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Chargeback Insurance 101

June 1, 2022
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by Justt Staff

Every merchant wants a simple way to address the issue of chargebacks. Chargeback fraud cost retailers $125 billion in lost revenue last year alone as the volume of customer disputes continues to rise in line with the rapid expansion of eCommerce and convenient payment options. For enterprises with tight margins, chargebacks present a growing problem to business profitability.

In response, merchants have integrated multiple solutions to protect against chargeback fraud. Traditional dispute mitigation is complex, costly, and time-consuming, so any service that can reduce the financial and operational expense of chargeback fraud is in demand. One useful option has quickly become apparent: chargeback insurance.

At first glance, a comprehensive chargeback guarantee capable of solving all chargebacks risk seems quite attractive. But chargeback insurance does not operate like standard insurance for things like cars and homes and comes with its own set of benefits and drawbacks.

Let’s examine all you need to know about chargeback insurance, that way you can determine if you would like to include the service in your chargeback prevention strategy.

What is Chargeback Insurance?

Chargeback insurance is a policy that reimburses you for the costs of a chargeback resulting from specific instances of payment fraud. A service provider covers any losses in the event of a repudiated transaction in exchange for flat or per-transactions fees.

Chargeback insurance functions as a way for merchants to recover and protect against lost revenues. In the event of an authentic dispute, the customer limits their financial damage per the Fair Billing Act of 1974, while merchants can pass the chargeback losses to their chargeback warranty service. Throughout the entire process, the customer-to-business relationship remains intact.

How Does Chargeback Insurance Work?

Imagine that a fraudster makes several purchases at your eCommerce store with a stolen credit card. The cardholder victim, in hopes of recouping any losses due to the identity theft, may repudiate the charges. Upon review, their issuer will initiate a reimbursement, leaving you responsible for any revenue losses associated with the chargeback and the fraudulent actions. (Of course, all merchants have the chance to dispute a chargeback if they believe it is a false claim, but in any instance of true fraud, merchants are liable for protecting consumers against fraudulent orders).

But if you have a chargeback insurance policy provider, you can request a reimbursement of your own for the lost revenues related to the chargeback. The service will then evaluate the transaction process to ensure that the losses fall within the coverage outlined in your policy before providing a payout. Standard evaluation criteria involves examining if the fraud occurred due to a failure associated with your detection software. Other known policy requirements for coverage qualifications include having proof of delivery, reimbursement requests before a given deadline, and outgoing shipping dates posted earlier than the chargeback request.

The terms of each vendor policy will differ and have specific set conditions before any payout is issued. If approved under your coverage, your service provider may reimburse you for the cost of the product or service sold and the overall loss of profit related to the chargeback.

What Types of Chargebacks Are Covered?

Issuing institutions use reason codes to identify chargebacks and list the needed evidence to dispute a particular claim. While a customer dispute may occur for several varied reasons, merchant reimbursement policy providers only cover certain instances of fraud. Exactly what is and isn’t covered changes between services, but the general rule of thumb relates to chargebacks resulting from criminal actions.

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The chargeback system is meant to create a safe environment for seamless payments. Chargeback guarantee policy providers almost always extend protection to chargebacks identified with reason codes that protect consumers from fraud.

What Types of Chargebacks Are Not Covered?

On the other hand, chargeback insurance is not considered a replacement for fraud prevention or chargeback management. Most policies offer no coverage for chargebacks due to explicit negligence by merchants, and services will have no support for any chargeback reason codes that are unrelated to unauthorized transactions.

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In effect, only a small portion of chargebacks are covered by chargeback protection services. The large majority of repudiated charges often do not qualify, decreasing the overall value of chargeback insurance.

What Are the Costs Involved With Chargeback Protection?

While having a chargeback guarantee appears like a simple solution for limiting fraud risk and recovering lost revenues, chargeback insurance involves a series of expenses that must factor into your cost/benefit analysis.

  • Policy Provider Fees: Each service provider offers reimbursements for set fees. The fee format will change based on the vendor, but popular options include paying monthly premiums or per-transaction percentage (Stripe offers chargeback protection at 0.4% a transaction). Payment processors also offer free chargeback defense solutions, but only for a set sales volume.

