Know When Chargeback Insurance Helps & When it Doesn't
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.
In this article, we’ll give you the skinny about chargeback insurance. We’ll look at some leading providers, and how chargeback insurance works, what it covers, and what it doesn’t cover. We’ll also offer some tips to help you prevent chargebacks before they happen, and consider why this might be your best option.
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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.
It’s important to understand 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.
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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 insurance coverage.
They aren’t the only options out there, though. Examples of payment processors with some form of chargeback insurance offerings include:
Covers physical goods with proof of delivery from within the United States to buyers around the globe. Also covers intangible items (digital items and services).
Chargeback Protection is available for businesses in the US and Europe for an additional 0.4% per transaction.
Shopify chargeback insurance comes in the form of built-in chargeback protections offered as part of the Shopify merchant platform.
Built-in solutions are the most convenient, but sometimes, you need more targeted coverage.
There are a number of fraud management service providers that 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.
Some notable examples are as follows:
|Kount’s patented digital fraud prevention solution means fewer chargebacks and declines, plus lower operational costs. It’s used by some of the world’s largest payment service providers, gateways, processors, and acquirers.|
|Riskified uses machine learning to instantly differentiate between good and bad actors, allowing merchants to approve more orders (with a 100% chargeback guarantee) while providing a frictionless customer experience.|
|Signifyd offers fraud protection for eCommerce backed by a 100% financial guarantee. Their technology identifies both good and bad consumer behaviors—reducing losses, lowering rejections, and increasing revenue.|
|Ravelin provides technology and support to help merchants prevent evolving fraud threats and allow them to accept payments with confidence. They offer machine learning, access to a global fraud network, and more.|
|Seon uses machine learning and a modular risk scoring solution, along with device fingerprinting, which looks at users’ browser and device hardware configurations. All the data is fed through rules, which calculate the risk for specific user actions (login, signup, etc.) or transactions.|
Remember, though: using fraud filters means that your decline rate will likely go up. It’s in the CBG vendor’s best interest to flag suspicious transactions whenever possible as a means to keep chargebacks low. If you process a high number of transactions per month, and uncritically decline all orders flagged by fraud filters, this can end up costing you quite a bit.
When choosing a chargeback insurance provider, it is important to fully weigh your options. The promise of comprehensive coverage is often greater than the return, and knowing when chargeback insurance makes sense—and when it doesn’t—can save you a lot of money.
What DOESN’T Chargeback Insurance Cover?
What you have to understand about chargeback fraud insurance is that it is not intended to be a replacement for effective chargeback prevention and management. Chargeback insurance providers will only extend protection in cases of true fraud.
This fraud prevention tactic sometimes works as intended. However, you’re in for an unpleasant surprise if you enroll in such a policy assuming it provides complete protection. Specifically, chargeback Insurance DOES NOT cover cases of friendly fraud.
Did you know that 6 out of every 10 chargebacks filed by cardholder this year will be cases of friendly fraud?
So, for instance, if a customer orders and receives an item from you, then falsely denies they received the item, you would not be covered. Most merchants are well aware that friendly fraud is on the rise and is one of the key reasons they might seek protection, but there is no such thing as ‘friendly fraud’ insurance.
This has important implications for your chargeback ratio, or the amount of chargebacks you receive on a monthly basis as tabulated by banks and processors. That number can get you into trouble if it gets too high, particularly if you intend to pay for chargeback insurance.
Unfortunately, there is no foolproof method to prevent all chargebacks. They are bound to happen, no matter what you do or how much money you spend to prevent them. Chargeback insurance can help alleviate some of the costs and fees associated with chargebacks, but in terms of coverage, the scope is limited. That's why the best option is to prevent as many as possible, then be proactive about any chargebacks that slip through your defenses.
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.
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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.