Sadly, chargebacks are a fact of life for merchants. Although many steps can be taken to reduce chargebacks, they will never be completely eliminated. Fighting chargebacks is costly and time-consuming for merchants, and can have repercussions on the merchants standing with banks and payment providers.
Chargeback insurance is a policy that reimburses merchants for costs related to credit card fraud, under certain conditions. On the face of it, chargeback insurance sounds like a perfect solution for merchants. However, it is important to understand that not all chargebacks are covered by this type of insurance.
Chargeback insurance only covers chargebacks relating to credit card fraud, for specific reasons. These could be:
Unauthorized charges – purchases made with lost or stolen credit cards
Inauthentic transactions – purchases made with false or counterfeit cards, accounts or gift cards
Altered shipping information – altered shipping information after the purchase is completed to ship the goods to the criminal instead of the legitimate purchaser
Falsified verification information – customer signatures or other identity checks do not match the records on file
Automated security tool failure – the security tool allowed the transaction incorrectly.
In all these instances credit card fraud has been committed, and it is these types of transactions that the chargeback system is designed for, in order to protect cardholders.
Chargeback insurance does not cover chargebacks for other reasons, including:
Merchant error – for example the merchant shipped wrong goods, or charged incorrectly, or shipped defective goods, or billed recurring items incorrectly
Failed shipments – the goods were stolen, lost or damaged in transit
Friendly fraud – where the purchaser files a chargeback in order to try and get the goods for free
Family fraud – where children or other family members made purchases on the card without the cardholder’s consent or knowledge, using stored card details on a device
Service delivery – server failures, login errors or other technical issues
Chargeback limit exceeded – merchants with very high levels of chargebacks may find that they are only covered up to a point
Orders modified after approval – if the purchaser contacts the merchant after the payment is approved and the merchant allows changes without the order being re-approved by the security tool
Region or product restrictions – some products or regions may be considered high risk and therefore excluded by the policy.
All insurance policies and vendor offerings are different, and it is very important for the merchant to understand what is and is not covered.
Chargeback insurance is often offered as a value-added product with fraud prevention tools. These security systems work with payment processing systems to analyze the risk of a transaction and then will either allow or decline the transaction. Fraud prevention services is an industry in itself, which has to keep up with ever-evolving criminal techniques. These services can be stand-alone offerings or part of a larger ecosystem such as a payment processor or payment gateway. It is important to note that if your chargeback insurance is linked to a fraud protection tool, it may be that the merchant will only be reimbursed for transactions that were allowed by the tool.
There is an important consideration with fraud prevention tools, and that is that they tend to give a high percentage of false positives. The technology will err on the side of caution if a transaction is considered borderline risky, and many legitimate transactions are terminated. Of course, this is not good for the merchant in terms of both lost revenue and customer goodwill.
In terms of costs for chargeback insurance, all vendors and offerings differ. Some work on a fixed fee, others on a charge per transaction, and others on a percentage. It is important for a merchant to fully understand how the charges are calculated.
When choosing a provider for chargeback insurance it is important to take into consideration several things:
- What are the charges
- What transactions are covered
- What transactions are not covered
- What the limits are
- What are the technical and other pre-requisites for the insurance policy
Chargeback insurance does not stop chargebacks from happening. And while chargeback insurance certainly can help under certain conditions, it must be understood that it is only one tool in mitigating chargebacks. Merchants should certainly not rely on this type of insurance alone to protect their revenues.
Merchants need to have a comprehensive chargeback mitigation strategy in place, which should include:
- Partnering with providers with great security technology
- Having excellent customer service
- Having clear returns policies
- Having clear descriptions of products on websites
- Having good security measures on user accounts
- Confirming orders or account changes with emails or text messages
- Investigating suspicious orders before fulfilling them
- Shipping with tracking methods
- Keeping meticulous records
In short, chargeback insurance could be helpful to your business, depending on the types and amounts of chargebacks you experience. It can indeed be beneficial if you sell high-value goods that are prime targets for credit card fraud or money laundering. Although again be sure that the products you sell are covered by the policy.
If you are looking for chargeback insurance for your business, talk to us at Baers Crest about the options and products that are available through our payment and security partners.