When Chargeback Insurance Helps And When it Doesn’t

Jun 29, 2022

Merchants have always dealt with chargebacks as part of their everyday business operations. However, the frequency of chargebacks has skyrocketed in the last few years, leaving merchants scrambling for solutions.

Chargebacks can happen for a number of reasons: 

  • A purchase was made with a stolen credit card
  • A purchase was made with a fake credit card
  • The fraudster changed the shipping information after the transaction was completed
  • A valid signature was never given for the purchase

When any of the aforementioned happens, the customer will file a “chargeback” or a payment dispute with their card’s bank in order to reverse the charges. The bank will “charge back” the total disputed transaction to the merchant. The money is given back to the cardholder, without needing authorization from the merchant.

When these chargebacks occur, merchants are essentially losing revenue. Many times losing as much as double the transaction amount after you account for chargeback fees and other costs associated with them. 

Frequent chargebacks can also mean an increase in the chargeback ratio for the merchant, meaning they can face serious consequences such as more chargeback fees and eventually the termination of their merchant account. 

The Purpose Behind Chargeback Insurance

It is no wonder that merchants are searching for that magic wand solution to mitigate chargebacks. There’s just too much at stake if no actions are taken.

In this case, there is something called chargeback insurance. Chargeback insurance is a type of policy that essentially protects merchants from the expenditures tied to credit card fraud. It also protects merchants where a credit card was stolen and a fraudulent purchase was made. This policy covers a merchant’s liability for any type of claims made that are tied to these types of fraudulent transactions

Chargeback insurance mainly protects against criminal fraud cases. This type of insurance works to protect you against any losses as a result of criminal fraud chargebacks. 

How It Actually Works

When a cardholder disputes a charge, the provider of the policy will reimburse you for the value of the product and/or your “revenue losses” as a result of the chargeback. Every chargeback insurance policy is different and therefore the specific conditions will determine what type of protection and reimbursements you are entitled to. 

One thing you must know is that there is no 100% guarantee against disputes. Although it is called chargeback insurance, most providers will encourage you to put preventative measures in place to mitigate fraud.

What It Doesn’t Cover

Friendly fraud claims are not covered by chargeback insurance. Unfortunately, friendly fraud is the most frequently experienced by merchants. 

Friendly fraud occurs when a customer reports that their purchase was never received. Or the product itself bears no resemblance to the product described and shown online. 

Since you are not protected if you experience friendly fraud, the best approach is to take preventative measures. Consider getting an end-to-end solution that can help you verify, authorize,  track, and process your e-Commerce transactions. With the gathering of more data, you will be able to get ahead and prevent friendly fraud from occurring. 

Furthermore, you really need to keep your chargeback ratio low. If it surpasses a certain threshold, you may find that you won’t have the coverage or protection you thought you had. Do whatever it takes to make sure that your ratio stays within a positive range. 

Do Not Rely Solely On Chargeback Insurance

Far too many merchants believe that having chargeback insurance is the only solution they need to mitigate the effects of chargebacks. The fact is that chargeback insurance covers but a “limited range and scope of chargebacks.”

Focus on implementing solutions that will keep chargebacks from occurring in the first place. For this, you will need to partner up with a trustworthy and reputable payment processor. 

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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