Can Chargeback Guarantees Protect You?
Few merchants actually enjoy dealing with the minutiae of chargeback management, but simply ignoring chargebacks as an unavoidable cost of doing business isn’t an option. Solutions that take some of the pain and hassle of chargebacks out of merchants’ hands can be very attractive, which is why some fraud prevention companies and related providers have started offering chargeback guarantees.
With these guarantees, the providers agree to reimburse merchants for the chargebacks that manage to slip past their defenses. How do chargeback guarantees actually work, and are they really an effective approach for merchants looking to reduce fraud and prevent chargebacks?
Fighting fraud is an inextricable part of managing chargebacks. Up to 15% of all chargebacks may be attributable to credit card fraud, and once a merchant receives a true fraud chargeback, there’s nothing they can do about it.
Friendly fraud and merchant error chargebacks can be fought and won if the facts are on the merchant’s side, but true fraud chargebacks are chargebacks working exactly as the Fair Credit Billing Act intended, and under normal circumstances there’s no way merchants can recover the revenue lost to these disputes.
There are numerous third-party vendors out there providing anti-fraud tools and services to merchants. Each vendor may have their own unique approach, but one of the most common—and effective—approaches to stopping fraud right now is to use behavioral analysis, artificial intelligence, and machine learning to create smarter, more accurate software for detecting fraud indicators and filtering out risky transactions.
With many competitors vying for the same customers, some vendors have started offering chargeback guarantees, promising to pay merchants the lost revenue and fees for any chargeback that results from a fraudulent transaction they failed to stop.
How do Chargeback Guarantees Work?
The specific guarantee terms and reimbursement procedures will vary between providers, but typically, a chargeback guarantee will only cover certain types of chargeback, as determined by their reason codes, that the provider’s solution is designed to prevent.
In other words, a chargeback guarantee offered by an anti-fraud provider will only cover true fraud chargebacks, not chargebacks related to merchant error.
If a merchant discovers that they have been hit with a chargeback covered under the guarantee, they should be able to submit information and documents about that chargeback to the provider and receive reimbursement within a short timeframe.
What are the Downsides of Chargeback Guarantees?
Fraud filters and similar anti-fraud tools and services can be very effective at blocking risky-looking transactions. The problem is that a lot of these transactions are actually valid orders from legitimate customers.
False positives are the biggest problem with the current generation of anti-fraud solutions, with some analysts projecting merchants will collectively lose $443 billion in revenue this year due to erroneously rejected transactions.
Using fraud filters cost-effectively means constantly reviewing and adjusting their settings to ensure they aren’t blocking your valid customers, and subjecting rejected orders to manual review to further minimize the rejection rate.
Chargeback guarantees create some perverse incentives with respect to false positives, where it can become more profitable for the vendor to accept a high rate of false positives in order to keep the chargeback rate as low as possible. This may suit their business goals, but it’s costing the merchant sales.
While most reputable vendors will make a good faith effort to strike a reasonable balance between minimizing chargebacks and accepting some degree of risk, there’s no getting around the fact that there can be a see-saw effect between these two objectives.
It’s also worth considering that few vendors are going to be willing to lose significant amounts of revenue by honoring their guarantees, and that the costs of their chargeback guarantees may be reflected in their fees and pricing structure.
Most importantly, however, merchants must bear in mind that a chargeback that you get reimbursed for still counts as a chargeback in the eyes of the banks and card networks.
Even when covered under a chargeback guarantee, your true fraud chargebacks will cause your fraud and chargeback ratios to increase, which can cause you to be classified as a “high-risk” merchant and subjected to various fraud and chargeback mitigation plans.
The worst case scenario when your chargeback rate stays too high for too long is that you end up losing your merchant account and getting blacklisted from opening a new one. Only by preventing these chargebacks in the first place can outcomes like this be avoided—getting reimbursed for the lost revenue won’t help you here.
How Can Merchants Safely Use Fraud Filters Without Chargeback Guarantees?
With or without chargeback guarantees, fraud filters are an important part of a comprehensive chargeback defense strategy for many merchants. The key is to understand your customers, the sources of your chargebacks, and the types of fraud you encounter, so that you can select and configure your anti-fraud tools in the most effective way possible.
Ongoing analytics of your fraud and chargeback data can help you modify and adjust these tools over time to maximize fraud prevention while minimizing false positives at the same time.
Every merchant’s situation is unique, and whether you’re managing your own anti-fraud tools or trusting a third party to handle it, your approach should be constantly evolving to account for new threats, updated information, and fresh insights from your analytics.
Most merchants go into ecommerce because they have a passion for bringing great products to market, not because they wanted to become experts on fraud and chargeback management.
For merchants who choose to outsource fraud and chargeback management, chargeback guarantees can provide some reassurance that they won’t lose money to an inadequate solution, but there’s no substitute for actual expertise when it comes to stopping chargebacks at their point of origin.
Merchants who are really struggling with revenue loss or a dangerously high chargeback rate may obtain the most benefit by engaging the services of a chargeback management firm that can address every potential source of chargebacks and come up with a comprehensive plan backed up by data analytics and years of experience.
The right firm will be able to deliver measurable results that have a direct impact on your chargeback rate and your bottom line.