What is Chargeback Insurance and Will it Solve Your Chargeback Problems?
Even the best chargeback management plan can let a few unauthorized transactions slip through the cracks. If the action of fraudsters starts to take a toll on your business’s bottom line, you might consider chargeback insurance.
On the surface, chargeback insurance sounds like a pretty sweet deal. However, it probably isn’t as great as you originally suspected.
Not the Insurance Policy You Expected
Most merchants are interested in securing chargeback insurance because they think it’s just like any other insurance policy. The term chargeback “insurance” suggests a policy helps protect the policyholder’s financial interests when unforeseen events occur.
Under the guise of “insurance,” it is easy to misidentify what this protection means. When it comes to helping merchants avoid a portion of chargeback liability, there are products that are beneficial; however, no insurance product has the ability to safeguard you from the negative effects of chargebacks.
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What Does Chargeback Insurance Entail?
Chargeback insurance usually relies on the use of fraud filters. When a fraud filter dubs a transaction as “high-risk,” most merchants generally have only three options:
- The merchant follows the advice of the fraud filter and does not fulfill any “high- risk” transactions.
- The merchant takes the time to manually contact each customer associated with a high-risk purchase. The merchant validates and charges any transactions that were false-positives.
- The merchant ignores the red flags and processes the transactions anyway.
Through the use of chargeback insurance, merchants actually have a fourth option.
To better understand how chargeback insurance works, let’s look at an example.
Bob uses a fraud filter. Out of 100 transactions, 10 are labeled high risk. After reviewing the data, he determines 5 of the 10 high risk transactions are actually safe to charge. Bob proceed with processing these transactions; he can rest assured that his chargeback insurance will reimburse him for any chargebacks that do happen.
Behind the scenes, these chargeback insurance companies are simply underwriting a handful of potential chargebacks that they take the time to manually review or analyze. Ultimately, chargeback insurance helps you recover revenue you might have walked away from because your fraud filter scored these transactions as high-risk.
Chargeback insurance is a great way to help salvage previously identified “high-risk” revenue without sustaining costs of the associated chargebacks. However, it is not a solution for merchants who suffer from high chargebacks.
What Chargeback Insurance Won’t Cover
The scope of coverage is very limited. Insurance won’t cover chargeback scams (or friendly fraud) that result from “undelivered purchases.” It also doesn’t reimburse for chargebacks that were initiated as a result of “poor quality.”
Depending on the insurance policy, the merchant will still have pay for the chargeback fee of any insured transaction (this can range anywhere from $20 to $100 for each dispute).
Also, insurance can’t alter the chargeback ratio a company sustains. The merchant might be reimbursed for lost profits, but the policy can’t do anything about the overall percentage of chargebacks received.
There is no shortcut to reverse the negative statistics of a chargeback. If the amount of chargebacks exceeds the 1-2% allotted amount, the company is still in danger of losing their merchant processing account.
In order to remain in good standing with your merchant processor, the company should implement chargeback prevention techniques. Relying on an insurance reimbursement should be a last resort.
Using a Protection Service in Addition to Insurance
In addition to chargeback insurance, merchants might be interested in working with a chargeback protection service, which will provide that extra layer of prevention.
Chargeback protection organizations maintain a database of shoppers who have initiated a chargeback in the past. Merchants can review this information before accepting a credit card payment, helping reduce the chances of fraud.
Fraud filter companies provide this service either through a gateway application or an after-market digital review.
Prevention is Better than Insurance
While chargeback insurance policies do have their benefits, merchants shouldn’t rely too heavily on them. Focusing resources on chargeback protection and prevention is much more effective.
The best way to insure your company against chargebacks is to employ a long-term strategy that works to prevent credit card transaction disputes.