Chargeback insurance 101: What it is, who needs it, and how to get it

Connect
Connect

The world’s most successful platforms and marketplaces, including Shopify and DoorDash, use Stripe Connect to embed payments into their products.

Learn more 
  1. Introduction
  2. Who needs chargeback insurance?
  3. How does chargeback insurance work?
  4. Factors that impact the cost of chargeback insurance
  5. Benefits and limitations of chargeback insurance
    1. Benefits of chargeback insurance
    2. Limitations of chargeback insurance
  6. How to apply for and manage chargeback insurance
    1. Applying for chargeback insurance
    2. Managing chargeback insurance

Chargeback insurance, often referred to as chargeback protection, is a service that some payment processors and insurance companies offer to protect businesses from the financial losses associated with chargebacks. Chargebacks occur when a customer disputes a transaction and requests a refund directly from their bank or credit card issuer, bypassing the business. Mastercard estimates that chargeback volumes will reach 337 million by 2026.

The core components of chargeback insurance include:

  • Coverage scope: This insurance typically covers fraudulent transactions that are disputed by customers. It’s important to know what types of chargebacks are covered, as policies may vary.

  • Reimbursement: When a covered chargeback occurs, the insurance policy reimburses the business for the transaction amount, minus any applicable deductible. This can mitigate financial losses due to fraudulent disputes.

  • Prevention tools: Many providers also offer tools and services to reduce the likelihood of chargebacks. These might include fraud detection systems, alerts for suspicious transactions, and best practices for payment processing.

  • Policy costs: The cost of chargeback insurance can vary depending on factors such as the business’s industry, transaction volume, and historical chargeback rates. Some providers might charge a flat fee, while others may have a percentage-based pricing model.

  • Claim process: Businesses usually need to submit evidence to the insurance provider to validate the legitimacy of the transaction and the wrongful nature of the chargeback. The claim process and its requirements can differ among providers.

Below, we’ll cover what businesses should know about chargeback insurance: how it works, what it costs, which types of businesses can benefit from it, and how Stripe can help.

What’s in this article?

  • Who needs chargeback insurance?
  • How does chargeback insurance work?
  • Factors that impact the cost of chargeback insurance
  • Benefits and limitations of chargeback insurance
  • How to apply for and manage chargeback insurance

Who needs chargeback insurance?

Chargeback insurance is particularly helpful for certain types of businesses and situations. This depends on the nature of the business, the risk of fraudulent transactions, and the potential financial impact of chargebacks. Here are some key business profiles that might need chargeback insurance:

  • Online retailers: Ecommerce businesses are more susceptible to chargebacks because of the higher risk of fraudulent online transactions and the lack of a physical card or cardholder verification.

  • Businesses in high-risk industries: Certain industries, such as travel, electronics, and luxury goods, face a higher incidence of chargebacks because of the high value of transactions and the increased risk of fraud.

  • Companies with high transaction volumes: Businesses that process a large number of transactions might face a proportionally higher risk of chargebacks, making insurance a smart safeguard.

  • Businesses with previous chargeback issues: If a business has a history of chargebacks, particularly if those were costly or frequent, chargeback insurance can provide a layer of financial protection.

  • Businesses selling digital goods and services: These companies face specific challenges in disputing chargebacks, as there is often no physical proof of delivery.

  • Companies with limited resources for dispute management: Small businesses or those without a dedicated team to handle chargeback disputes may find chargeback insurance valuable, since it can help reduce the administrative burden and associated costs.

  • Businesses in markets with high fraud rates: Companies operating in regions with higher rates of payment fraud are more likely to benefit from chargeback insurance.

How does chargeback insurance work?

Chargeback insurance is a financial safety net that protects businesses from losses incurred from chargebacks. Global retail ecommerce sales are projected to reach $7.3 trillion USD by 2025, and fraud and chargebacks will increase as well. Here’s how chargeback insurance works:

  • Policy acquisition: First, a business acquires chargeback insurance, either through a direct insurance provider or via a payment processing service that provides this coverage. The terms of the insurance—including coverage limits, types of covered chargebacks, and the cost of the premium—are established based on the business’s risk profile.

