Payment Platforms Offer Chargeback Protection, but Merchants May Need More Help
If someone offered you chargeback protection for your business, would be interested? A lot of merchants would be. This is particularly true in the eCommerce space, where chargebacks can be a serious revenue drain.
Unfortunately, there is no way you can completely insulate yourself from all chargebacks. The right to dispute a credit card charge is a federal mandate. As long as that consumer protection mechanism is in place, you’ll always be subject to a potential dispute. That said, there are plenty of tools and techniques that can help protect your business from the worst effects of chargebacks.
In this post, we’ll talk about chargeback protection at different stages of the transaction process. We’ll also look at some specific solutions to help you lower your risk of disputes.
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What Is Chargeback Protection?
- Chargeback Protection
Chargeback protection is any service, procedure, or technology used by merchants to reduce chargeback issuances. This can involve preventing fraudulent chargebacks, mitigating the worst impacts of chargebacks, or conducting research to identify chargeback sources.
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Excessive chargebacks threaten your business’s sustainability. It makes sense that you’d look for a way to prevent that damage.
“Chargeback protection,” as we talk about it here, refers to any of the various programs or platforms that insulate your business from the effects of chargebacks. There are three main forms we want to discuss:
|Chargeback Protection Type||What is it?|
|Pre-Transaction Chargeback Prevention||Identifying and stopping fraud and errors before a transaction is authorized.|
|Post-Transaction Chargeback Prevention||Responding to fraud and errors after the transaction but before a dispute is filed.|
|Post-Transaction Chargeback Protection||Proprietary programs that assume liability for certain chargebacks after the fact.|
All these solutions work in collaboration to protect your revenue and your chargeback ratio.
Preventing chargebacks is one of the keystones of any good chargeback management strategy. At the same time, post-transaction efforts can help deal with customer claims after the sale. We’ll cover these in more detail, but first, we should take a quick look at the chargeback process to better understand how merchant chargeback protection programs work.
Chargeback Prevention vs. Chargeback Protection
Chargebacks were originally created to be a “last resort” for cardholders victimized by either criminal activity or dishonest merchants. The system still functions well in that capacity. Unfortunately, more and more disputes are filed fraudulently, which has made the entire process much less efficient.
Chargeback protection services and tactics are designed to help lessen the impact of these claims. Each type of tool has a specific function, based on its use along the chargeback timeline.
Merchants can opt to implement tools that: stop fraudulent sales prior to authorization, preempt customer issues prior to actual chargeback, or reimburse them for eligible chargeback costs.
In many cases merchants should consider a multilayered approach utilizing the strengths of each chargeback protection program.
Step 1: Pre-Transaction Chargeback Protection
Pre-transaction prevention tools let you identify potential fraudulent transactions prior to processing. The goal is to stop fraud before it happens.
There are three primary categories of pre-transaction chargeback protection we want to discuss: fraud screening, fraud scoring, and merchant best practices.
These are free or low-cost tools that help verify buyers’ identities prior to completing a transaction. Some commonly-used tools include:
- Address Verification Service: AVS automatically checks the transaction billing address against the address registered with the bank.
- Card Security Codes: CVV codes are printed on the card and cannot be stored elsewhere. Without the card, fraudsters won’t know the code.
- 3-D Secure 2.0: 3DS2 is the technology behind automated fraud detection programs that compare over 100 data points to verify the buyer as the actual cardholder.
- Fraud Blacklists: These help by blocking sales to known or probable fraudsters, based on anything from an IP address to the purchaser's location.
- Velocity Limits: Velocity limits (or checks) scan for potential fraud based on how quickly a buyer submits multiple transactions.
Fraud scoring uses machine learning to examine each transaction to try and identify traits and trends associated with suspicious behavior. It then provides simple up-or-down decisioning as to whether transactions should be accepted, rejected, or manually reviewed.
You can submit flagged transactions to manual review. You also set fraud scoring technology to automatically reject transactions that do not pass.
Merchant Best Practices
Improving customer service procedures and optimizing logistics and fulfillment will increase loyalty and build better customer relationships. In the process, you also make it less likely that cardholders will turn to a chargeback. We recommend adopting all the following practices:
- Personalize the customer experience.
- Provide live, round-the-clock customer service.
- Make live service easily accessible by phone, email, and social media.
- Offer free, “no questions asked” return shipping.
- Ensure all staff are properly trained on customer service best practices.
- Be transparent about costs, shipping times, etc.
- Always look for opportunities to optimize and improve the customer experience.
Step 2: Post-Transaction Chargeback Prevention Tools
Deploying a post-transaction chargeback prevention tactic is not ideal. If you’re doing this, it means that a dispute has already been triggered by either fraud or some merchant error. However, post-transaction chargeback prevention is still better than getting hit with a chargeback.
In some situations, you may be able to resolve an issue by providing additional information. In most cases, however, you’ll need to refund the purchase. Chances of getting your merchandise back are low.
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Obviously, preventing chargebacks before the transaction is better, but these tools will still help you manage your chargeback ratio.
Chargeback alerts allow merchants to refund transactions, thereby avoiding chargebacks. Network affiliated banks will notify you of a pending dispute before a chargeback is filed. You then preempt the chargeback by refunding the cardholder.
