Among high-risk merchants, few topics hit closer to home than chargebacks. Chargebacks cost a great deal of time, money, and put merchants at risk for account freezes, escrows, fines, penalties, and even account closure. So it’s no wonder that many merchants have investigated so-called “chargeback insurance” policies also known as chargeback warranties. But before you invest in a policy, here is some important information to know.
Chargeback warranties and chargeback insurance are different.
Although some people (usually those trying to sell chargeback warranties) use these terms interchangeably, chargeback warranties and insurance are actually very different things. Chargeback insurance is usually offered to merchant service providers to protect them in case a bad merchant defrauds his customers and leaves the provider holding the bag. Chargeback warranties, however, are what are commonly offered to merchants and are simply a form of fraud filtering.
How Chargeback Warranties Work
When a merchant purchases a chargeback warranty, the company providing it usually installs a fraud filter that flags transactions with certain pre-determined criteria for manual review. If the order is reviewed and found to be a chargeback risk, it is rejected. If it is inadvertently accepted or not flagged by the filter and it results in a chargeback, then and only then, are you covered by the warranty. If the chargeback is non-fraud related, it is not covered.
You can probably see where the problem lies. These so-called chargeback warranties are simply a way of outsourcing the process you should be doing already to someone else who claims to be able to do a better job. This may be advantageous in certain cases, but it also comes with certain built-in limitations.
The Limits of Chargeback Warranties
Chargeback warranties rely on filters provided by and the judgment of people employed by the company that provided the warranty. This means that their main incentive is to prevent chargebacks – not make the most accurate and financially advantageous call for your business. If an order looks like it may result in a chargeback, companies like this are incentivized to simply reject them instead of investigating them. This can lead to losses from legitimate orders that may or may not exceed your savings from the prevention of bad orders. And again – chargeback warranties only cover chargebacks from fraud. All other chargebacks, such as those from “friendly fraud” issued under “merchandise not as described” or “not received” codes are not covered.
Furthermore, some warranties don’t cover the chargeback fees. So although the chargeback itself may be covered, you can still suffer loss from fees, penalties, and marks against your chargeback ratio.
A Better Solution
Chargeback warranties can be helpful in some instances – but more often than not, they don’t offer enough bang for their buck. Other services, such as advanced fraud protection software, chargeback alerts that allow you to take early action on actual chargebacks, and other preventative and remedial measures may be a better investment for your business. At E-Commerce 4 IM, we offer many solutions for high-risk merchants who need to control their chargeback ratios. So if you’re wondering whether or not chargeback insurance is right for you, give us a call at (800) 570-1347 and let us help you review your situation and pair you with the right solution.