth of e-commerce, more American consumers are choosing their debit card as the way to meet their payment needs on the Internet,” says Stacey Pinkerd, senior vice president for debit and prepaid products.
But using a debit card can be riskier than using a credit card because the funds come straight from a customer’s checking. Criminals could drain the account before the consumer even knows what’s happening. And customers simply have less recourse than with credit cards. “We advise consumers to use debit cards for a cash-and-carry purchase, rather than when buying for future delivery,” says Susan Grant, vice president for public policy at the National Consumers League. Noting that Visa and MasterCard have policies that treat debit card disputes the same as credit card disputes, Grant says: “If you have a problem when you’ve paid by debit card, the money is already deducted from your account and you have to prevail upon your bank to put it back in. With a credit card, you haven’t paid the bill yet so it makes it easier to dispute.”
MasterCard International declines to offer comparable figures for its debit cards.