Chargeback insurance — also called a chargeback guarantee, chargeback reimbursement, or chargeback warranty — reimburses you for the cost of the chargebacks resulting from certain fraudulent transactions. In exchange for this coverage, you pay the insurer a monthly premium or a portion of each transaction you process.
This detailed guide will help you understand what chargeback insurance protects against, how it benefits you and your business, and how to cover the gaps through other methods, tactics, and tools.
How Does Chargeback Insurance Work?
How chargeback insurance works depends on the terms of the specific policy. There are several different insurance providers, and policy types can vary from one vendor to the next. The following is a general overview of how chargeback insurance usually works.
You choose a vendor.
Chargeback insurance is usually sold as an add-on feature to fraud detection services. So if you want chargeback insurance, you’d work with a fraud solution provider that offers this warranty feature.
You accept the terms.
Most chargeback insurance policies have several stipulations and restrictions. If you don’t follow the rules, your reimbursement request will probably be denied.
In order for chargeback insurance to be effective — yield a positive ROI — you need to have a high approval rate for reimbursement requests. Find out what the eligibility requirements are and then work to meet those expectations.
For example, chargeback guarantees might only cover card-not-present (CNP) transactions. Coverage may be limited to transactions that take place through approved gateways or payment processors. Or you may be required to use specific filter settings to help analyze and reject suspected fraudulent transactions.
Read the policy’s fine print so you know what’s expected. Later in this article, we’ll provide examples of what might make a chargeback ineligible for reimbursement.
The technology checks for fraud.
The fraud detection tool you select will review each transaction you process, looking for warning signs of fraud.
- Transactions that seem to be legitimate and from authorized shoppers are usually approved.
- Transactions that seem suspicious and might be unauthorized are usually declined.
The vendor reimburses you for chargebacks.
If the technology fails to accurately flag a transaction that turns out to be fraudulent and you receive a chargeback, you may file a claim for reimbursement.
Depending on the terms of your policy, your insurer may reimburse you for the:
- Cost of the product or service sold
- Loss of profit
What Is Covered by Chargeback Insurance?
All chargeback insurance policies are different, yet most have one thing in common: only chargebacks with fraud-related reason codes are eligible for reimbursement.
To qualify for reimbursement, a fraud-related chargeback usually has to meet additional criteria. The following are examples of policy requirements that may be applicable:
- The disputed transaction was reviewed and approved by the vendor’s technology.
- You submit the reimbursement request within the given deadline.
- You have proof of delivery (such as a tracking number for physical goods or usage logs for digital goods).
- The purchased item was shipped before the chargeback notification date.
What is Not Covered by Chargeback Insurance?
Chargeback guarantees don’t usually cover chargeback reason codes unrelated to fraud or unauthorized transactions.
A WORD OF WARNING:
Though chargeback insurance covers criminal fraud, it doesn’t usually cover cases of friendly fraud. Be sure you understand the difference between criminal and friendly fraud and how both threats can impact your business.
Learn more here: What’s the Difference between Friendly and Malicious Fraud?
In addition, chargeback insurance may not cover a chargeback due to:
- Failed deliveries or misdeliveries
- Merchant errors (such as incorrect charges, recurring transaction errors, or delivery of damaged or incorrect goods)
- Certain types of products or services (such as digital goods)
- Sales to high-risk regions
- Orders modified after initial approval by the fraud prevention tool
- Transactions automatically flagged as fraudulent but manually approved after the fact
Some chargeback insurance policies further stipulate conditions that must be met in order to qualify for reimbursement. If you don’t meet those conditions, your request may be denied. For example:
- You don’t have proof of delivery.
- You don’t have proof that the service was provided.
- You didn’t verify the shopper’s identity and card for a buy-online-pickup-in-store (BOPIS) order.
In other cases, your policy may specify coverage limits for transactions up to, and not exceeding, a given amount.
Take a careful look at what the insurance provider is and isn’t willing to cover. Before you sign up for service, make sure you can comply with what’s being asked. Once the policy is in place, review the outcomes to make sure you have a positive return on investment (ROI).
Does Chargeback Insurance Provide Enough Protection?
For some businesses, chargeback insurance can be a helpful addition to your chargeback management strategy. But it should never be the only form of protection.
