What Merchant Fraud Insurance Does and Doesn’t do for You
Chargeback is one of the most dreaded words in e-commerce. Basically, a chargeback is what happens when a credit cardholder disputes a transaction and reports it to their issuer. In most cases, credit card companies give the customer a refund and come after the merchant to recover the expense. To help you avoid chargebacks, a number of companies have begun offering fraud filters merchants can use to insure transactions against fraud. Commonly referred to as chargeback insurance, here’s what this form of merchant fraud insurance does—and doesn’t do—for you.
The primary benefit of merchant fraud insurance plans is a reduction in overall loss rates. Properly managed, this can add to your bottom line by freeing you to accept card not present transactions with less concern about fraud. This can add several percentage points of revenue to your bottom line.
Before fraud filters became commonplace, online merchants had to be especially careful to avoid massive chargebacks. Let’s say you’re considering how to start a furniture store online. In the past, the threat of chargebacks would have made this very risky because of the number of high dollar value purchases. With fraud protection filters in place, merchants can sell big-ticket items online with less concern.
But in the past, merchants had to set strict dollar limits on each sale. Ironically, this had the potential to expose them to more fraud because they had to engage in more transactions. Each deal was for less, so they had to make up the difference in volume, which increased the likelihood of encountering fraud.
Before fraud protection filters, merchants also had to manually consult lists of card numbers to ensure they weren’t accepting a bad card. Automating the process negated this need. While real live human beings are still sometimes required to make marginal decisions, machines largely handle this process now, which reduces labor costs.
With that said, even with merchant fraud insurance in place, you’ll still be liable for chargebacks related to undelivered purchases, or quality issues. In other words, if a customer institutes a chargeback outside the realm of fraud, you’ll be liable.
Most card issuers impose a chargeback fee when fraud occurs and the insurance policies typically do not cover them. While you will get reimbursed for the chargeback, you’ll still be liable for the fees imposed by the card issuer. In most cases, this can range from $2.50 to $100 for each instance of fraud.
By the way, card companies keep track of the number of chargebacks you incur to determine the level of risk you represent to decide whether to continue doing business with you. While fraud insurance will cover the primary losses you’ll sustain from chargebacks, they won’t get then expunged from your record. If a card issuer decides you’ve had too many, you can lose your processing account.
For this reason, relying upon chargeback insurance alone for coverage is a flawed strategy. Now that you know what merchant fraud insurance does and doesn’t do for you, signing with a chargeback protection company might be a good idea too. These organizations keep databases of chargeback shoppers. Should someone on the list initiate a transaction with your store, you can decide whether to accept or pass, based upon the number of chargebacks they’ve instituted. Keep in mind; most legitimate customers approach merchants for a refund before they involve the credit card company. An extensive history of customer chargebacks could be an indication of fraudulent activity.