What Is Chargeback Insurance?


    Simply put, chargeback insurance is a fraud solution that shifts the monetary risk of chargeback fraud from merchants to a fraud prevention company, like Vesta.

    The cost of chargeback fraud can adversely impact eCommerce merchants. But, consider the idea that this "insurance" is actually a fraud solution to protect a merchant's revenue, reputation and business continuity.

    Business owners know that too many chargebacks can hurt their business and their bottom line. However, there are solutions to help. This article will explore the idea of payment fraud insurance as an eCommerce fraud prevention tool.

    What is a chargeback?

    A chargeback happens when a card-issuing bank reverses a previously approved credit or debit card transaction at the request of the cardholder under a fraud claim. Some examples include friendly fraud and third-party fraud. Chargebacks happen most often due to fraud, but sometimes fraud isn't involved.

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    According to a Chargebacks911 report, "friendly fraud is the number one fraud attack source that merchants have to deal with." That means that friendly fraud, or first-party fraud, is far and away the most common type of chargeback fraud for eCommerce, card-not-present transactions. Estimates suggest six out of 10 chargebacks in North America are cases of friendly fraud.

    The report goes on to say that the average cost of a chargeback is estimated at $190 for an average transaction amount of $90. Unfortunately, merchants estimate friendly fraud to be 42% of their chargebacks on average while fraud "data suggests the rate is considerably higher."

    A strategic chargeback prevention strategy can help merchants not only fight back against fraudulent chargebacks and true fraud--it can protect their merchant account against fees and closure.

    Let’s explore some details and benefits of why eCommerce merchants should implement a chargeback insurance fraud solution as soon as possible.

    What Is Chargeback Insurance?

    Chargeback insurance is a fraud solution that moves the monetary risk of fraud from merchants to a fraud prevention company. It allows a merchant or seller to approve more orders and authorize more transactions since the risk of chargeback fraud lies with the chargeback insurance company rather than with the merchant.

    For example, Vesta Payment Guarantee is an indemnification solution that removes the risks and costs of fraud from our customers to Vesta. If a Vesta-approved transaction turns out to be fraudulent, we pay for it. Period.

    In general, the way chargeback insurance works depends on a company's policy and those policies can vary based on the vendor you choose.

    Your third-party fraud prevention vendor's policy may include restrictions and stipulations, so you need to clearly understand what those are to prevent claim denials.

    After selecting a vendor and subsequently accepting their terms for your chargeback insurance, your goal should be to yield a positive ROI for your coverage. This means that your reimbursement requests will have a high approval rate.

    For example, if your policy only covers card-not-present (CNP) transactions, your chargeback insurance would limit you to reimbursements of only those types of transactions (not card present transactions). It’s critical to read the fine print of your chargeback insurance policy so that you receive full indemnification and fraud protection.

    Vendor Reimbursement

    In addition to chargeback reimbursement insurance, your fraud prevention partner should also offer a fraud detection tool that enables you to review every transaction that is processed and the warning signs of potential fraud.

    While each policy is different, the insurer could reimburse you for the chargeback costs of the product or service that is sold and the profit loss.

    One thing that is generally similar among policies is that the chargeback must be deemed a designated type of fraud in order for reimbursement to happen. Here are a few scenarios of how a typical chargeback insurance policy works:

    • The vendor’s technology reviews and approves a transaction.
    • The merchant sends a reimbursement request in the allotted timeframe.
    • The merchant retains proof of product/services delivery.
    • The product was shipped prior to the chargeback notification date.

    In contrast, the list below contains a few things that typically are not covered by a payment fraud insurance solution.

    • A missed or failed delivery.
    • Merchant errors.
    • Sales to high-risk places.
    • A certain type of product or service, like digital goods.
    • An order change after the initial approval from the fraud prevention tool.
    • A vendor-declined transaction flagged for potential fraud that a merchant manually approves.

    Sometimes vendors may specify a limit for coverage, so transactions up to a certain amount are covered. It is best to know what your insurance provider will and will not cover.

    Chargeback Protection and Prevention

    If you are an eCommerce merchant, you need chargeback insurance, and Vesta can help. We help authorize more online orders while reducing the cost of fraud based on billions of data points on our industry-leading machine learning platform.

    That matters because your fraud prevention partner should have a rich heritage of fraud-fighting expertise. We've been recognized as an established industry leader, and our platform/technology wins awards year over year in the fraud prevention space.

    Our chargeback guarantee is powered by our Payment Guarantee solution. We help with card-not-present transactions, evaluating transactions for risk of fraud. If we make a mistake and you receive a chargeback later, we cover the costs. With our Payment Guarantee solution you have zero worries and zero fraud costs.

    It’s that simple. Contact Vesta today and learn more.

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