This post was authored by Trent Woodbury, Joacim Strand, Vanja Smailovic on the Pagos Machine Learning, Analytics, and Data Engineering team.

Online payments have revolutionized commerce, enabling businesses like frictionless taxi services, on-demand delivery, and online furniture retail to thrive. Behind this global payments infrastructure are payment brands like Visa, Mastercard, and American Express, who make it possible to pull funds from an account anywhere in the world. They have also tackled one of the biggest challenges in payments: trust and safety.  

The Role of Chargebacks

One key safety feature of card and bank-based payment systems is chargebacks. Chargebacks encourage commerce by making payers feel safe while purchasing online products they can’t physically see or touch from merchants they might not know. If a purchase isn’t as expected, the seller breaks customer trust, or customers can’t easily request a refund, that customer can turn around and issue a chargeback to recoup lost funds. Chargebacks can be initiated up to 120 days after the purchase, and it’s the customer’s bank—not the customer themselves—that shoulders the liability for the dispute.

While chargebacks are powerful and necessary for incentivizing customers to buy at a distance, they can also present a major challenge for businesses. With ecommerce, it’s hard to confirm the true identity of shoppers and whether they’re using legitimate cards to make purchases. As such, chargebacks can be exploited and issued nefariously, contributing to the cost of doing business (see our previous blogs on friendly fraud).

The Importance of Monitoring Chargebacks

Monitoring and analyzing chargeback volume is crucial to your overall payments strategy. As a business, you want to both minimize them up front and win as many as you can, thereby holding onto as much of your successful sales revenue as possible. Chargeback rate is therefore a particularly important metric to keep an eye on, as it can indicate changing fraud trends and lower customer satisfaction—both of which impact your bottom line. 

Chargeback rate can be a complex metric to wrap your head around, as it compares your chargebacks today to approved transactions in the past. There are different formulas you can use to calculate Chargeback Rate:

• Visa’s Formula: Total Visa chargebacks this calendar month divided by total approved transactions this calendar month (this is soon to change, stay tuned for updates).

• Mastercard’s Formula: Total Mastercard chargebacks this calendar month divided by total approved transactions last calendar month

Navigating Chargeback Monitoring Programs

Visa and Mastercard’s chargeback formulas are used to assess your level of risk as a business. If your chargeback rate consistently exceeds established thresholds, card networks may deem your operations to be too risky and may place your businesses in a chargeback monitoring program. Such programs come with various consequences, including regular reviews, operations restrictions, and increased fees. Issuing banks may also penalize your businesses with a tax on your approval rate until your business appears less risky.

For example, if your Visa chargeback rate exceeds 0.9%, you may be enrolled in the Visa Dispute Monitoring Program, which can be very costly and time consuming. Once in this program, you may be blocked from processing Visa transactions altogether until you can get your chargeback rate down. Fortunately, you can track your chargeback rate as calculated by both Visa and Mastercard’s formulas in the Chargebacks dashboard in Peacock, our data visualization platform.

The Challenge of Identifying Your “Seasoned” Chargeback Rate

While calculating and monitoring your chargeback rate using Visa and Mastercard formulas is important, it doesn’t give you a complete picture of your true or “seasoned” chargeback rate. Seasoned chargeback rate is the exact percentage of approved transactions this month that eventually resulted in chargebacks. To calculate your seasoned chargeback rate, you must take into account the inherent delay between when a transaction is approved and when the customer issues a corresponding chargeback. This delay, also known as chargeback lag, can be significant, as customers are able to file chargebacks up to 120 days after a purchase.

The complexity of chargeback lag can become especially pronounced during high-volume periods like Black Friday/Cyber Monday. For example, a business that doubles its monthly transaction volume in November due to Black Friday sales may see a corresponding spike in chargebacks in December. The Mastercard formula would account for this, but the Visa formula might show an inflated chargeback rate.

How, then, can we estimate our seasoned chargeback rate without waiting four full months? The solution is to estimate a chargeback rate you can trust. For some businesses, 99% of chargebacks may come in within two months, though the timing of chargebacks can vary widely by region. In France, for example, over 90% of chargebacks happen within 60 days, but this pattern doesn’t hold in Canada..

Observing Chargeback Lag

As mentioned above, the term chargeback lag refers to the time between a transaction and the corresponding chargeback. Analyzing Pagos’ chargeback data from the entirety of 2024—comprising over three billion transactions—revealed distinct patterns:

• Industry: In the Pagos transaction data, we observe Digital Content typically receiving chargebacks more quickly than Retail. Travel and Retail may see spikes 15-18 days after transactions.

  

• Payment Method: In the Pagos transaction data, we observe Klarna’s chargebacks typically rolling in later; this might be expected, as Klarna is a buy-now-pay-later payment method. It’s also interesting to note that Google Pay has slight peaks after 30 and 60 days.

  

  
  

• Country: In the Pagos transaction data, we observe a peak in chargebacks 8 days post-transaction for businesses in France. Germany and the UK have bimodal distributions, with peaks at 5-10 and 20-25 days.

  

Why is Chargeback Lag Important?

By viewing your chargeback rate through the lens of Visa and Mastercard’s formulas only, you get a valuable, but incomplete picture of your chargeback risk. To give you a more accurate understanding, the Pagos team is building an advanced chargeback-monitoring system that also takes chargeback lag into account. This will give you a better sense of what your seasoned chargeback rate is and how it’s trending, which in turn helps you manage chargebacks more proactively.

For real-time tracking of your chargebacks over the past six months, check out the Arrivals chart in Peacock’s Risks page. This shows you how many chargebacks have come in each day for the 120 days since the beginning of the month.

Supercharge Your Chargeback Analysis Today!

If you’d like to monitor and analyze your chargebacks in more detail, check out the Chargebacks dashboard under Metrics in Peacock. Not working with us yet? Reach out today to see how Pagos can transform the way you use payments data.