Ultimate Guide To Choosing The Right E-commerce Chargeback Protection

As an e-commerce shop owner, I’ve dealt with a fair share of chargebacks and had enough. Leading me to deploy chargeback protection tools. Moreover, we’re a chargeback prevention platform. We know a bit about protection.

In this guide, we’ll explain what chargeback protection is. From there, we’ll provide your options and how to choose the best tools.

Let’s protect your business from further losses from chargebacks.

Key Takeaways

• Chargeback protection reduces financial losses from fraud and/or can prevent it.
• It helps fight disputes and improves revenue retention.
• Businesses can choose pre-transaction, post-transaction tools, or post-chargeback tools.
• Important factors include integration, cost, and data analysis.
• Chargeback protection helps maintain good standing with processors.

What Is Chargeback Protection?

Chargeback protection refers to services, procedures, or technologies merchants use to reduce chargeback occurrences. These can include preventing them, mitigating the worst impacts, or conducting research to identify sources.

These tools help sellers reduce financial losses by preventing fraudulent transactions and resolving disputes efficiently. Thus, preserving revenue and customer relationships.

Some services provide real-time monitoring of transactions. Others offer chargeback representment—responding to disputes on behalf of the business.

Many services also provide data analytics to help businesses identify patterns of fraud. This allows retailers to prevent future chargebacks or fraud potentially.

We’ll get into the details in a bit.

These tools are a good option for vendors with high fraud rates (around 1% chargeback rate). It's also useful for companies that sell high-value goods and services.

Summary: Chargeback protection tools shield businesses from losses due to fraudulent credit card transactions by proactively identifying risk and assisting with dispute resolution.

How to Choose the Right E-commerce Chargeback Protection

Here's how to consider different factors for choosing a chargeback protection provider:

• Identity Behavior Analysis (IBA): Check if they use this technology to track customer behavior across transactions for better fraud detection.
• How Long Fraud Analysis Takes: Prioritize services that offer real-time or near-real-time analysis to quickly take action in fraudulent transactions.
• Return on Investment (ROI): Calculate the potential cost savings from reduced chargebacks compared to the cost of the provider's service.
• Early Detection and Reduced False Positives: Look for solutions with a strong record of accurately identifying fraud early, without flagging legitimate orders.
• Efficient Resource Allocation: Evaluate whether the tool optimizes your team's time by automating tasks or offering chargeback representment assistance.
• Customer Support: Choose a provider with responsive and knowledgeable support, especially for complex chargeback issues.
• Case Studies: Review case studies from businesses in your industry to gauge the product’s effectiveness and past successes.

These factors are what to consider in general. We’ll dive into more specific examples when diving into tool categories, which we’ll cover next.

Summary: Evaluate their fraud detection capabilities, speed, cost-effectiveness, ease of use, support, and evidence of results to ensure a worthwhile investment in protecting their revenue.

Types of Chargeback Protection Tools

When dealing with chargeback protection tools, we’ll see 3 types:

• Pre-transaction chargeback prevention: Stops fraudulent transactions before they occur using tools that analyze and block suspicious activity.
• Post-transaction chargeback prevention: Identifies and resolves potential disputes with customers before they file a formal chargeback.
• Post-transaction chargeback protection: Assists businesses in fighting and responding to chargebacks already filed, aiming to minimize financial losses.

The following sections will cover all the subcategories of tools that each of the primary categories offers.

1. Pre-transaction Chargeback Protection

Pre-transaction chargeback protection tools help identify and prevent fraud before a transaction is finalized. These tools typically analyze order details, customer behavior, and historical data to uncover potential risks.

Here are the tools we’ll talk about in the next few sections:

• Fraud Scoring: Assigns a risk level to transactions based on various factors, assisting in decision-making.
• Fraud Detection: Uses algorithms to identify patterns indicative of fraudulent activity.

Learn whether you’d need these tools.

1. Fraud Scoring

Fraud scoring analyzes various data points in a transaction to assess its fraud risk. It assigns a numerical score (usually 1–100) based on factors like IP address, device, and past behavior. From there, businesses use these scores to determine the likelihood of a transaction being fraudulent.

Some of these tools claim to reduce fraud by up to 75% [1].

If a transaction has a high risk, then the business will cancel it and there’s no worrying about fraud. If not, let it proceed. And if it’s in a gray area (like if it has certain red flags), then have a team manually review the transaction.

This reduces the risk of chargebacks and financial losses.

