Chargeback Insurance: How Does It Work and Should You Get It?
We’ve talked about how chargebacks can be detrimental to your business’s revenue. However, not all chargebacks come from fraud. Your customer’s purchase can also be declined if they don’t have enough money in their account. Or if they don’t recognize a charge on their credit card statement and dispute it with their card company.
Fortunately, it’s easy to implement chargeback protection to reduce chargeback fees for your small business. In this article, we will look at how chargeback insurance works, and how you could use it to protect your business.
Let’s dive in.
What is chargeback insurance?
Chargeback insurance offers fraud protection. However, it doesn’t protect your business from liability arising from cardholder error. If your customer forgets to sign for a purchase, you’re on your own. Ultimately, chargeback insurance protects your business from a loss of profit from unnecessary chargebacks.
“Friendly” fraud is on the rise. Almost 64% of retailers reported an uptick in organized retail crime last year. And chargeback prevention is particularly important for small businesses since chargebacks harm their profits in a more discernable way. In this environment, fraud prevention is more important than ever, so fraud prevention tools will quickly become your best friend.
How does chargeback insurance work?
Chargeback insurance is typically sold as an add-on to fraud prevention services. Companies that offer chargeback guarantees use machine learning to identify potential chargebacks in real-time. They will automatically flag and decline any transactions deemed high-risk to protect your bottom line. However, if the tool approves a fraudulent transaction, they will reimburse you for the chargeback.
Chargeback insurance works differently depending on your insurance policy and provider. A simple security audit of your small business will show you where you’re losing the most revenue. From there, you can identify what branch of your business is losing the most revenue to fraudulent transactions.
You’ll want to know whether fraudsters get you on your eCommerce store, a specific physical store, cash register, etc. This information will allow you to ensure that your policy covers your fraud chargebacks, wherever they arise for your business.
Each chargeback insurance policy varies depending on the provider and the package you choose. Your insurance provider will work with you to determine what insurance policy you need for your merchant account.
What does chargeback insurance cover?
Chargebacks on high ticket items can tank even the most effective small business’s bottom line. That’s why prevention is key. Do keep in mind that chargeback insurance doesn’t cover chargebacks related to customer or retailer errors at checkout. Only chargebacks with fraud codes will be reimbursed by your insurance provider.
There are a few other criteria governing fraudulent transactions covered by chargeback insurance. For instance, you’ll need to submit the reimbursement request within the deadline required by your insurance company.
You may also need proof of delivery. Or to be able to verify the identity of the customer whose transaction is in question. Ultimately, you’ll want to request the criteria from your insurance company to ensure that your chargeback reimbursement requests are approved.
Most chargeback insurance companies cover eCommerce fraud prevention. Like with most insurance companies, pricing varies. High-risk businesses will be charged more than those in low-risk industries. Businesses selling alcohol and lotto tickets will still pay more for insurance than those selling tools and home goods.
Most fraud management companies, such as Verifi, offer chargeback insurance as part of their business portfolio. However, partnering with the wrong fraud protection merchant services provider can negatively impact your chargeback ratio. That’s because it’s in the insurance company’s best interest to flag all potential chargebacks.
So, they often employ fraud filters to flag any suspicious transactions. Fraud filters may require 3D secure authentication to verify transactions. Or they may use machine learning to flag anything suspicious.
This results in false positives when non-fraudulent transactions are flagged for not meeting the fraud filter’s strict approval criteria. This can also result in false declines when the company declines valid customer payments due to overly strict fraud filters.
Does chargeback insurance cover friendly fraud?
Few chargeback insurance providers cover friendly fraud. Your insurance policy is not a pass to let customers not sign for items or to be lax with cash register security. Just like with your health insurance, you’ll still want to do everything you can to avoid incidents on your own. Your insurance issuer won’t prevent chargebacks, it will just reimburse you for those from criminal fraud.
How to ensure complete chargeback protection
The best way to deal with chargebacks is a mix of prevention and recovery. Analyzing the reasons behind your chargebacks can help you prevent them to a certain extent. You must also arm yourself with the necessary knowledge to fight any fraudulent chargebacks you receive.
Many payment processors offer some form of chargeback insurance in addition to providing payment gateways and software. However, even if chargeback insurance isn’t the right fit for your small business at the moment, you can still save on your monthly payment processing bill.
Payment Depot helps small business owners like you save an average of $400 a month or more on credit card processing. With award-winning customer service and an A+ rating with the Better Business Bureau, Payment Depot is a game-changer for those that need to save money on payment processing. Contact us today to learn how you can save more on credit card processing every month.
Quick FAQs about ChargeBack Insurance
Q: What is chargeback insurance?
Chargeback insurance is a protection plan for businesses that shields them from financial losses due to fraudulent chargebacks. It is usually sold as an add-on to fraud prevention services.
Q: How does chargeback insurance work?
Chargeback insurance providers use machine learning to identify potential chargebacks in real-time. If any transaction is deemed high-risk, it is automatically flagged and declined. If a fraudulent transaction is approved, the insurance provider will reimburse the business for the chargeback.
Q: What does chargeback insurance cover?
Chargeback insurance typically covers fraudulent transactions. However, it does not cover chargebacks related to customer or retailer errors at checkout. The specific coverage might vary depending on your insurance policy and provider.
Q: Who offers chargeback insurance?
Many fraud management companies, such as Verifi, offer chargeback insurance as part of their business portfolio. Payment processors like Shopify and Stripe also offer chargeback protection solutions.
Q: What can cause a chargeback?
A chargeback can occur when a customer disputes a charge on their credit card statement with their card company. This could be due to unrecognized charges, insufficient funds, or fraudulent transactions.
Q: How can I prevent chargebacks?
The best way to prevent chargebacks is through a combination of prevention and recovery measures. Regular security audits, using fraud prevention tools, and understanding the reasons behind your chargebacks can help in their prevention.
Q: What happens if there is a false positive in chargeback detection?
If there is a false positive, you can open a dispute with your insurance issuer. You may still be charged a fee for the fraudulent transaction, and lose all proceeds from it.
Q: Are there any limitations to chargeback insurance?
Yes, chargebacks resulting from customer error, retailer error, and friendly fraud are not covered. Moreover, claims not submitted properly or within the allotted time frame could be rejected by your issuing insurance provider.
Q: When should a business consider getting chargeback insurance?
A business should consider getting chargeback insurance when the cost of chargebacks resulting from intentional fraud exceeds the cost of the insurance. This ensures a positive return on investment for the business over time.
Q: Does chargeback insurance cover eCommerce fraud?
Most chargeback insurance companies cover eCommerce fraud prevention. However, the pricing varies and high-risk businesses may be charged more than those in low-risk industries.