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The Green Sheet Online Edition

August 08, 2011 • Issue 11:08:01


High-risk merchants and chargebacks

GS Online MLS Forum member BER posted the following question on the forum:

I'm no expert in high risk and have been bumping into more opportunities in that space lately that I'd like to explore. I'm interested in finding out how ISOs manage chargebacks for high-risk merchants. I understand there are certain practices for merchants to implement to help fend off and avoid chargebacks, as well as technology solutions to help the fight.

But what happens when merchants reach or exceed the acceptable chargeback percentage? Is the chargeback percentage set by card networks or the processor? If set by the card networks, how can an ISO/processor keep the merchant on the books? If the merchant exceeds the percentage allowed by the card networks, what happens? Are they given time to correct it? Cut off altogether?

Forum member JESTEP provided this detailed response:

    The least restrictive high-chargeback monitoring program states 100 chargebacks per month, and greater than 1 percent chargeback volume. Acquirers and processors have much more restrictive thresholds that are never published. The reason: codes play into it a lot. Fraud-type reason codes are looked at much closer. Retrievals and even returns may be aggregated in the chargeback ratios.

    The rules are a little different for Visa and MasterCard. This is the basic breakdown; it's actually a little more complicated than this.

    For Visa, merchants are first put into the Merchant Chargeback Monitoring Program (MCMP). The processor is basically put on alert, and they are told to notify and help the merchant get their chargebacks down. If the merchant cannot get the chargebacks under a suitable level, they are put on the High Risk Chargeback Monitoring Program (HRCMP).

    The HRCMP allows Visa to fine the processor/ISO $100 for each chargeback that the merchant receives in addition to other larger fines. The processor is responsible for collecting the fine from the merchant. The regs may read that the merchant gets fined, but Visa takes the money directly from the processor and doesn't deal with the merchant on these at all.

    Once a merchant hits this level, the chargeback fine liability can be huge. I've also seen Visa retroactively fine a processor for several months of chargebacks because they deemed that the processor did not do enough to try and correct the situation.

    MasterCard's is called the Excessive Chargeback Program (ECP), which has two levels: Chargeback-Monitored Merchant (CMM) and Excessive Chargeback Merchant (ECM). These are chargeback percentage based. CMM requires a 0.5 percent chargeback rate, and the ECM requires 1 percent, with at least two months. The fines for these are $50 and $300, respectively.

    There are also programs that specifically look for fraud-related chargebacks. Merchant Fraud Performance (MFP), Risk Identification Service (RIS) and MasterCard's Merchant Audit Program are separate programs. ... Fines can be in the tens of thousands of dollars for continuing, fraud-related chargebacks.

    Anyway, in a nutshell once they get on one of these programs, major fines are to follow. Realistically, unless your ISO is specifically organized and priced to deal with these types of merchants, you don't want them on the books. Just based on the retroactive fining I've seen, you really want them off the books as soon as possible.

    Putting obvious ethics aside, merchants running businesses that have chargeback rates this high will usually be happy to pay 10 to 25 percent for their processing rate, plus a massive uncapped reserve, and anywhere from a few days to a month delay on their deposits.

    They're extremely volatile, and the liability on even a single account is huge. Businesses that get put on these are also often on the FTC's radar, as well. The FTC has stepped in more than once and seized a merchant's reserve and assets in order to pay people that were ripped off. It's a pretty tough argument that a legitimate business ends up on one of these programs unless they are doing a huge volume of transactions."

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