2. Fraud Screening

Fraud screening involves analyzing transactions in real-time to identify red flags that signal potential fraud. These tools use various data points like IP location, device information, and order history.

It’s not the same as fraud scoring.

Here are examples of tools you’d use:

• Address Verification Service (AVS): Matches billing address with card issuer's records.
• Card Verification Value (CVV): Confirms the unique code on the back of the card.
• 3-D Secure: Requires customer authentication from the issuing bank during checkout.
• Velocity Checks: Monitor transaction frequency to identify suspicious bursts of activity.
• Negative Database Screening: Checks customer information against databases of known fraudsters.

3. How to Choose the Best Pre-transaction Chargeback Protection Tools

When choosing pre-transaction chargeback protection tools, consider your business's vulnerabilities. For instance, if you sell high-value electronics, focus on tools strong in identifying suspicious activity around those products.

Here’s what else you should consider:

1. Integration: Ensure the chosen tool integrates with your existing e-commerce platform (like Shopify or WooCommerce) and payment processor (like Stripe or PayPal).

This avoids technical headaches and streamlines data exchange between systems.

2. Strike a Balance: Look for customizable thresholds. This allows you to target high-risk transactions (e.g., orders from a new customer with a high-value purchase and shipping to a different country) for extra scrutiny.

This minimizes disruptions for legitimate customers with lower risk scores.

3. Transparency: Choose a tool that provides clear explanations for assigned risk scores. This transparency allows you to understand the rationale behind the risk assessment and make informed decisions about approving or declining transactions.

4. Adaptability: The best pre-transaction chargeback protection tools continuously learn and adapt to identify new fraud patterns. This ensures the tool's effectiveness over time as fraudsters develop new tactics.

Summary: To choose the best pre-transaction chargeback protection tools, prioritize integration, customization, transparency, and adaptability.

2. Chargeback Alerts

Chargeback alerts provide early notification to merchants when a shopper starts a dispute with their bank. The alert typically includes details about the transaction and the reason for the dispute.

This early warning allows businesses to take proactive steps like issuing refunds or providing evidence to resolve the issue. As all chargebacks tend to surprise sellers. Giving them little time to react.

Here's the typical chargeback alert timeline:

1. Customer disputes a transaction with their bank (issuing bank).
2. The issuer sends an alert through a designated network.
3. The merchant receives the alert.
4. The merchant can choose to address the dispute proactively.

Usually the vendor wouldn’t know about a chargeback until after the bank issues the chargeback. But this tool allows them to receive it early.

How do retailers receive these alerts early with these tools?

It’s not magic.

Companies like Ethoca and Verifi collaborate with major banks and payment processors to deliver these updates. Other smaller chargeback prevention companies tend to team up with these solutions to offer similar services.

The following sections will cover different types of chargeback alert tools you’ll see.

Summary: Chargeback alerts give merchants a headstart in managing disputes.

1. Mastercom Collaboration

Mastercom Collaboration is a Mastercard tool that allows merchants to address customer disputes before they escalate into chargebacks.

When a cardholder initiates a dispute, Mastercard may generate a Collaboration request on behalf of the issuer. This request gives the merchant an opportunity to provide order details or evidence to resolve the issue.

If the merchant responds effectively, it can potentially prevent the formal chargeback process.

Summary: Mastercom Collaboration provides merchants an opportunity to resolve customer disputes directly with card issuers, potentially stopping chargebacks before they are filed.

2 Visa’s Rapid Dispute Resolution

Visa's Rapid Dispute Resolution (RDR) is an automated system that expedites the resolution of eligible chargeback disputes before they become formal chargebacks. 

Here’s how it works:

• Dispute Initiation: The customer initiates a dispute with their credit card issuer.
• RDR Eligibility: Visa checks if the dispute meets RDR criteria (e.g., transaction amount, reason code).
• Merchant Notification: Visa notifies the merchant about the RDR dispute if eligible.
• Merchant Response: The merchant has a short time frame to accept liability for the dispute or provide evidence to counter it.

If the business accepts liability, the dispute ends without becoming a chargeback. If they proceed to fight it, the chargeback process occurs, and eventually, Visa makes a decision.

Merchants can tailor their participation in RDR by defining rules (such as specific dispute reason codes or transaction amounts) for automatically accepting liability.

For instance, a seller can automatically accept liability for RDR disputes involving transactions below $25 (to avoid contesting small charges and expedite resolution).

