The Credit Card Associations have established certain rules to monitor chargeback levels at merchants accepting their credit and debit cards. Their member banks are charged with the task of enforcing these rules and are the first to suffer the consequences of excessive chargeback levels.
MasterCard considers a chargeback level to be excessive if in each of two consecutive calendar months (the "trigger months"), a merchant has a minimum chargeback-to-transaction ratio (CTR) of 100 basis points and at least 50 chargebacks in each month. This designation is maintained until the merchant's CTR stays below 100 basis points for two consecutive months. The CTR is defined as the number of chargebacks received by the merchant bank (acquirer) for a merchant in a calendar month divided by the number of the merchant's sales transactions in the preceding month acquired by that processor. (A CTR of 1% equals 100 basis points.)
Merchant banks are responsible for monitoring their merchants' chargeback levels, calculating the CTR for each calendar month and reporting to MasterCard any merchant that is a Chargeback-Monitored Merchant (CMM) or an Excessive Chargeback Merchant (ECM). In addition, merchant banks must submit separate reports for each of their Chargeback-Monitored Merchants (CMM). A merchant qualifies as a CMM if it has a CTR in excess of 50 basis points and at least 50 chargebacks in a calendar month.
Within 30 days of the end of the second trigger month, and on a monthly basis thereafter, the merchant bank must submit a separate ECM report for each of its ECMs (in lieu of a CMM report) until that ECM's CTR is below 100 basis points for two consecutive months. The acquirer also must provide a copy of the ECM report and these ECP Standards to the specific ECM merchant. MasterCard will assess the acquirer a reporting fee of $300 for each ECM report submitted.
In addition to any applicable assessments for CMM reports, ECM reports, or late report submissions, MasterCard may assess the merchant bank for issuer reimbursement fees and violation assessments for excessive chargebacks arising from an ECM. The issuer reimbursement fees and assessments are applied in each calendar month that the ECM exceeds a CTR of 100 basis points, including the two trigger months. The reimbursement fees are calculated as the number of chargebacks that account for the CTR above 100 basis points are multiplied by $25. The violation assessment is calculated as the issuer reimbursement fees are multiplied by the CTR (expressed as basis points) and divided by 100.
It is clear that merchant banks have a powerful incentive to rigorously monitor their merchants' chargeback levels. Typically, if your chargeback levels exceed a CTR rate of 100 basis points for more than two consecutive months, your merchant account service will be suspended.
Chargeback Management
Small Business Merchant Accounts
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