Chargeback Insurance: Choose the Best Protection in 2024

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.

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.

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.

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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:

It’s Reported as a Fraudulent Transaction

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.

Transaction Complies With Payment Guidelines

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.

Transaction Fits Product Criteria

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.

Transaction Is Timely & Accurately Reported

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.

Claim Is Within Transaction Limits

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.

Successful Identity Authentication

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.

You can Provide Proof of Delivery

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.

Important!

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.

Did you know: more than 7 in 10 chargebacks filed by cardholders this year will be cases of friendly fraud?

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:

Quality Disputes

Disputes that stem from dissatisfaction with the quality of a product or service often fall outside the coverage. This represents a significant gray area, as determining the legitimacy of these claims can be complex and subjective.

Non-Compliance With Policy Terms

Remember those policy terms you agreed to? They're not just formalities. Failing to adhere to specific requirements, like using approved payment gateways or setting filters correctly, can leave you uncovered. The insurance is predicated on following a set of rules to the letter.

High-Risk Transactions

High-risk transactions, or those deemed outside the normal scope of your business activities, might not be eligible. This includes sales in certain countries or territories known for higher fraud rates or dealing in goods and services prone to chargeback disputes.

Exceeding Claim Limits

Even if you're within the bounds of what's covered, there's often a cap to how much you can claim. Whether it's a maximum amount per transaction, a limit on the number of claims within a certain period, or a ceiling on total reimbursement. These thresholds can quickly become limitations for businesses with frequent chargebacks.

Specific Product Or Service Exclusions

Some policies explicitly exclude certain categories of products or services. High-value items, digital goods, or services prone to subjective customer satisfaction issues might not be covered. This means even if you do everything right, the nature of what you're selling could leave you unprotected.

Billing Or Fulfillment Errors

Mistakes or oversights on your part often fall outside the protection of chargeback insurance. This can range from incorrect product descriptions or billing errors to issues with order fulfillment. If the root cause of the chargeback is traced back to a mistake made by your business, the insurance is unlikely to cover the loss.

Failed Identity Authentication

This is particularly relevant in the context of card-not-present transactions, where verifying the buyer’s identity is more challenging. Insurance policies expect merchants to employ robust authentication processes. A failure in this area not only increases the risk of fraud but also means you're likely to make a critical mistake.

Failure to Provide Proof of Delivery

You can't provide concrete proof that the product was delivered, chargeback insurance won't cover you. Proof of delivery is a cornerstone in defending against chargebacks in eCommerce transactions. Without it, you're at a significant disadvantage, both in contesting chargebacks and in seeking any form of reimbursement through 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 Protection

Built-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.

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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:

It’s an Added Expense

Insurance costs can take the form of a monthly premium, or a small proportion of each transaction your business processes. Remember, this expenditure is ongoing, for as long as you maintain the policy. It may not always provide a return on your investment, as you could end up paying more in premiums than you receive in claim compensations.

You need to consider the opportunity costs, too. The funds used for chargeback insurance could potentially be better invested in enhancing your fraud detection and prevention tools.

It Could Lead to False Positives

Chargeback insurance providers accept risk on your behalf. In exchange, they might implement more rigorous fraud detection standards, which could lead to false positives.

False positives occur when legitimate transactions are incorrectly flagged as fraud. Each one means rejecting a genuine sale, leading not only to monetary loss but also to customer dissatisfaction and potential damage to your business's reputation.

It’s Not Addressing Core Problems

A safety net doesn't prevent a trapeze artist from falling. In the same way, chargeback insurance does not prevent the occurrence of chargebacks in business transactions. Instead, it cushions the financial impact when chargebacks do occur, minimizing the financial fallout to your business.

The underlying problems causing your customers to dispute charges in the first place are still there. It also does not improve your chargeback-to-transaction ratio, nor will it protect you from breaching your chargeback threshold. Importantly, it does nothing to enhance your customer satisfaction or bolster your online reputation.

It’s Not Comprehensive

As we addressed above, there are many scenarios in which chargeback insurance will not apply. Given that up to 75% of all chargebacks are cases of friendly fraud, this could mean that the majority of chargebacks filed against you are not eligible for protection.

There’s a very real possibility that you could end up paying a premium to receive chargeback insurance, but still be held liable for most of your chargeback claims.

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.

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In a Nutshell

How to Choose the Best Chargeback Insurance Option for Your Business

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