There are four reasons why you shouldn’t depend solely on chargeback insurance to protect your bottom line.
Insurance is an additional expense.
You pay for chargeback insurance by paying a monthly premium or a nominal portion of each transaction. This expense continues for as long as you maintain the policy.
Because chargeback insurance is so limited in its coverage, your policy may sometimes result in a negative ROI: you’re paying more for coverage than you’re receiving in compensation for claims. In this case, the coverage may be working just as expected, but isn’t likely saving you money — or even breaking even.
You must also consider your business and operating expenses. Could what you pay for chargeback insurance be used to improve your fraud detection and prevention tools instead? If margins are tight, it may be worth investing your budget into tools that address a larger percentage of disputes with better accuracy and, ultimately, better ROI.
Insurance might cause a higher rate of false positives.
Insurance providers take on the risk of compensating you for covered claims. However, it’s also in their best interest to reduce the likelihood of a claim being filed because they don’t actually want to reimburse you for the costs that have been lost — that chips away at the service provider’s revenue.
This means that, in some cases, insurers will require strict filters that reject any potentially fraudulent transaction. Though this helps prevent chargebacks, it may also lead to false positives — legitimate transactions that, for one reason or another, are incorrectly flagged as fraudulent. As a result, legitimate sales are rejected, you lose out on revenue, and your customer is made frustrated by the experience.
Insurance doesn’t prevent the chargeback from happening.
Like other types of insurance (such as your car or health insurance), chargeback insurance doesn’t prevent a covered event — in this case, a chargeback — from taking place. It still happens — you just don’t lose as much money.
Therefore, maintaining chargeback insurance coverage won’t stop chargebacks from impacting your chargeback ratio or breaching your chargeback threshold. Nor does it positively influence customer satisfaction or your online reputation.
Even if you do have chargeback insurance, you still have to work to provide an exemplary customer experience and stop disputes from happening.
Insurance only covers chargebacks in a small portion of cases.
Chargeback insurance is also extremely limited. It doesn’t cover many of the day-to-day chargebacks you receive, but only a small subset of them: those resulting from deliberate criminal fraud.
Therefore, you need to have a plan in place to address the revenue loss caused by the chargebacks not reimbursed by your warranty.
Think of chargeback insurance as you would health insurance. You likely try to avoid getting sick or injured, and may even take steps to improve your overall well being through diet, exercise, and healthy behaviors — similar to the fraud protection tools your business depends on.
When you do fall ill, your health insurance kicks in to mitigate many of the expenses you’d otherwise incur. It’s a type of backup intended to bridge the gaps left behind by your preventative methods, similar to how chargeback insurance covers those rare fraudulent transactions that bypass your fraud prevention tools.
But your health insurance policy doesn’t usually cover 100% of your medical bills. You are expected to chip in and cover a certain percentage of the costs — just like chargeback insurance doesn’t reimburse every chargeback you receive.
So what happens when you receive a chargeback that isn’t covered by insurance? Do you accept it as a loss, just like you would hand over money to your doctor’s office?
No!
There isn’t usually much wiggle room when it comes to paying your medical bills, but there is something you can do about chargebacks. You can fight back and recover the revenue that’s been overlooked by your insurance policy.
It is vitally important to understand this reality. If insurance is your only chargeback management tool, you are needlessly losing a significant portion of your revenue. You need to fight what isn’t reimbursed. Otherwise, your bottom line may suffer irreparable damage.
We have resources that can help you understand the value of fighting chargebacks and put a plan in place to protect your revenue.
Create Complete Chargeback Protection with Midigator
It’s not enough to merely react to chargebacks and rely on stopgap measures like chargeback insurance. To maintain a low chargeback-to-transaction ratio, avoid costly chargeback fees, and protect your hard-earned revenue, you’ll need a comprehensive chargeback management strategy. After all, win rate guarantees aren’t as great as you might think.
Midigator can help.
Instead of paying more per transaction so you can have a lower approval rate, use Midigator to actually detect and stop fraud, so you can keep more of your hard-earned revenue.
Midigator delivers intelligent chargeback technology that both prevents and fights chargebacks with the best results possible. Sign up for a demo today to learn how easy it can be to create and maintain a comprehensive chargeback management strategy.
