What is chargeback insurance (and do I need it)?
Vaishali Ravi
·June 7, 2024
Online payments fraud is a big concern for merchants. A recent report found that merchants will lose an estimated $362 billion globally over the next five years.
Many of the losses are due to a common ploy known as chargeback fraud, a form of return fraud in which a customer orders a product, then claims it never arrived or that they never ordered it. As a result, their credit card processor will reverse the charges—and, in most cases, the merchant is on the hook for the loss, unless they can provide hard evidence that the customer was in the wrong.
To protect your business against the risk of financial losses due to chargeback fraud, it may be helpful to purchase chargeback insurance. In this article, we’ll discuss what chargeback insurance covers and how your business can use it to mitigate against the risk of chargeback fraud.
What is chargeback insurance?
Chargeback insurance, otherwise known as chargeback protection, is a type of coverage that protects merchants against financial losses from chargebacks. It typically covers the amount lost due to chargeback fraud, as well as any related fees or penalties imposed by the credit card processor. This can include reimbursement for products or services that were fraudulently claimed as not received or unauthorized.
Some chargeback insurance policies may also offer additional benefits such as assistance with disputing chargebacks and providing evidence to support your case. This can be especially helpful for small businesses who may not have the resources to handle chargebacks on their own.
To obtain chargeback insurance, you will need to apply for coverage through an insurance provider. They will assess your business’s risk level and determine the cost of premiums based on factors such as your industry, sales volume, and history of chargebacks.
It is important to carefully review the terms and conditions of any chargeback insurance policy before signing up. Some policies may have limitations on coverage or exclusions for certain types of chargebacks.
Does your business need chargeback insurance?
To evaluate whether chargeback insurance is worth the cost, consider your business’ risk level. Certain industries have a particularly high risk of chargebacks because of the high value of the items, such as jewelry, luxury brands, electronics, and hospitality purchases.
If you operate an online clothing store where the average item cost is only $25, you’ll be more likely to identify and flag transactions that have a high risk of chargeback—for instance, if a customer is purchasing thousands of dollars in merchandise at once. But if your shop sells jewelry with an average item value of $1,000, you’ll be less likely to spot potential scam artists, as they’ll only need to purchase and charge back a single item to walk away with a high-value item for free. This makes it crucial for businesses in these industries to have strong fraud detection and prevention measures in place.
It’s also important to look at your business’ history with chargebacks. If you’ve frequently fallen victim to chargeback fraud in the past, and haven’t found a successful mitigation strategy, then springing for chargeback insurance is a good way to minimize the losses you’ll face in the future.
How can you get chargeback protection?
Before paying for a separate chargeback insurance policy, it’s worth taking a look at built in protections that may already be available through your ecommerce platform or payment processors.
For example, Shopify’s merchant platform offers a product called Shopify Fraud Protect, which uses advanced algorithms to identify potentially fraudulent orders, which merchants can decline. That means if a dispute arises on a protected order that Shopify hadn’t flagged, Shopify will reimburse you for the chargeback and work with the bank to resolve the issue on your behalf.
If you use Stripe to process transactions, you can use Stripe Chargeback Protection. The program uses AI to screen for potentially fraudulent transactions, and covers the cost of the chargeback as well as associated fees if Stripe failed to identify the fraudulent transaction.
Have a PayPal merchant account? You can take advantage of their PayPal Chargeback Protection, an opt-in program that evaluates the risk of any transaction processed through PayPal and helps merchants decide whether to accept or decline the order. If a transaction was marked as low risk, but later is disputed in a chargeback, PayPal will cover the costs associated with the chargeback, though you will be required to submit proof of delivery or other evidence to support the claim.
Is a full-service solution worthwhile?
However, if your payment processor doesn’t participate in such programs, or you need more protection than they offer, it may be worthwhile purchasing chargeback insurance. With such insurance solutions, you’ll be able to approve more transactions that are likely to be legitimate orders, as 30% of “false declines” are, helping you retain more revenue.
With a full-service fraud protection solution, such as those offered by Kount and ClearSale, you’ll be able to go beyond standard fraud monitoring detection with tools that use your own historical data and machine learning to determine the right response for each transaction: approve, decline, or further review. Such solutions can help you approve more legitimate orders, while offering chargeback protection and management on those fraudulent orders that still slip through.
A full-service solution will likely be a higher cost than protection plans offered by your merchant services platforms, which typically work on a per-transaction basis. But, if you’re able to protect more of your legitimate transactions, and eliminate time spent in dispute management, the higher cost may be a good tradeoff for a more advanced level of protection.
Minimize your risk of return fraud with optimized returns management
Beyond investing in chargeback protection, you can also reduce your risk of other forms of return fraud by setting clear return rules and policies. Using an automated returns management platform like Loop, you can set up customized workflows that set return conditions on certain product types, sales events, and warranty claims. You’ll also get access to insights like item grade and disposition data from integrated warehouse or 3PL partners. By taking control of your returns strategy, you’ll be able to reduce return abuse and retain more revenue from your sales.
Want to reduce your rate of return policy abuse?
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