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The Green Sheet Online Edition

November 23, 2009 • Issue 09:11:02

Hazards of chargeback monitoring

By Ken Musante
Moneris Solutions

In "Understanding chargeback rules," The Green Sheet, July 27, 2009, issue 09:07:02, I wrote about chargeback rules, programs and associated fines, and discussed how Visa Inc. and MasterCard Worldwide rigorously enforce those rules and enact programs to protect their brands.

I also discussed the ramifications of continuously exceeding the threshold and the possibility for merchant disqualification in extreme cases.

Because of the severity of the penalties, you might expect Visa and MasterCard to have highly sophisticated monitoring for these programs. Unfortunately, neither company has an exact count of chargebacks by merchant number. Rather than speculate on why, I would like to share the consequences.

MasterCard's requirements

MasterCard mandates acquirers to report each merchant who exceeds specific thresholds. It must include the:

  • Merchant's name and location
  • Calendar month of the violation
  • Merchant category code and description of business
  • Gross dollar volume and number of transactions for the month in which the violation occurred and for the preceding month
  • Gross dollar volume and number of chargebacks for the month in violation

Failure to provide this report within 30 or 45 days following the end of a calendar month (depending on the program) may result in fines of $5,000 per month for each merchant for which a report is overdue. Fines may escalate to $1,000 per merchant per day for more serious merchant violators.

My point, however, is not the fines' severity, but rather that MasterCard relies on self-reporting. I imagine some acquirers do not even realize they are required to notify MasterCard in the event of a violation.

Visa's requirements

Visa, on the other hand, is able to identify merchants directly and identify violators. Visa relies on the merchant's Doing Business As (DBA) field and counts both transactions and chargebacks associated with a specific merchant. Regardless of whether the acquirer is familiar with the chargeback monitoring program, it will be singled out if it exceeds the threshold.

Visa's Merchant Data Manual outlines specific naming conventions to use in the DBA field to assist Visa in tracking and identifying violators. Visa prohibits merchants from creating a unique DBA for each product the merchant sells because it makes monitoring attempts futile.

Visa recently notified acquirers they are required to ensure direct-marketing merchants are in compliance with DBA requirements by Jan. 1, 2010. I believe this communication was necessary because of how Visa monitors merchants. To monitor merchants by DBA, the naming convention must be known and common among acquirers.


Both Visa and MasterCard programs, however, have chargeback levels that must be exceeded to "trip" their program thresholds. Visa's Merchant Chargeback monitoring program is for merchants exceeding 100 chargebacks and a 1 percent chargeback-to-transaction ratio in a calendar month.

MasterCard's similar program is engaged at 50 percent and 0.5 percent. Obviously, plenty of room exists, and the chargeback percentages can be enormous while still not tripping the above numbers. Worse, some acquirers - intentionally or ignorantly - divide a merchant's processing into smaller groups. The purpose for doing so can vary and can include tracking marketing programs and Web sites.

Some acquirers and merchants know this and disguise their chargebacks by setting up many smaller accounts. The net effect is these accounts remain below the chargeback threshold, enabling them to avoid entering the program. If an acquirer does this with the intent to deceive Visa or MasterCard, the consequences can be severe.

The problem is that sometimes it is the salesperson or down-line ISO that does this, placing the acquirer in harm's way. Acquirers need to ensure they monitor across their entire portfolios to guarantee that a merchant is not split among different ISO portfolios. Not doing so jeopardizes the acquirer's relationship with Visa and MasterCard - not to mention with the merchants who may not have a complete grasp of chargeback rules.

Unfortunately for U.S. acquirers, offshore acquirers have more liberal chargeback thresholds. This allows (or causes) some U.S.-based merchants to seek overseas accounts to maintain higher chargeback ratios while still maintaining compliance. Doing so establishes an entirely new set of issues, but that is the subject of a future article. end of article

Ken Musante is Executive Vice President and Chief Sales Officer of Moneris Solutions. Contact him by e-mail at ken.musante@moneris.com or by phone at 707-269-3200.

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