  • Chargeback occurrence: When a customer initiates a chargeback, the business faces a financial reversal of the transaction. Chargebacks can occur for a variety of reasons that range from unauthorized use of the credit card to dissatisfaction with the product or service or a customer making fraudulent claims.

  • Claim submission: After a chargeback takes place, the business files a claim with the insurance provider. This involves submitting evidence related to the transaction, such as proof of purchase, delivery confirmation, and any communication with the customer. The purpose of this is to demonstrate that the transaction was legitimate and the chargeback is unjustified.

  • Insurer review: The insurance company reviews the claim to determine if it falls under the policy’s coverage. They assess the evidence provided by the business to validate the legitimacy of the transaction and the wrongful nature of the chargeback.

  • Payment and reimbursement: If the claim is approved, the insurance provider reimburses the business for the amount of the chargeback, minus any applicable deductible. This reimbursement helps the business recover the lost funds from the disputed transaction.

  • Prevention and monitoring: Many chargeback insurance providers also provide services to help businesses prevent future chargebacks. This might include fraud detection systems, alerts for suspicious transactions, and advice on best practices for transaction processing.

Chargeback insurance is especially useful for businesses that are at a higher risk of experiencing chargebacks, such as those in ecommerce or high-value transactions. Before a business chooses to use chargeback insurance, they should learn the costs, limitations, and terms associated with these policies.

Factors that impact the cost of chargeback insurance

The cost of chargeback insurance for businesses varies based on several factors. These include:

  • Industry risk level: Different industries have varying levels of chargeback risk. The businesses that fall into the high-risk categories, like those that sell electronics, luxury items or digital goods, tend to face higher premiums because of the increased likelihood of chargebacks.

  • Transaction volume: Businesses with a high volume of transactions typically pay more for chargeback insurance because the probability of encountering chargebacks increases with the number of transactions processed.

  • Historical chargeback rate: A business’s past chargeback history is another important factor. Companies with a higher rate of chargebacks in the past might need to pay more for insurance, as they present a higher risk to the insurer.

  • Average transaction value: The value of individual transactions also affects the cost of insurance. Higher transaction values can lead to higher costs for chargeback insurance, as the potential loss per chargeback is greater.

  • Type of coverage: The extent of coverage required by the business also influences the cost. Comprehensive policies that cover a wide range of chargeback scenarios are generally more expensive than basic policies with limited coverage.

  • Deductibles: Policies with higher deductibles, in which the business pays a portion of the chargeback amount before the insurance kicks in, typically have lower premiums. Choosing a higher deductible can be a way to reduce the overall cost of the insurance.

  • Additional services: Some insurers include value-added services such as fraud detection tools and transaction monitoring systems. Packages that include these services might be more expensive than basic chargeback insurance.

  • Insurance provider: Costs can vary between providers based on their pricing models and the specific services they offer. Shopping around and comparing quotes from different providers can help businesses find the most cost-effective option.

Although chargeback insurance provides protection against financial losses due to chargebacks, businesses must weigh the premiums and other associated costs against the potential risks and losses from chargebacks.

Benefits and limitations of chargeback insurance

Learning what chargeback insurance can and can’t do for a business is a key part of deciding whether this type of plan is suitable for your needs.

Benefits of chargeback insurance

  • Financial protection: The primary benefit is the protection against financial losses due to chargebacks. The insurance covers the cost of chargebacks, safeguarding the business’s revenue.

  • Reduced administrative burden: Handling chargebacks can be time-consuming and require substantial administrative effort. Chargeback insurance can reduce this burden, as the insurance provider often assists in the dispute process.

  • Fraud mitigation: Many chargeback insurance providers offer tools and services to detect and prevent fraudulent transactions, which can help reduce the overall incidence of chargebacks.

  • Risk management for high-value transactions: Businesses dealing in high-value goods or services are especially vulnerable to chargebacks, since even a single contested transaction can represent a substantial loss. Chargeback insurance acts as a means of risk mitigation, and is particularly effective in industries like luxury goods or B2B services with large transaction values.

  • Enhanced analytical insights: Some chargeback insurance providers offer advanced analytics as part of their service. These tools can identify patterns in chargeback occurrences, providing businesses with data-driven insights to inform their fraud prevention strategies.