Chargeback alerts can lower chargeback issuances up to a 20% in a matter of days. The Chargebacks911 Alerts Management Platform combines CDRN notifications and Ethoca Alerts with our own proprietary network for the most comprehensive coverage.
Like chargeback alerts, network inquiry tools allow you to intercept disputes before a chargeback is filed. Unlike alerts, however, automated inquiries offer resolution options beyond just issuing a refund.
If a customer contacts their bank about an unrecognized charge, banks participating in a network inquiry program can request additional transaction information in real time. If the new data doesn’t refute the claim, a refund is automatically issued. Either way, potential chargebacks are preempted.
Step 3: Post-Chargeback Protection
Chargeback protection plans don’t keep chargebacks from happening. In many cases, though, you can avoid dealing with as much—or any—of the fallout.
There are also some third-party protection programs and apps available. Many of the most widely used payment platforms like PayPal and Stripe, however, offer their own protection plans.
All these various plans are different, and the coverage offered varies widely. None of them claim to cover all chargeback situations. Examples of platform-specific chargeback protections include (in no particular order):
Stripe Chargeback Protection is part of the company’s AI-driven fraud detection system, Stripe Radar. The system flags high-risk transactions and requires those users to provide additional identification. Then, if your business faces a fraudulent dispute, Stripe will cover the disputed amount and waive any dispute fees. This only applies if:
- Your account is in good standing.
- The charge in question is eligible for coverage.
- You are below Stripe’s protection limit (currently $25,000/year).
Additionally, Stripe handles all aspects of challenging the chargeback. You will not even be required to gather evidence. Stripe Chargeback Protection costs 0.4% of the total transaction cost, per transaction.Learn More About Stripe Chargeback Protection
PayPal Seller Protection offers liability coverage in the event of claims, chargebacks, or reversals that are a result of unauthorized purchases or “item not received” chargebacks. For other transactions, PayPal typically assesses a $20 fee in the event of a chargeback.
PayPal also offers an opt-in service called Chargeback Protection. If a cardholder disputes a charge on a card transaction processed through PayPal, the company will reimburse eligible merchants. Sellers must pay a higher rate (currently 0.40% of the transaction cost per approved transaction) to receive Chargeback Protection.Learn More About PayPal Chargeback Protection
Square is another platform that seeks to identify and proactively stop fraud before it happens. The company’s basic chargeback protection program includes fraud screening, as well as a limited amount of other chargeback protections.
After receiving any requested information, Square will work with the bank to resolve disputes. While provided at no charge, note that this protection only covers $250 in sales each month. Also, the coverage does not extend to transactions involving “high risk” items.Learn More About Square Chargeback Protection
Shopify doesn’t claim to have actual chargeback protection for merchants at this time. However, the platform does offer Fraud Protect, a technology that proactively identifies potential fraud. Using advanced algorithms to analyze and accurately identify fraudulent orders, Fraud Protect classifies transactions as either "protected" or "not protected".
If a dispute is filed on a protected order, Shopify reimburses you, then actively works with the bank to resolve the issue. Chargebacks on non-protected transactions have a fee of $15 (US). There is also a small fee per protected transaction. Also, there are hundreds of available protection apps that integrate with the Shopify platform.Learn More About Shopify Chargeback Protection
eBay Seller Protection offers a limited amount of protection to sellers. Buyers who have an issue with an eBay transaction are allowed to file a dispute. If no resolution can be reached between the buyer and the seller, eBay will intervene. If eBay decides in the customer’s favor, the buyer will be reimbursed, and the company will recover the funds from the seller.
This protection, however, is limited to disputes within the eBay platform. If a customer files a bank chargeback, eBay steps out of the picture. The company says it will aid the seller in gathering evidence to defend against the dispute. Overall, though, eBay takes no responsibility for disputes from the bank.Learn More About eBay Chargeback Protection
What About Chargeback Insurance?
Some third-party providers offer “chargeback insurance.” At first glance, it seems this would work like any other insurance. The merchant pays a regular premium, and is reimbursed by the insurance company in the event of a chargeback…right?
You must remember that insurance policies vary considerably in their coverage. Chargeback insurance is no different. Every policy will have different requirements, different exclusions, and different price points.
Some will be redundant—overlapping with existing coverage—while others only work with certain processors and gateways. The range and scope of protection will be limited, at best. Chargeback insurance is not inherently bad, but it should never be your first line of defense.Learn More About Chargeback Insurance
The Bottom Line
While chargeback prevention tactics will help in the short term, most do not address the underlying causes of disputes. Unless you can resolve chargebacks at their true source, you’ll end up fighting the same battles over and over.
An effective long-range chargeback management strategy must be flexible enough to identify new trends and techniques, counteract new technology, and adapt on the fly to a constantly shifting landscape.
Chargebacks911® offers the most comprehensive chargeback management services and products available today. No other provider can deliver our level of transparent, end-to-end chargeback management, going beyond prevention to revenue recovery and future growth.
Whatever you need to prevent chargebacks, we can help. Contact us today for a free demo.