Chargeback Insurance: What Is It & Should You Get It

As an owner of e-commerce stores, I’ve considered chargeback insurance and have done a lot of research into it. This guide will compile my research and help you determine whether it’s a worthwhile investment.

I’ll talk about what it is, how it works, who it’s best for, what it covers, and examples of providers.

Let’s learn about chargeback insurance.

Key Takeaways

• Chargeback insurance protects businesses from financial losses caused by fraudulent credit card transactions.
• It's ideal for high-risk businesses like online retailers.
• Costs vary based on business risk, with options for flat fees, percentages, or per-transaction charges.
• Chargeback insurance doesn't cover all disputes, mainly focusing on fraudulent transactions.
• Consider alternatives like fraud prevention tools and chargeback mitigation services.

Who Should Get Chargeback Insurance?

Businesses experiencing frequent chargebacks specifically caused by fraud are the candidates for chargeback insurance.

Examples includes businesses where stolen credit card information or unauthorized transactions are a major source of losses, such as:

• Online Retailers: E-commerce stores lack face-to-face verification, making them vulnerable to card-not-present fraud, where thieves use stolen card details.
• Luxury Item Retailers: High-value goods attract fraudsters who use stolen payment information, increasing the potential financial impact of chargebacks.
• Businesses Prone to Specific Fraudulent Chargeback Schemes: Companies may face industry-specific fraud patterns (e.g., unauthorized resales in ticketing, recurring billing disputes in subscription services) that align with their selected insurance coverage.

Ensure the covered chargeback reason codes match the types of fraud your business is most likely to experience.

For example, an online retailer might be primarily concerned with card-not-present fraud (CNP), where thieves use stolen card details for unauthorized purchases.

A business should look for an insurance policy that covers chargeback reason codes related to CNP, such as "Fraudulent Transaction" or "Card Not Present" (reason codes can vary by provider).

Summary: Chargeback insurance is best for businesses facing significant losses from fraudulent chargebacks. Always review policy details to ensure it covers the types of fraud your business experiences.

Pros & Cons of Chargeback Insurance

Pros of chargeback insurance:

• Saves businesses from financial ruin: Fraudulent chargebacks can bankrupt vulnerable businesses; insurance acts as a lifeline in these situations.
• Eliminates the stress of chargeback disputes: The insurance company handles the complex and frustrating process, freeing up the merchant's focus.
• Prevents business closure: Excessive chargebacks can result in banks terminating accounts, forcing businesses to shut down; insurance offers a safeguard.
• The only way to recover losses: In many cases of fraud, chargeback insurance is the merchant's sole chance of recouping lost funds.
• Sign of responsible business ownership: Demonstrates to banks and customers that the merchant is serious about combating fraud.

Cons of chargeback insurance:

• Prohibitively expensive: Premiums and deductibles can financially burden small businesses or those with tight margins.
• Limited coverage leaves businesses exposed: Many common chargeback reasons aren't covered, leaving gaps in protection.
• Creates moral hazard: Insurance can tempt merchants to be careless with fraud prevention, knowing they have a financial cushion.
• Damages customer relationships: False declines alienate legitimate customers leading to lost sales and negative reputation.
• Masks deeper underlying problems: Insurance doesn't address root causes of chargebacks, potentially allowing serious issues to fester.

The decision to pursue chargeback insurance requires a careful cost-benefit analysis specific to each business's situation.

Summary: Chargeback insurance offers potential salvation but comes with steep costs. It's a complex decision, not a guaranteed solution.

What Is Chargeback Insurance?

Also known as:

• Chargeback guarantee
• Chargeback warranty
• Chargeback reimbursement

Chargeback insurance is a policy that reimburses merchants for losses caused by fraudulent chargebacks. This protection helps businesses recover potentially lost funds due to criminal activity.

You pay a monthly premium or a percentage of each transaction in exchange for coverage.

If a customer files a chargeback claiming they didn't authorize the transaction (often due to a stolen card), the insurance company may reimburse you for the following:

• Cost of the product or service
• Any chargeback fees from the bank
• Other associated costs

Still confused?

