Chargeback Insurance

In the event that a business has to pay for charges related to a credit card chargeback, there is a chargeback insurance coverage a company can purchase to cover such an eventuality.

When an acquirer (bank) or Independent Sales Organisation (ISO) signs a business up for a merchant account, they are taking on the risk that the merchant will stay solvent and not owe money to various card issuers due to chargebacks, not shipping goods or other reasons.

A merchant may not be fraudulent, but they may have a poor product that results in a lot of refunds. Some merchants may receive a lot of chargebacks from third party fraud.  Some merchants may be fraudsters themselves. There are many risks an acquirer takes on when they underwrite a merchant.

In case a merchant cannot cover the cost of their chargebacks, a Chargeback Insurance policy protects that acquiring bank or ISO.

If a business is unexpectedly hit by many chargebacks in a short period of time and the charges are immediately deducted, a business could become severely cash strapped, while trying to locate documentation. Banks and other financial businesses such as PayPal often charge merchants a penalty or a processing fee per chargeback, to discourage bad business practices.

Additionally, credit card companies such as Visa and Mastercard issue steep penalties to banks that continue to service merchants with frequent chargebacks.   This penalty is usually passed on to the merchant involved. It is not uncommon for merchants that continue to frequently incur chargebacks to be charged in excess of $100 per chargeback. If chargeback frequency continues, the merchant’s bank may discontinue service altogether. A business should check if their bank requires a reserve to cover any future chargebacks. Some banks can demand a reserve as high as $5, 000.

COMMON TYPES OF CHARGEBACKS

Often the merchants themselves cause chargebacks. Hidden system errors could be the problem. Two common merchant errors are:

Recurring payment chargebacks may be filed against specific types of merchants that have a recurring payment system for on-going services such as gym or magazine subscriptions. A cardholder cancels a recurring payment or claims to have done so. Such a chargeback can be filed against merchants that allow for payments in instalments, particularly if the payment plan is not clearly defined at the time of the purchase.  In such a situation, chargeback insurance would be well worth having.

Authorisation errors can occur when the merchant tries to override a declined transaction, particularly if the override is done with voice authorisation. Multiple deposits made to complete a single authorisation can result in chargebacks.

A CARD USED WITHOUT AUTHORISATION

This type of chargeback may be true criminal fraud and it is one of the most common types of chargeback. The cardholder claims that a charge was made on their card without their permission. It sometimes happens that a family member has used the card without the cardholder’s knowledge or permission.

FRIENDLY FRAUD

There is a type of fraud known as friendly fraud. A consumer makes an online shopping purchase with their own credit card. After receiving the goods the consumer asks for a chargeback from the issuing bank. Once approved, the chargeback cancels the financial transaction and the consumer receives a refund of the money they spent. When a chargeback occurs, the merchant is accountable, regardless of whatever measures they took to verify the transaction.

Although chargebacks cannot be completely avoided, steps can be taken to reduce their occurrence.

The business name provided to financial institutions should be a name which customizers recognize. Sometimes customizers do not recognize a business name next to the purchase on their credit card and then think it is a fraudulent transaction.

Receipt signatures on credit and debit cards should be checked against the signature on the back of the card.

If a credit card is declined, one should not continue to run the transaction.

The authorisation obtained should be for a total amount and not broken in several smaller amounts.

If a purchase is made online or by phone, the Address Verification System should be used to ensure that the customer is providing a correct billing address.

A shipper must provide proof of delivery and a customer’s signature if the item is expensive.

A business can get chargeback insurance that reimburses the cost of a product or service and the loss of profit if a chargeback stems from a stolen or counterfeit credit card, signature mismatches or post-purchase shipping address charges.

There are banks which offer sophisticated chargeback defense systems as part of their merchant services. These electronic dispute systems can allow you to manage chargebacks more efficiently and speed resolution. They also provide online reporting tools that will notify a business quickly of chargeback and retrieval requests.