Merchants who sell online have access to markets and channels that traditional brick-and-mortar stores can’t match. But those opportunities come with fraud risks that card-present transactions don’t have because of the EMV liability shift. And as EMV has reduced fraud opportunities at point-of-sale terminals, fraudsters have gone all in on CNP fraud.
One possible solution for online merchants is chargeback insurance, more commonly referred to as a chargeback guarantee, provided by some fraud-prevention services. Should merchants use a chargeback protection service? There’s not a standard answer to this question.
First, why do some online fraud prevention companies offer chargeback guarantees? It usually depends on whether the company offers decisions or scores. Those that offer decisions approve or decline orders on behalf of their clients, while companies that offer scores rate each order for its likelihood of fraud but allow the merchant to approve or decline. Companies that offer decisions sometimes guarantee they will cover the cost of any fraudulent chargeback because the decision to approve the order was their responsibility. Such a guarantee typically covers all fraud-related chargeback losses, regardless of payment gateway or processor.
Advantages of chargeback guarantees
Chargeback guarantees offer four main benefits that companies may want. First, such programs allow for predictability of costs and better cash-flow management. The only cost the merchant sees is a fixed percentage charged on orders regardless of the actual chargeback rate. In contrast, merchants whose CNP fraud-screening provider doesn’t offer a chargeback guarantee will see transaction fees that vary by volume plus harder-to-predict chargeback costs.
Other benefits are specific to certain types of companies and those in particular stages of growth. Fast-growing companies can eliminate some of the stress and risk of expanding into new markets and categories by having a chargeback guarantee in place to limit losses. Merchants who see wide variation in their order values can benefit from guaranteed chargeback protection. For example, a store with an average ticket value of $150 may not be able to absorb a chargeback on one of the $10,000 handbags that are also in its inventory. Companies with a risk-averse culture can also do well with a chargeback guarantee to provide peace of mind.
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