  • Scalability support: Growing businesses face increased exposure to chargebacks, especially as they may expand into new markets or online platforms. Chargeback insurance can be an important element of a scalable risk management strategy, adapting to the changing transaction volume and nature.

  • Influence on merchant service agreements: Merchant service providers and payment gateways may view businesses with chargeback insurance more favorably than those without. This can lead to better terms in service agreements, as the insurance demonstrates proactive risk management.

Limitations of chargeback insurance

  • Cost: The premiums for chargeback insurance can be substantial, especially for businesses in high-risk industries or those with high chargeback rates.

  • Coverage limitations: Not all types of chargebacks may be covered. Insurance typically covers chargebacks due to fraud but may not cover those resulting from customer dissatisfaction or processing errors.

  • Policy exclusions: Some policies have exclusions and conditions that limit when a chargeback is covered.

  • False sense of security: Relying solely on insurance can lead to complacency in implementing comprehensive fraud prevention and customer service practices.

  • Claim process: The process of filing a claim and getting reimbursed can be complex and time-consuming, requiring ample documentation to prove a case.

  • Complexity in high-risk sectors: In sectors like cryptocurrency, gaming, or adult entertainment, the complexity of chargeback disputes increases. Standard chargeback insurance policies might not fully cover the nuances of these sectors, requiring businesses to seek specialized or additional coverage.

  • Potential impact on customer relationships: For businesses, relying on insurance to handle chargeback disputes can sometimes lead to less direct engagement with customers over complaints or issues, potentially affecting customer loyalty and repeat business.

  • Regulatory considerations: Businesses operating in multiple jurisdictions must consider a variety of regulations regarding chargebacks and consumer protection. Chargeback insurance policies must comply with these diverse regulatory environments.

  • Quantifying intangible losses: While chargeback insurance covers direct financial losses, it doesn’t account for intangible losses like damage to brand reputation or customer trust, which can have long-term financial impacts.

  • The changing nature of fraud: The evolving tactics of fraudulent actors mean that businesses and their insurers must constantly adapt their strategies. This shifting environment can lead to gaps in coverage if the insurance policy isn’t regularly reviewed and updated.

How to apply for and manage chargeback insurance

Applying for chargeback insurance

  • Conduct a risk analysis: Start by evaluating your business’s risk for chargebacks. Look at your transaction history, types of products or services sold, and your industry’s typical chargeback rates. Gather as much data as possible to understand what risks your business faces.

  • Choose an insurance provider: Research insurance providers or payment processors that offer chargeback insurance. Compare what types of chargebacks they cover, their process for handling claims, and the overall cost of the insurance.

  • Prepare your application: You’ll need to provide detailed information about your business when applying for chargeback insurance. This includes financial records, sales transaction data, and information on your current fraud prevention measures, including your history with chargebacks.

  • Tailor your policy: Work with the insurance provider to tailor a policy that fits your business. This involves discussing coverage limits, deductible amounts, and specific scenarios you want covered.

  • Submit your application: Once you’ve gathered the necessary information and decided on the terms, submit your application to the insurer. They may also ask for additional details to complete their evaluation.

  • Finalize your policy: After your application is approved, thoroughly review the policy before signing it. Make sure you understand all the terms and conditions, including what is covered, the process for filing a claim, and any exclusions.

Managing chargeback insurance

  • Regularly review your policy: Business needs and risks can change over time, so it’s important to periodically review your policy. You may need to make adjustments if your business grows, enters new markets, or changes its product lineup.

  • Implement fraud prevention strategies: Work with your insurer to develop and implement effective fraud prevention strategies. Keeping up with the latest in fraud prevention can help minimize chargebacks.

  • Educate your team: Make sure your team, especially those handling transactions, customer service, and finance, are aware of the best practices to prevent chargebacks.

  • Monitor chargeback trends: Keep track of any chargebacks that occur. Analyze them to learn why they happened and what can be done to prevent similar situations in the future.

  • Handle claims efficiently: If you need to file a claim, do so promptly and provide all necessary documentation to support your case. Get to know your insurer’s claim process and follow it closely for effective resolution.

  • Use insights for improvement: Learn from each chargeback and claim experience. Use these insights to refine your business practices and reduce the risk of future chargebacks.

Ready to get started?

Create an account and start accepting payments—no contracts or banking details required. Or, contact us to design a custom package for your business.