How to Choose the Best Chargeback Insurance Option for Your Business
Every merchant wants a surefire method to prevent revenue loss from chargebacks. Each dispute filed against you is an expensive, time-consuming headache that can wreak havoc on your finances. So, who wouldn’t love to have a comprehensive chargeback insurance policy that works the same way as fire, collision, or flood insurance?
Well, the good news is that this insurance does exist. You can get a policy that will insulate your business against chargeback losses. However, it may not work exactly as you imagine it.
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What is Chargeback Insurance?
- Chargeback Insurance
Chargeback insurance is a policy that protects merchants from costs related to credit card fraud, or instances in which a credit card was used by someone other than the card carrier to make a fraudulent purchase. The policy covers a merchant’s liability for any claims arising from these transactions.
[noun]/chahrj • bak • in • SHo͝o • rəns/Chargeback insurance is meant to protect against cases of criminal fraud. In effect, it’s a policy that will guarantee you against losses resulting from criminal fraud chargebacks.
If a fraudster manages to use stolen cardholder information to carry out an attack against you, the cardholder would be entitled to file a chargeback. The chargeback insurance would then cover the loss so that you don’t have to pay for the fraud incident.
How Does Chargeback Insurance Work?
Let’s say a cardholder disputes a charge, claiming one of the following is true:
- The purchase was made using a lost or stolen credit card.
- The purchase was made using a fake or counterfeit credit card and account number.
- A fraudster edited the shipping information after the purchase was completed.
- A valid signature was never provided for the purchase.
The policy provider may reimburse you for the cost of the merchandise and/or your lost revenue resulting from the chargeback. The specific conditions of your chargeback insurance policy determine what protections and reimbursements you receive.
Just keep in mind that chargeback insurance isn’t a 100% guarantee against disputes. Even with insurance against chargebacks, your provider will require you to conduct due diligence to prevent fraud whenever possible. This ties in with the provider you partner with to secure chargeback insurance.
The effectiveness of chargeback insurance hinges on the details of your specific policy. With a multitude of insurance providers out there, it's important to know that the nuances of these policies can vary widely from one to another.
What is Covered by Chargeback Insurance?
Chargeback insurance specifically protects you from chargebacks that originate with fraud and those that stem from system errors or other incidents that are outside of your control. There are some stipulations, but we’ll get into those in a bit.
For now, here’s what is generally covered by your chargeback insurance policy. For insurance to apply, all the following conditions must be true:
Chargeback insurance can provide last-resort protection against chargebacks stemming from genuine fraud incidents, such as transactions made with stolen credit card details or through identity theft. This coverage offers you protection against the financial fallout from transactions that are unauthorized by the cardholder.
Chargebacks on transactions that are compliant with terms laid out according to policy. If you use approved payment gateways, configure fraud detection filters accurately, and follow the recommended transaction processing protocols — but still receive a chargeback — this would be eligible.
Chargeback insurance covers transactions that squarely fit within the criteria defined by your policy. This could include sales of specific product types, transactions from certain geographical locations, or purchases made through designated transaction methods. It’s all about aligning your business operations within these parameters.
Immediate and precise reporting of chargebacks, in line with your policy's stipulations, activates coverage. This includes adhering to deadline requirements for filing a claim and providing all necessary documentation without delay. Fulfilling these conditions is crucial for securing reimbursement for covered chargebacks.
There are caps to coverage defined by per-transaction limits, specific periodical thresholds, or an overall maximum coverage limit. Ensuring that your claims do not exceed these limits is essential for coverage eligibility, highlighting the importance of understanding and working within the confines of your policy’s limitations.
The transaction has undergone successful identity verification using the methods and tools specified by your policy, and still result in a chargeback. This emphasizes the importance of employing robust identity verification processes to both prevent fraud and ensure chargeback claims are covered.
Providing tangible proof that the customer received the goods or services in question through delivery confirmation, tracking numbers, or other verifiable means. Such documentation is a critical defense against chargebacks and is a fundamental requirement for claim eligibility under chargeback insurance.
While chargeback insurance offers a layer of protection against certain types of fraud-related chargebacks, it's not an all-encompassing shield. The fine print holds the key to understanding where you stand. This highlights the importance of choosing a provider that aligns closely with your business model and the inherent risks it faces.
What Isn’t Covered By Chargeback Insurance?
