Skip to content

Chargebacks As Insurance For Online Shopping

Customers are shopping online more than ever. According to Cloudwards.net, e-Commerce sales are predicted to hit $5.5 trillion worldwide in 2022. Close to 76% of adults in the U.S. currently shop online.

The pandemic certainly drove more consumers to shop online for the first time ever, contributing to the growth of online shopping worldwide.

With more shoppers online, more fraudsters are working overtime to take advantage of consumers to steal their information. In fact, it was reported on Ravelin.com that 20% more businesses witnessed a surge in online payment fraud in 2021 than the year prior. 

This led to “global e-Commerce losses” due to online payment fraud reaching $20 billion in 2021. To say that online payment fraud is a threat is an understatement. 

What Is A Chargeback?

A chargeback is a charge that is returned back to a credit or debit card after a customer disputes a purchase on their statement. Chargebacks can be filed for a number of reasons:

  • The products they ordered never arrived.
  • The products were defective or damaged.
  • The customer forgot to cancel recurring payments on the subscription.
  • The customer prefers to file a chargeback instead of contacting the merchant directly for a refund.
  • Merchant processing error: Accepts payment from an expired credit card.
  • Merchant overrides a declined authorization, creating authorization issues.

Chargebacks, although part of doing business online, should not be something to simply get used to. Merchant acquiring banks will charge you a fee for every transaction.

These fees pay for the costs incurred by the processing network. There may also be additional payments, depending on your merchant account agreement. If your chargeback ratio exceeds a certain threshold, you can even have your merchant account shut down.

What Is Chargeback Insurance?

Knowing that chargebacks can pose a real threat to the earning potential of a business, what solution do you have?  Chargeback insurance.

Chargeback insurance is a type of insurance product that protects the merchant from a transaction where a credit card was not authorized. For this coverage, you would pay a monthly premium or a percentage of every transaction that you process. 

You would need to sign up with a fraud detection service. Typically, legitimate transactions that are made by authorized customers are approved. If transactions appear suspicious and could be unauthorized are usually declined. 

If your fraud detection solution falters in flagging a fraudulent transaction correctly and you get a chargeback, you could file a claim in order to be reimbursed. 

Of course, chargeback insurance is not a cure-all for chargebacks. The best strategy you can have for your business is to mitigate them as much as possible. Prevention is the key. Here are some helpful ways to do so:

  • Follow card acceptance guidelines and train employees to do so as well. This will cut down on processing mistakes.
  • Choose a reliable POS system and payment gateway.
  • Have clear refund policies. Respond to customer inquiries quickly and issue a credit when reasonable.
  • Use CVV verification, address verification (AVS), and order velocity. When signing up for a POS system or payment gateway, ensure that it has a fraud prevention and detection tools. 

Customers will use chargebacks as a way to resolve their dissatisfaction with the final outcome of their purchase. For merchants, the key to avoiding chargebacks is to implement the aforementioned tactics. This will ensure that you don’t become embroiled in the costly dealings of the chargeback aftermath. 

Prevention Is Everything

Chargebacks are one of the most costly consequences of doing business online. A good strategy is not about simply reacting to it or leaning heavily on your chargeback insurance. 

A complete chargeback management strategy would be much more effective, helping you avoid staggering chargeback fees and keeping your chargeback to transaction ratio as low as possible.