Chargeback and fraud monitoring programs

In addition to promptly resolving disputes to prevent financial losses, it is crucial to keep your chargeback and fraud numbers at an acceptable level. The card networks have a low tolerance for disputes, which is reflected in what they regard as acceptable dispute ratios. If your dispute ratios exceed the thresholds set by a card network (such as Visa or Mastercard), you may be enrolled in something called a monitoring program.

Monitoring programs are initiatives maintained by global card networks. The aim is to closely track business (merchant) activity and identify those who receive excessive fraud disputes and/or chargebacks. After enrolment, you can incur monthly fines and additional fees until your chargeback or fraud levels are sustainably reduced. There are different monitoring programs for reaching or exceeding a card network’s fraud and chargeback thresholds.

To leave a monitoring program, you must carry out remediation and take steps to reduce your dispute ratio below a specified threshold.

It is crucial to take monitoring programs seriously, even if they are rare. If you get enrolled in one, you need to act quickly to address the issue. Failure to meet the program's remediation requirements within the given timeline could result in the card network ceasing to process payments to your business with their cards. This could endanger your ability to accept credit card payments and negatively impact your revenue since your customers will have fewer payment options available.

For VISA, these programs are the Visa Dispute Monitoring Program and Visa Fraud Monitoring Program, while for Mastercard, they are the Excessive Chargeback Merchant - ECM program, High Excessive Chargeback Merchant - HECM program and Excessive Fraud Merchant - EFM program.

These various dispute monitoring programs are discussed in detail below, but first, let’s briefly discuss dispute ratios.

Your dispute ratio is the percentage of total successful payments made to you that have been disputed as fraudulent or for a chargeback.

Card networks have a similar convention for calculating ratios. Visa and Mastercard calculate fraud ratios by dividing the value of all the fraudulent reports gotten in a month by the total value of all the transactions processed in that month. For example, January’s fraud ratio will be calculated like this:

Total fraud value for January ÷ Total transaction value for January = January fraud ratio.

On the other hand, chargeback ratios are calculated differently by the card networks. Visa calculates chargeback ratios using this formula:

Number of chargebacks for the month ÷ Number of transactions for the month = chargeback ratio.

Mastercard calculates chargeback ratios using this formula:

Number of chargebacks for the current month ÷ The previous month’s transactions = chargeback ratio.

It is very important to track chargeback and fraud levels. For instance, Mastercard counts disputes regardless of the liability shift or dispute resolution outcome. Disputes and fraud are tallied based on the date when the dispute or early fraud warning notification is received, not the payment date.

Important to note

At Paystack, we track the dispute rates for Paystack businesses (our merchants) and alert them when they are close to breaching the limit. This helps us detect spikes early enough and avoid the monthly fines and additional fees associated with monitoring programs from card networks.

For VISA, an acceptable chargeback ratio is below 0.65%. An acceptable fraud ratio is also below 0.65% or a disputed value of less than $50,000. Once these two figures are reached for chargebacks or fraud, VISA provides the user with a one-month notification to take steps that would reduce the numbers.

VDMP applies to users with an unusually high level of payments disputed as chargebacks. Once your dispute ratio has reached 0.65%, a notification is sent via your Acquirer, and you get added to the program when the dispute ratio reaches 0.9%.

Important to note

To prevent penalising small businesses due to a possible rise in chargeback ratio resulting from only one or two chargebacks, the VDMP also requires a minimum of 75 disputes for a merchant to be eligible for Early Warning enrolment.

Important to note

Businesses (merchants) on both the Standard and Excessive timelines can be disqualified and prevented from receiving online payments via the card network after month 12. This means Paystack will not be able to process payments for the disqualified merchant.

From month 5 of the Standard level or immediately at Excessive thresholds, users lose liability shift. A liability shift means that if a merchant has used 3D Secure (also known as 3DS) to authenticate a transaction, the responsibility for covering losses from fraudulent transactions moves from the merchant to the issuing bank.

Losing liability shift means issuers can raise fraudulent disputes on 3DS transactions and expect merchants to cover the losses. The liability shift gets restored only after fully exiting the program, so users are encouraged to reduce their fraud levels once identified at any threshold. Read more on 3DS here. 

You can only leave these programs with a dispute (chargeback or fraud) ratio lower than 0.9% for three consecutive months.

For Mastercard, the acceptable chargeback ratio is less than 1.5%, with a minimum dispute count of less than 100. The fraud ratio should be less than 0.5%, or the fraud value should be less than $50,000. If your chargeback or fraud ratio exceeds any of these numbers, you have one month to bring it back below the acceptable level.

During an open case, you can request Mastercard to suspend an assessed fine once. It's important only to request this when you're confident that you'll be below the thresholds for the next three consecutive months. If you request a fine suspension and avoid identification for two months but then exceed the limits in the third month, the program will not end, and fines will continue until you leave the program.

Important to note

Just like VISA, in order to prevent penalising small businesses due to a possible rise in chargeback ratio resulting from only one or two chargebacks, Mastercard requires a minimum of 100 disputes for a merchant to be enrolled as an excessive chargeback merchant.

ECP consists of two levels: Excessive Chargeback Merchant (ECM) and High Excessive Chargeback Merchant (HECM).

The Issuer Recovery Assessment charges an extra fee of $5 per chargeback for each chargeback after a 300 count. For instance, a merchant identified in month 4 of ECM with 400 disputes gets charged a $5,500 fine ($5,000 + (400-300) x $5).

To exit ECM, your dispute level must stay below the threshold for 3 consecutive months. If you're in HECM and your dispute level is still above ECM thresholds (between 1.5-2.99%), you will move to that program. To be removed from EFM, you must avoid at least one of the conditions for 3 consecutive months.

Mastercard removes you from the program(s) if your dispute activity falls below the thresholds (1.5% for chargebacks and 0.5% for fraud) for three consecutive months.

It’s very important to monitor your dispute numbers. You can check out this article on how to calculate your chargeback and fraud ratios.

Remediation refers to a series of steps taken to reduce the dispute ratio below a specified threshold. If you exceed any of our thresholds, we will notify you via email of what the numbers mean for your business and provide tips on lowering your chargeback/fraud ratio.

As part of the remediation process, you must provide Paystack with details on the steps you are taking to prevent disputes. You should also state your timeline for the implementation of said steps.

The cost implication for these programs is bankruptcy, immense financial loss, and losing access to the card networks, which results in the inability to process online card payments etc. Beyond cost, there are other implications that merchants could suffer due to these programs. Reputational damage, leading to reduced trust from payment processors, revenue loss, e.t.c

• Stripe monitoring programs

• JP Morgan Visa Dispute & Fraud Monitoring Program guide

• Paypal card brand monitoring programs

• Visa core rules, product and service rules

• ECP: Excessive Chargeback Program

• EFM: Excessive Fraud Merchant Program