While chargeback insurance sounds like a safety net for businesses grappling with fraud, it's not a catch-all solution. Coverage may also vary according to vertical, scale, and other factors outside of your control. This is why understanding what isn't typically covered is just as important as knowing what is.
Here are a few common limitations and exclusions of chargeback insurance:
Chargeback Insurance Options: A Quick Survey of the Market
Many fraud management vendors offer some form of chargeback protection in their merchant services platforms (usually for an additional fee). Verifi and Ethoca, for example, both offer fairly comprehensive chargeback alerts coverage.
They aren’t the only options out there, though. Examples of payment processors with some form of chargeback insurance offerings include:
Paypal
Covers physical goods with proof of delivery from within the United States to buyers around the globe. It also covers intangible items (digital items and services).
Learn more about PayPal Chargeback Protection
Stripe
Chargeback Protection is available for businesses in the US and Europe for an additional 0.4% per transaction.
Learn more about Stripe Chargeback Protection
Shopify
Shopify chargeback insurance comes in the form of built-in chargeback protections offered as part of the Shopify merchant platform.
Learn more about Shopify Chargeback ProtectionBuilt-in solutions are the most convenient, but sometimes, you need more targeted coverage. A number of fraud management service providers operate using a “chargeback guarantee” ( or “CBG”) model. This means that if a fraud solution provider screens and then recommends you accept a transaction, but that transaction results in a chargeback due to third-party fraud, the provider will cover the chargeback costs.
It’s important to fully weigh your options. The promise of comprehensive coverage is often greater than the return. And, as we’ll see below, knowing when chargeback insurance makes sense — and when it doesn’t — can save you a lot of money.
Other Issues to Consider
Chargeback insurance can be a great asset. However, there are several reasons why it should not be your primary solution for chargeback prevention:
Chargeback Prevention is the Best Insurance
Chargeback insurance isn’t a bad idea. However, preventing disputes from becoming chargebacks should be your top priority. Chargeback prevention tools are still your best bet here. As long as banks tend to regard chargebacks as a particular sort of ‘gray area,’ disputes are going to stick around for the long haul.
Keeping that in mind, make sure you and your employees fully understand and appreciate the process and its triggers. Here are just a few chargeback prevention tips you should incorporate into your chargeback strategy:
- Investigate suspicious orders before you fulfill them.
- Make sure your contact information is easy to find.
- Provide outstanding customer service, from purchase through item delivery.
- Make your shop policies crystal clear and highly visible.
Too many things can affect the outcome of a given dispute. Spending time and money on half-hearted protection schemes will not prove as effective as you would like. Instead, you should be focused on growing your business. That’s where we come in.
The fully-customized, turnkey, end-to-end chargeback solutions offered by Chargebacks911® can take chargebacks off your plate, delivering a guaranteed ROI. Prevent chargebacks. Recover revenue. Contact us today to learn more.
FAQs
Can a merchant get insurance for a chargeback?
Yes. A merchant can obtain chargeback insurance as a safeguard against financial losses from chargebacks, especially those due to fraudulent transactions. They adhere to the insurer's policy terms and conditions, though. This insurance is typically offered as an add-on to fraud detection services.
Is chargeback protection worth it?
Chargeback insurance can be useful for merchants facing high volumes of online transactions and at risk of fraudulent chargebacks. It mitigates financial losses while encouraging adherence to best practices in fraud prevention. However, the value depends on the merchant's specific business needs, transaction volume, and the cost of the insurance relative to the potential savings from reduced chargebacks.
Do merchants ever win chargeback disputes?
Yes. Merchants can and do win chargeback disputes by presenting compelling evidence, such as proof of delivery, customer communications, and transaction documentation that validates the legitimacy of the transaction. Success largely depends on the quality of the evidence provided and adherence to the payment processor's dispute resolution procedures.
What rights does a merchant have after a chargeback?
After a chargeback, merchants have the right to contest the dispute by providing evidence to support the legitimacy of the original transaction, including transaction records, communications, and proof of product delivery or service. If successful, the merchant can reverse the charge and return funds to their account.
Can a merchant sue for a chargeback?
Yes, a merchant can technically pursue legal action against a customer for a chargeback if they believe the chargeback was unjust, and they can prove the transaction was legitimate and fulfilled as agreed. However, legal action is generally considered a last resort due to the costs and time involved.