By setting these rules, the retailer allows for faster resolution of smaller value or specific disputes. Potentially reducing costs and maintaining a positive customer experience.

3. How to Choose the Best Chargebacks

When considering post-transaction chargeback protection tools, evaluate factors:

• Compatibility: Ensure the tool integrates with your existing payment processors and e-commerce platforms.‍
• Coverage: Understand which card networks the tool supports (Visa, Mastercard, etc.).‍
• Features: Look for tools offering a range of features including representment assistance and collaboration systems (Visa's RDR or Mastercard's CMR).‍
• Customization: The tool should offer flexibility for setting thresholds and rules.‍
• Reporting and Analytics: Analyze chargeback data to identify trends and inform prevention strategies.‍
• Cost: Choose a solution with a pricing structure aligned with your company's chargeback volume and budget.

These alerts are a nightmare for businesses to integrate, though. That’s where we come in. We bundle many different alert types (e.g., RDR) and integrate them for you. And you’ll only pay when receiving an alert.

Summary: To choose the best post-transaction chargeback protection tools, businesses need to prioritize compatibility, coverage, features, customization, data insights, and a cost-effective pricing model.

3. Post-chargeback Protection

Examples of post-chargeback protection tools include:

• Dispute Resolution Platforms: Streamline communication between merchants, cardholders, and issuing banks.
• Representment Services: Assist sellers in submitting evidence to fight chargebacks.
• Revenue Recovery Tools: Automate the process of challenging chargebacks to reclaim lost funds.

Post-chargeback protection tools help businesses manage and respond to chargebacks after they have already occurred.

They aim to minimize the costs associated with chargebacks and improve a merchant's standing with payment processors.

When considering post-chargeback protection tools, businesses should evaluate:

• Integration with Existing Systems: Ensure compatibility with e-commerce platforms and payment processors.
• Features and Capabilities: Consider the specific tools and services offered and their alignment with your business needs.
• Pricing Models: Select a cost-effective solution based on your chargeback volume.
• Data Analytics: Look for tools providing insights into chargeback trends.

Summary: Post-chargeback protection tools assist businesses in mitigating chargeback losses and navigating the dispute resolution process, with key considerations being integration, features, cost, and data analysis.

Is Chargeback Insurance Worth Considering?

Chargeback insurance is often beneficial for:

• Online Retailers: They are more vulnerable to online fraud.
• Businesses Selling Luxury Items: These sellers may attract fraudulent activity.
• Subscription services that may experience "friendly fraud" chargebacks.

Chargeback insurance is a policy that reimburses businesses for financial losses due to certain chargeback reason codes. It typically covers losses when a customer uses a stolen credit card or disputes a transaction without a valid reason.

For instance, Stripe’s insurance offers annual protection up to $25,000 [2].

Most policies don’t cover chargebacks stemming from customer dissatisfaction or issues with product quality (merchant error). The chargeback reason codes covered will vary by provider.

Here's how it works:

1. The seller pays a premium for the insurance policy.
2. The insurance provider may integrate fraud prevention tools.
3. If a covered chargeback occurs, the business files a claim.
4. The insurance provider investigates the claim and reimburses losses if valid.

Costs for chargeback insurance vary by provider. Some will have per-transaction fees. Others will take a percentage of your sales. And many will charge monthly and annual fees.

Many payment processors like PayPal, Stripe, and Shopify have chargeback insurance built-in. Shopify’s insurance is free. Meanwhile, Paypal and Stripe take a percentage of your sales.

Availability of insurance will also vary by country. For instance, PayPal and Stripe only offer insurance coverage in the US.

Summary: Chargeback insurance acts as a financial safety net for businesses exposed to fraudulent chargebacks, offering reimbursement for covered losses while potentially including fraud prevention tools.

Are Chargeback Analysts Any Good?

Consider hiring a chargeback analyst if your business:

• Experiences a high volume of chargebacks.
• Operates in high-risk industries prone to fraud.
• Lack the resources to handle chargeback disputes internally.
• Want to improve chargeback prevention strategies.

A chargeback analyst specializes in managing disputes for businesses. They help by investigating chargeback cases, gathering evidence, and responding to disputes on the business's behalf.

They analyze transaction data to identify patterns and trends of fraud. This information helps them develop strategies to prevent future chargebacks. They also ensure compliance with payment processing regulations to minimize the merchant's financial risk.

You (the business owner) will also need to consider the knowledge they possess.