Imagine a customer's credit card information is stolen and used to make an unauthorized purchase from your online store. The customer disputes the charge, leading to a chargeback. With chargeback insurance, the provider could reimburse you the loss, minimizing the financial impact of the theft.

Summary: Chargeback insurance offers financial protection against fraudulent chargebacks. Merchants should carefully weigh its costs and benefits before purchase.

How Does It Work?

Here’s an example of how chargeback insurance works (in general):

1. Choose a vendor: Find a provider that combines chargeback insurance with fraud detection services.
2. Accept the terms: Review the policy, paying attention to restrictions and eligibility requirements.
3. Technology checks for fraud: The integrated fraud tool analyzes transactions, aiming to block fraudulent purchases.
4. Vendor reimburses you for chargebacks: File a claim if a fraudulent chargeback slips through. You might be reimbursed for lost product, fees, and in some cases, even lost profits.

This will vary by provider. As will the policy types.

Here’s an example:

Provider A:

• Coverage focus: Specializes in "friendly fraud" (customers claiming they never received goods) for online businesses selling physical products.
• Eligibility requirements: Requires merchants to use a specific payment gateway and have a chargeback ratio below 1%.
• Reimbursement: Covers the product's cost, shipping fees, and chargeback fees.

Provider A is a better fit for smaller online businesses with a good track record focusing on a specific fraud issue.

Provider B:

• Coverage focus: Offers broad protection against various fraudulent chargeback types for online and brick-and-mortar stores.
• Eligibility requirements: More flexible, accepting merchants with higher chargeback ratios. Requires use of their proprietary fraud detection software.
• Reimbursement: Covers product costs and chargeback fees, but may exclude shipping or have reimbursement caps.

Provider B suits a wider range of merchants but may carry higher premiums to offset the broader coverage.

Summary: Chargeback insurance involves working with a vendor to protect against fraudulent chargebacks. Careful policy review is crucial for a successful experience.

Coverage Model

In short:

• Chargeback insurance only covers some instances of fraud.
• It doesn’t cover instances of friendly fraud or merchant errors.

The following sections will provide more details on what it covers. Keep reading to learn more.

1. What Does Chargeback Insurance Cover?

Issuing banks categorize chargebacks using reason codes to pinpoint the root cause of the dispute. Understanding these codes, such as "Fraudulent Transaction," is crucial for contesting a chargeback and determining whether it falls under potential coverage from your insurance provider.

Chargeback insurance primarily focuses on fraudulent chargebacks, such as those resulting from stolen credit card information or unauthorized use.

For example, chargeback insurance might cover losses when a customer's card details are stolen and used without authorization.

However, coverage details vary between different providers. Some policies cover a range of fraud-related chargeback reason codes, while others are more restrictive

Summary: Chargeback insurance mainly protects against losses from fraudulent chargebacks. Always review your provider's policy carefully for coverage details and eligibility requirements.

2. What Doesn’t Chargeback Insurance Cover?

Here’s what chargeback insurance DOESN’T cover:

1. Friendly Fraud: This type of fraud occurs when a customer makes a purchase and then claims they never received the item or that it wasn't as described, even when they did.

Here’s an example of friendly fraud in action:

A customer orders a high-end smartphone online, receives it, but files a chargeback claiming the phone is defective (when it's not) to avoid paying.

2. Non-Fraudulent Disputes: Most insurance providers won't cover chargebacks due to customer dissatisfaction, shipping mishaps, or merchant mistakes.

This includes:

• Failed or misdelivered packages: Losses if the package was lost in transit or delivered to the wrong address due to a customer-provided incorrect address.
• Merchant errors: Chargebacks from overcharging a customer or delivering damaged/incorrect goods due to a picking or packing error on the merchant's side.‍
• Disputes over digital goods: Customers claiming they didn't access or use the digital product after purchase.

3. Specific Restrictions: While specifics vary by provider, some commonly excluded categories include:

• Intangible goods: Certain digital goods or services with high dispute rates, like event tickets or downloadable software, might not have coverage.
• High-risk regions: Transactions originating from countries with a history of high fraud rates (e.g., Brazil) might be ineligible for coverage [1].

