Last Updated on August 30, 2022 by merchantfraudjournal
Chargeback insurance is a service offered by many top eCommerce fraud protection solutions that reimburses merchants for the value of any order their tool approves that results in a chargeback. It is commonly referred to as a chargeback guarantee. It allows merchants to sell goods and services without fear of losing revenue when fraudsters steal from them, giving them peace of mind when fulfilling expensive or high-risk orders.
What Is Chargeback Insurance?
Merchants that use an eCommerce fraud prevention solution offering chargeback insurance get reimbursed for chargebacks covered by that solution’s policy. When chargeback insurance is successfully invoked, it refunds the merchant 100% of the cost of a chargeback.
However, merchants must remember that chargeback insurance does not eliminate all the problems associated with chargebacks, including:
- Payment processing accounts will still be placed into a high risk merchant account program if their ratio of chargebacks to approved orders is too high.
- Insurance does not refund the payment processing fees associated with servicing chargebacks.
- Time spent reviewing orders with a tool, or being in contact with a wholly outsourced solution.
How Does Chargeback Insurance for Business Work?
When merchants use an eCommerce fraud prevention tool with a chargeback guarantee, chargeback insurance refunds them 100% for any chargebacks incurred on qualifying orders. However, different tools work in different ways, and so the exact ways their chargeback insurance plans work vary as well.
Here are some types of qualifying orders that may be included:
- Stolen credit or debit cards. The classic fraud scenario, when a purchase is via credit or debit card without the permission of the authorized card user.
- Synthetic Identity Fraud. A fake identity is constructed, and then used to take out credit cards to make purchases online.
- Friendly Fraud. When the legitimate card holder makes the purchase, and then files a chargeback anyway.
Ecommerce fraud comes in many shapes and sizes, and each one comes with its own specific chargeback risks and scenarios. Merchants should educate themselves about the types of eCommerce fraud so they can better understand how chargeback insurance works to protect them.
Does It Protect Against All Chargebacks?
No. Chargeback insurance only protects against certain types of chargebacks. In addition, the fine print of every eCommerce tool is different, so merchants should always check with the service they plan to use to ensure they understand what is covered and what is not.
The reason for this is because chargeback is actually a catch-all term used to describe any time a legitimate card holder demands a merchant refund payment for goods or services provided. In reality, there are many reasons why merchants get hit with chargebacks. Each of these reasons is treated differently by banks and credit card companies.
That being said, there are a few general things merchants should understand about chargeback insurance:
- It usually only covers fraud related chargebacks. Chargebacks due to merchant error such as a failure to deliver goods, sending damaged/incorrect goods, or incorrect recurring payment charges usually are not covered. Be sure to check the chargeback codes for Visa, MasterCard, Amex, and Discover and know which ones an eCommerce fraud prevention tool covers.
- It only covers chargebacks for orders approved by the company’s tool. Some eCommerce fraud tools allow merchants to override them and approve an order the tool would decline. Merchants that do so almost always accept the liability for the chargeback if the order turns out to be fraudulent.
- It usually does not cover orders modified after approval. If a purchaser contacts the merchant to change the details of an order after it is approved and the merchant agrees to change them, the merchant usually loses insurance protection unless after the order is re-approved by the tool.
- There may be product or geographic restrictions. Ecommerce tools sometimes place restrictions on chargeback insurance in some extremely high-risk situations. Chargebacks for certain products known to be targeted by fraudsters, or certain areas of the world known for high-fraud rates, may not be covered.
When Should You Get Insurance?
Merchants in the following circumstances should consider using an eCommerce fraud prevention tool that offers chargeback insurance:
- Scaling up. In-house fraud prevention methods that work for small businesses do not often scale well. Merchants planning to scale up to higher sales volumes must scale their fraud prevention processes at the same time. It is inevitable that there will be mistakes and oversights, and it’s important to protect revenues during that adjustment period. Unfortunately, many merchants needlessly learn this lesson the hard way.
- An overly conservative fraud prevention strategy. Chargebacks are emotional, and many merchants respond to them by significantly diminishing their risk threshold and a declining a large number of orders due to a fear of chargebacks. Unfortunately, this cure is worse than the disease, because it results in a very high rate of eCommerce false declines that can destroy revenues.
- New product releases. Fraudsters target different products differently, and it takes time for merchants to learn the associated patterns. Businesses that release a new product should enlist outside expertise to help them get up to speed quickly.
Chargeback Insurance for Merchant Services Account
Despite the prevalence of fraud prevention knowledge and tools, merchants still struggle with knowing exactly how to fight chargebacks. Every merchant and industry is different, but in the game of cat and mouse between fraudsters and merchants, fraudsters still have a lot of tricks up their sleeve.
That’s why chargeback insurance is an important tool or all merchants to consider. While it’s true that this insurance costs money, and that the ROI of chargeback insurance varies from merchant to merchant, it’s very rare that a merchant won’t benefit from it at all. But at the same time, it doesn’t eliminate all the problems associated with chargebacks, such as processing fees and the potential to get designated a high-risk merchant. There’s no perfect solution, but there are ways merchants can make their lives easier.
To learn more about the different ways merchants can combat eCommerce fraud, check out our directory of fraud solution vendors.