They stay on top of current payment processing technologies and laws, which will prevent your business’ processes from becoming outdated. Outdated processes are usually the most vulnerable to fraud.

Do you want to hire a chargeback analyst? You’ll need to decide whether to use freelancers or hire in-house.

Consider hiring in-house chargeback analysts when your business experiences a consistently high volume of complex chargeback cases. Freelance chargeback analysts are a cost-effective solution for sellers with smaller volumes of disputes.

Or those needing occasional support.

Summary: Chargeback analysts protect businesses by investigating chargebacks, handling disputes, identifying fraud trends, and ensuring compliance, ultimately minimizing financial losses.

Why Businesses Need Chargeback Protection

Benefits of chargeback protection for businesses:

• Reduces financial losses from fraudulent transactions.
• Protects merchants’ reputation by avoiding chargeback-related penalties.
• Streamlines the dispute resolution process, saving time and resources.
• Provides data insights to identify and prevent future fraud attempts.

Then there’s the perk of having fewer chargebacks in general. This is the greatest benefit because a business’ chargeback rate could make or break them.

Let’s take a look at chargeback thresholds for different card networks and payment providers:

• Visa: 0.9% and 100 chargebacks each month
• Mastercard: 1.5% and 100 chargebacks monthly
• PayPal: 1% monthly
• * Stripe: 0.5% monthly

* Here’s the source on where I found 0.5% as Stripe’s threshold [3]. Stripe does not have official information clarifying whether this is true. However, I found one scenario where Stripe issued a warning to a business’ account because they reached a 0.5% chargeback rate [4].

Chargeback threshold refers to the number of chargebacks monthly that a payment processor allows before considering a merchant as “high risk.” Card networks place sellers in this category in special programs until they improve their chargeback rates.

Think of it as a "time-out" for businesses.

For instance, exceeding Visa’s threshold would land a seller in their Visa Fraud Monitoring Program (VFMP). The longer a vendor remains in this program, the higher their fees per chargeback. 

After remaining in the program for 12 consecutive months, businesses will no longer be able to accept Visa payments.

This sounds harsh. However, it is what it is.

Payment processors view excessive chargebacks as a sign of risk. Thus, businesses need tools and standard operating procedures to prevent chargebacks.

Summary: Chargeback protection helps businesses avoid the damaging financial impacts of fraud and maintain a positive relationship with payment processors, ensuring the ability to accept credit card payments.

How to Prevent Chargebacks as a Business

Here are some of the best strategies you can use to help prevent fraud and chargebacks:

• Utilize Address Verification Service (AVS): Match billing address details provided by the customer with those on file with the card issuer.
• Implement CVV Verification: Request the Card Verification Value (CVV) code from shoppers during transactions.
• Set Order Quantity Limits: Helps prevent fraudsters from placing large-scale orders with stolen cards.
• Require Strong Passwords: Enforce complex password or passcode requirements for accounts. Also offer 2FA through One time passwords (OTP) and/or FIDO Universal 2nd Factor (FIDO U2F).
• Maintain PCI Compliance: Adhere to strict Payment Card Industry (PCI) security standards.
• Offer Clear Policies: Buyers should easily understand terms of service, return policies, and shipping information.
• Monitor Transaction Patterns: Look for unusual activity like failed transactions.
• Stay Updated on Fraud Trends: Be aware of new fraud techniques to adapt your prevention strategies.
• Use Fraud Detection Tools: These tools analyze transactions, flag suspicious behavior, and may automate certain prevention actions.

These aren’t all the best strategies to deploy on top of chargeback protection software. But these are a great start. We provide more details in a separate guide.

Summary: Businesses can reduce fraud and chargeback risk by using a combination of address and card verification, smart order limits, strong security practices, and more.

FAQs for Chargeback Protection

What Types of Chargebacks Aren’t Covered by Chargeback Protection?

Chargeback protection typically doesn't cover chargebacks caused by merchant error. Such as shipping problems or billing mistakes. It also doesn't cover friendly fraud.

Is There a Difference Between Fraud Protection & Chargeback Protection?

Yes, fraud protection focuses on preventing fraudulent transactions from happening in the first place. Chargeback protection typically helps businesses manage and fight chargebacks that have already occurred.

Conclusion

Chargeback protection tools and best practices help businesses prevent fraud and fight disputes. When choosing tools, consider their integration, fraud detection features, and cost-effectiveness for your business.

Yes, we offer a chargeback prevention tool as well. Try it and brace yourself for a reduction in chargebacks.