Pay attention to potential restrictions on product categories (e.g., travel bookings, virtual currency) and whether your coverage applies to all regions where your business operates.

Manual overrides can also negate your insurance protection. If your fraud prevention tool flags a transaction as suspicious but you approve it anyway, the provider likely won't reimburse you if a chargeback occurs due to fraud.

Summary: Chargeback insurance is designed for fraudulent transactions, not customer disputes or merchant errors. Careful review of policy exclusions is crucial for understanding your level of protection.

Costs & Providers of Chargeback Insurance

Chargeback insurance premiums vary based on your business's risk profile, including factors like industry and chargeback history. Businesses in high-risk sectors or those with frequent chargebacks will typically pay more. Customization of coverage limits and deductibles also impacts pricing.

Chargeback insurance providers generally use one of the following models:

• Flat Monthly/Annual Fee: A fixed premium charged regardless of how many chargebacks you receive. This offers predictable pricing.
• Percentage of Sales: This scales with your business but could be costly for high-volume merchants.
• Per-Transaction Fee: A small fee charged per transaction processed through your payment gateway. This is best for low-volume merchants or those with low average order values.

Let’s compare some providers. Here are payment processors that offer chargeback insurance.

1. Shopify

• Coverage: Fraudulent chargebacks on eligible orders processed through Shopify Payments.
• Countries: United States of America
• Costs: Free
• Built-in: Yes, automatically enabled for qualifying merchants.

2. PayPal

• Coverage: “Item not Received” and “Unauthorized” chargebacks.
• Countries: United States of America
• Eligibility: PayPal business account users who enabled Advanced Credit and Debit Card checkout.
• Costs: 0.40% per transaction with Chargeback Protection; 0.65% with Effortless Chargeback Protection
• Built-in: No

Effortless Chargeback Protection eliminates operational overhead by removing the requirement to submit delivery conformations for certain fraud chargebacks. However, you will still need to provide a delivery confirmation for “product not received” chargebacks.

3. Stripe

• Coverage: Supports a number of chargeback reason codes; has annual protection limits up to $25,000 [2]
• Countries: USA and some European countries
• Costs: 0.4% per transaction
• Built-in: Yes

Here are the reason codes that Stripe Chargeback Protection will support [3]:

• AE 4540: Card Not Present
• AE 4534: Multiple Records of Charge
• AE F29: Fraudulent Transaction; Card not Present
• AE FR4: Fraud Full Recourse Agreement
• AE FR2: Fraud Full Recourse Program
• Diners Club, JCB, and Discover UA01: Fraud Card Not Present Transaction
• MC 4840: Fraudulent Processing of Transactions
• MC 4837: No Cardholder Authorization
• Visa 10.4: Card Absent Environment

“AE” stands for American Express. “MC” stands for MasterCard. We explain what these reason codes are and how you’d deal with them in separate posts.

Additional Considerations

Here are other factors and scenarios to consider when searching for chargeback insurance:

1. Agents: Businesses new to chargeback insurance, those with complex needs, or those wanting a streamlined process may benefit from working with an insurance agent or broker.

Agents help compare policies, explain terminology, and guide the selection process.

2. Chargeback insurance outside the USA: Merchants operating outside the US need to take different precautions when searching for chargeback insurance. For instance, when doing business in Australia, look for insurance providers with Australian Financial Services Licenses (AFSL).

They should also review if the policy covers the specific needs of a business operating in Australia.

3. Commission Chargeback Insurance: Commission-based businesses, like real estate or insurance, may face unique chargeback risks due to delayed payments or client disputes over fees. Specialized policies may address these situations, offering tailored protection for commission-reliant income streams.

4. Policy Details & Limitations: Scrutinize several factors:

1. Coverage limits: Pay attention to per-chargeback reimbursement caps and overall policy coverage limits, ensuring they align with your potential losses.
2. Deductibles: Consider how high deductibles might impact the financial benefit of the insurance.
3. Eligibility: Ensure your business model and operations fit within the policy's eligibility requirements to avoid claim denials.
4. Reimbursement timelines: Understand how quickly to expect payouts for covered chargebacks.