  • Chargeback Ratio Penalties: Relying solely on chargeback insurance rather than mitigating chargebacks will have a negative impact on your chargeback ratio. If your chargeback ratio exceeds set chargeback thresholds, issuers will levy stiff penalties that can range into the tens of thousands of dollars. In egregious cases, you can lose your credit card processing rights. Additionally, it can damage the needed relationships with financial institutions and result in a bad reputation, ultimately discouraging business growth. 
  • High Rate of False Positives: Policy providers rely on fraud prevention tools and strict assessment applications to evaluate coverage qualification. Such integrations can lead to an increase in false positives, where honest transactions are flagged as risky and the sale terminated. Outside of the friction such solutions introduce to the customer experience, merchant losses due to false positives now amount to 118$ billion annually.
  • Conflict of Interest: As with any traditional insurance service that operates on the likelihood of a calamitous event, chargeback protections suffer from a conflict of interest. Policyholders want to minimize the amount and overall volume of payouts, situating them in opposition to your reimbursement claims. Often, this means the fraud prevention tools used to deter and assess transactions will err on the side of the service for a majority of transactions. Chargeback guarantee vendors will also do what they can to limit their risk, ensuring chargeback codes will not result in payouts and raising premiums as required.

Often, the overall cost of the chargeback insurance coverage results in a negative return on investment. Due to the limited scope of covered chargeback reasons and the high set of expenses, the costs of managing chargebacks on your own could offer better value than the fees involved with a chargeback guarantee. For merchants with excellent fraud prevention and a low rate of chargebacks, a cost/benefit analysis can offer surprising information.

Alternative Chargeback Defense Solutions

For most, chargeback insurance is one element of a comprehensive chargeback strategy, and typically a specific line of defense for instances of true fraud. Consider combining a chargeback protection policy with several different chargeback service options that can offer better, alternative benefits:

Fraud Prevention

Since chargeback insurance is not a complete chargeback defense solution, it offers limited support regarding fraud prevention. You still need to deter fraudulent transactions whenever possible, for the protection of your customers as well as your own profits.

Luckily, there are a myriad of fraud defense software applications available, all with improved security, as the overall fraud detection market increases in sophistication and volume (with an estimated market value of $69 billion by 2025).

A good combination of prevention and recovery, when applied in tandem with chargeback insurance, can create a much safer payments environment.

Chargeback Alerts

Chargeback alert systems can also help you predict and prepare for potential instances of chargebacks, helping you lower your overall dispute volume. Alert services work with issuers to notify you of possible upcoming chargebacks, giving you time to refund cardholders before damage is done to your chargeback ratio. When employed with a fraud prevention service and insurance, chargeback alerts will help prevent your business from falling into credit card schemes’ monitoring programs. These programs lead to much added expense and potentially the revocation of your card processing privileges, so avoiding them should be a high priority.

Chargeback Mitigation

The chargeback process is complex and requires nuanced attention within each business vertical. To that end, adopting chargeback mitigation services that can handle the entire chargeback life cycle and create effective dispute strategies can increase win rates, manage friendly fraud, and put less stress on your operation. Such services also incorporate data insights that can discover business bottlenecks that create the majority of your chargeback volume. Such breadth of protection further helps with dispute prevention beyond what chargeback insurance can provide.

Key Takeaway

While chargeback reimbursement guarantees may appear like an ideal solution to the issue of chargebacks, policy services are not a comprehensive answer. With limited coverage, added costs, and no additional merchant support for fraud prevention, chargeback insurance presents a possible negative return on investment.

Still, chargeback guarantees are useful as a form of revenue recovery against events of true fraud, and they operate best as a support service combined with other chargeback management methods. That is why Justt is built as a risk-free mitigation service, where we can enhance and complement a chargeback protection policy. As a customized AI-powered technology, we earn a high dispute win rate—but only take success-based fees. You are only charged when we recover lost revenues for you, meaning the entire process is hands-off and won’t result in a negative return on investment. For margin-tight businesses, our mitigation solutions offer a complete answer to the issue of chargebacks.

Want more information on how you can recover revenues lost to chargebacks risk free?

Contact us today
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