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The Green Sheet Online Edition

July 27, 2009 • Issue 09:07:02

Understanding chargeback rules

By Ken Musante
Moneris Solutions

Cardholders have little patience for chargebacks. When they dispute charges on their statements, they submit disputes to the card-issuing banks that correspond to acquiring banks, which, in turn, correspond to merchants who must either accept or dispute chargebacks.

While chargebacks are messy, they occur less than once per 1,000 transactions. Thus, when they arise frequently, and at the same merchant, Visa Inc. and MasterCard WorldWide take notice.

Both card companies have set limits on chargebacks and chargeback ratios; if merchants were to continue with abnormally high chargeback ratios, the card brands could suffer reputational damage, and cardholders could lessen or discontinue transacting.

To prevent this, both brands have implemented severe fines and escalating penalties for violations. Visa has two specific chargeback monitoring programs and a fraud identification program to minimize disputes and cardholder angst. MasterCard has similar programs.


Visa's Merchant Chargeback Monitoring Program (MCMP) places merchants that exceed all of the following in a given month into the MCMP program: 100 transactions, 100 chargebacks and a 1 percent or greater charge-back ratio. In the MCMP program, merchants have three months to reduce chargebacks before per-chargeback fines kick in. During the first three months, there is an initial notice for the first trigger month and a two-month workout period.

Fines of $5,000 and $10,000 can be assessed in months one and two, respectively, if an acceptable chargeback reduction plan is not submitted within 10 days of notice by Visa. This is significant given that Visa notifies the bank, which (sometimes) must then notify the acquirer, who must then notify the merchant.

Additionally, beginning in the third month in which a merchant is in the program, the merchant is fined $50 per chargeback with escalating fines as follows:


Worse, should the merchant exceed the program's limits for more than 9 months, the merchant may be permanently disqualified from accepting Visa transactions.

Visa has another program, specifically targeted to high-risk merchants, called the Visa High-Risk Chargeback Monitoring Program (HRCMP). High-risk merchants are defined as merchants with the following merchant category codes: 5962, 5966, 5967 and 7995.

This program's review fees are greater, starting at $5,000. The per-chargeback fines are larger, as well, and are assessed the first month the merchant triggers a program.


Visa reserves the right to disqualify high-risk merchants after the sixth month. Furthermore, for acquirers na_ve enough to sign high-risk merchants without proper registration, there is a $25,000 per-merchant fine.

In both the MCMP and the HRCMP, merchants remain in the monitoring program until chargebacks are under the threshold for three consecutive months.


To further protect cardholders, Visa also monitors reported fraud transactions through its Risk Identification Service (RIS). The RIS program can sometimes more quickly identify problem merchants and is dependent upon issuer reported fraud. Reported fraud is highly correlated to chargebacks, but not always on a one-to-one basis.

The RIS program identifies merchants with more than $25,000 in reported fraud and more than 100 fraud transactions and fraud transactions of 1 percent or more. The fees and fines for this program are as follows:


Merchants may be disqualified from accepting Visa at month 10. MasterCard's Excessive Chargeback Program (ECP) applies to all merchants; no distinction is made between high-risk and non-high-risk merchants. The ECP has two tiers, Chargeback Monitored Merchants (CMMs) and Excessive Chargeback Merchants (ECMs).

To be a CMM, all of the following must apply over a calendar month: At least 50 chargbacks and a 0.50 percent or greater chargeback to transaction ratio. This ratio is calculated by dividing the number of chargebacks in a given month by the number of transactions in the preceding month.

The monthly merchant fines are $50 per merchant per month.The second classification, ECM, is more severe. It is applied to merchants who exceed all of the following thresholds over a given month: At least 50 chargebacks and a 1 percent or greater chargeback to transaction ratio. This ratio is calculated by dividing the number of chargebacks in a given month by the number of transactions from the prior month.

A $500 reporting fee is assessed each month a merchant triggers the ECM. MasterCard also assesses an issuer recovery fine and a violation fine. MasterCard's fee schedule is a bit more complex. Like Visa, MasterCard requires a chargeback reduction plan with fees escalating to $1,000 per day for late submittal.

Unlike Visa, MasterCard relies on self-reporting by the acquirer. Because MasterCard reserves the right to audit, acquirers would be shortsighted if they failed to report their violators.

The benefit to the acquirer is that it will know earlier in the month where its merchants fall within the program, whereas Visa's reporting is often nearly one month in arrears. MasterCard also has an issuer reimbursement fee that is calculated in accordance with section of MasterCard's Security Rules and Procedures Manual:

"Merchants continue to be classified as an ECM until they drop below the threshold for two consecutive months."

Brand protection

Visa and MasterCard enforce these rules rigorously. Their brands are their most valuable assets, and protecting them is more important to them than individual merchants. Regardless of the size of the merchant or perceived unfairness, these rules are consistently applied.

ISOs and merchant level salespeople would be wise to understand these fee and fine programs so that, should their merchants enter one of them, they have proper reserves for the chargebacks - and the fines. Service providers may also assist merchants in understanding the consequences if chargebacks get out of hand. end of article

Ken Musante is Executive Vice President and Chief Sales Officer of Moneris Solutions. You may contact him by phone at 707-269-3200 or e-mail at kmusante@hbms.com.

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