Summary: Chargeback insurance details vary, choose a policy meeting your needs. Consider factors related to industry, location, and policy specifics.

Importance of Fraud Prevention Strategies Alongside Insurance

While chargeback insurance offers a financial safety net, it doesn't address the root cause of the problem: fraudulent transactions themselves. Proactive measures can reduce the number of fraudulent attempts, saving businesses money on insurance premiums, chargeback fees, and lost inventory.

Here are examples of ways to prevent chargebacks:

• Address verification systems (AVS): It matches the billing address that customer provides and matches the address on file with the card issuer.
• Card Verification Value (CVV) checks: Requires the customer to enter the 3-digit security code located on the back of the card, an extra layer of security.
• 3D Secure authentication: An additional security protocol requiring customers to verify their identity with their bank during checkout.
• Velocity checks: Monitor for unusual purchasing patterns, such as a sudden surge in orders from a new customer or multiple orders from the same IP address.
• Device fingerprinting: Analyzes a user's device and browsing data to identify potential risks that come with the specific device being used.

Combine these methods for optimal results. Also consider getting software like Chargeback, which also helps in eliminating chargebacks before they happen.

Summary: Chargeback insurance is a valuable tool but works best alongside proactive fraud prevention. Prevention strategies reduce losses and improve the overall health of a business.

Alternatives to Chargeback Insurance

The high rate of false positives from chargeback insurance can cost your business a lot. Studies suggest that false positive rates can reach as high as 19% for some insurance providers [4]. This means legitimate transactions get flagged as fraudulent, leading to lost sales and frustrated customers.

The conflict of interest within chargeback insurance can also work against businesses.

Chargeback insurance providers, like any insurance company, focus on profitability. Minimizing payouts helps them control costs and reduce their financial risk. This approach protects the insurance company's financial stability while managing potential abuse of the system.

That isn’t beneficial for a business that wants to save money.

Here are some alternatives to chargeback insurance:

1. Chargeback Alerts: Services that provide early warnings of incoming chargebacks (often within 24 hours), giving businesses a window to resolve the dispute directly with the customer. Potentially preventing the chargeback from being filed.

2. Chargeback Mitigation: Solutions focus on contesting valid but potentially preventable chargebacks through the representment process.

This may involve:

• Gathering evidence: Compiling documentation like order confirmations, shipping receipts, and communication records to demonstrate the legitimacy of the transaction.
• Representing the case: Clearly outlining the facts and evidence to the issuing bank in a professional and persuasive manner.
• Negotiation skills: Experienced chargeback mitigation services can often negotiate with issuing banks to recover lost funds.

3. Refund Optimization Tools: Proactive communication and flexible refund policies can preempt many chargebacks and improve customer satisfaction.

Here's how:

• Clear return and refund policies: Outlining your return window, conditions, and procedures helps customers to make informed purchases and reduces confusion.
• Self-service options: Offering online return portals or automated refund processes streamlines the refund experience for customers, reducing frustration and potential disputes.
• Omnichannel communication: Providing multiple channels for customers to reach customer service (phone, email, live chat) allows for prompt resolution of inquiries and fosters trust.

4. Chargeback Prevention Service: Tools that’ll help prevent chargebacks by stopping them in one of the following categories (P.S., we offer a prevention tool):

• Pre-transaction: Identifies potential chargeback triggers and resolves them before transaction happens.
• Post-transaction: Resolves in-progress disputes before they escalate to chargebacks.
• Source detection: Identifies reasons for chargebacks on your site and offers solutions.

Summary: Alternatives to chargeback insurance prioritize prevention and resolution. Businesses can save money and improve customer relationships by implementing these solutions.

Should You Get Chargeback Insurance?

Consider chargeback insurance if your business is high-risk and vulnerable to fraud. It offers financial protection. However, you should weigh the costs against potential benefits. Explore alternatives like fraud prevention and chargeback mitigation for a more proactive approach.

Speaking of chargeback mitigation. We offer a solution to prevent many chargebacks from happening. Learn how today.

‍