Chargeback Insurance

With the sharp increase in the number of Chargeback insurance filed last year, eCommerce businesses need to find a way to prevent chargebacks from draining their revenue more than ever, as merchants have a lot of options these days when it comes to addressing the issue of chargebacks.

A solution some merchants turn to in order to address this problem is chargeback insurance. Exactly what is chargeback insurance, how does it work, and is it a good option for merchants who deal with chargebacks?

Chargeback insurance: what is it?

You can protect yourself against chargebacks by purchasing chargeback insurance. Chargeback insurance works like any other insurance policy. You pay a monthly premium to the insurance company, which then covers the cost of chargebacks.

In reality, this type of insurance coverage varies greatly. The merchant is expected to know what his or her chargeback insurance policy includes and does not cover for chargebacks. No two policies are the same and they do not cover all chargebacks.

Many merchants falsely believe that they are protected from chargebacks.

What is the process of this insurance?

Specifically, merchant insurance is designed to cover fraud claims when, for example, credit card charges are not authorized, as well as claims arising from bank liability.

The following scenarios may require chargeback insurance:

Credit card purchases made before the card owner reports the card lost or stolen.

The use of a fake or counterfeit credit card and account number.

After the purchase has been completed, the shipping information is edited.

There are problems with the signature – either it does not match the one on file or it is not provided.

If you make a claim against your chargeback insurance for such an occurrence, you may be reimbursed for the lost item or your loss of profits, depending on your policy.

Most chargeback insurance policies only cover payment card losses that have been processed by a recognized payment gateway or processor.

Hint: Verifi is a recognized and leading payment processor. We work with and for you to prevent such fraudulent charges from occurring and to identify fraud and chargeback risk before it happens. Furthermore, we offer a comprehensive payment processing solution through our Global Payment Gateway.

Chargeback insurance covers what?

Generally, chargeback insurance only covers chargebacks resulting from fraud on transactions that were explicitly approved by the vendor’s fraud prevention software, and only if the merchant followed all the provider’s policies and procedures.

Only a small percentage of total chargebacks are covered by chargeback insurance. Chargebacks due to friendly fraud or merchant error will not be reimbursed.

In most cases, chargeback insurance won’t cover a chargeback if the item was received broken, or never received. It also won’t cover chargebacks based on clerical errors, such as being overcharged or duplicate charges. Digital goods, such as games, entertainment downloads, e-books, webinars, etc., will not be covered by insurance.

Additionally, these policies don’t always cover all the costs of a chargeback, so merchants should read the terms carefully to determine the payout when a covered chargeback occurs.

Another problem is that chargebacks aren’t just financial. Credit card networks track merchant chargeback ratios, and if they climb too high, there can be severe consequences.

It is not intended to penalize the merchant, but rather to reflect potential problems with the merchant’s operations. A high number of chargebacks may indicate lax fraud prevention, repeated merchant errors, or poor customer service.

The issue with insurance, then, is that it’s far from a one-size-fits-all solution. Merchants who aren’t doing anything to correct chargeback problems will still face serious consequences regardless of their insurance coverage. Chargebacks are often dealt with seriously by merchants who take several prevention and recovery measures, which makes insurance somewhat redundant.

Is chargeback insurance applicable when there is no chargeback?

Chargeback insurance does not protect you from all chargebacks, in fact, its scope is rather limited.

Chargebacks not covered by chargeback insurance include:

Friendly fraud is one of the most common forms of chargeback fraud. When a customer claims that the purchase wasn’t received or doesn’t match their expectations, their claim generally won’t be covered. This is why an end-to-end solution for online sales authentication, authorisation and tracking is essential. It allows you to build up more data on your customers and transactions, which can assist in preventing friendly fraud from occurring in the first place.

In the event that your chargeback ratio exceeds defined limits, you may not have the coverage and protection you thought you did. In order to keep your chargeback ratio positive, it’s important that you know how you can manage it. You can prevent unnecessary business losses by reducing your chargeback ratio with a solution like Verifi’s CDRN.

Reading your chargeback insurance policy after the fact will not prevent revenue losses, escalating chargeback ratios, or increased bank fees.

Does chargeback insurance have conflicts of interest?

Chargeback insurance comes with an inherent conflict of interest. The client wants any claim they make paid. The insurance provider wants to pay as few claims as possible.

People have heard stories of insurance companies finding every possible way to avoid paying a claim, and many have experienced that frustration first-hand.

Insurance companies tend towards greater caution with their fraud prevention tools, as they have a vested interest in reducing the number of claims they must pay out. As a result, merchants may see an increased rate of legitimate customers being refused due to false positives than if they were using score-based fraud prevention tools, which leave them free to make their own decisions as to what transactions to reject.

It is most likely that merchants with an average order of $250 to $500 or more will see the best ROI from chargeback insurance — especially those selling luxury items that can easily be re-sold by fraudsters with stolen credit card numbers. Chargeback insurance can be a lifesaver for merchants who sell expensive goods without a high profit margin, but there are better options for most merchants.

Do I need chargeback insurance to protect my business?

Chargeback insurance is not your only solution. To many merchants, chargeback insurance is the only solution they need. But, as you know, chargeback insurance covers a very limited scope and range of chargebacks.

The first thing you need is a preventive solution in place that will work for you to prevent chargebacks from happening. To do this, you need to partner with a trusted payment processor.

Since 2005, Verifi has been the premier provider of chargeback prevention. We’re proud to partner with companies of all sizes and shapes, from small start-ups to Fortune 500s, empowering them to protect their payments, reduce risk and boost their revenue. Research shows that chargeback claims can devastate your business. That’s why you must trust Verifi for the ultimate security and guidance needed to inspire customer trust, attract investors, support employees, satisfy card issuers and win third-party praise. Rapid, reliable processing grants extended coverage against fraudulent activity: a must-have feature for any thriving enterprise.

Chargeback insurance alternatives

The right fraud prevention tool should be chosen by merchants based on its effectiveness and efficiency rather than its insurance coverage.

A combination of prevention and recovery is the best way to handle chargebacks. By analyzing the causes of chargebacks, you can gain insight into how you can prevent them, and tools like chargeback alerts can help you stop chargebacks before they start.

You need the knowledge and experience to fight any illegitimate chargebacks you receive.

If you think that sounds like an intimidating task, you’re not alone. Chargebacks are complicated, which is why many merchants, from small businesses to large international corporations, outsource chargeback management to a team of experts.

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