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Chargeback insurance is one way merchants can protect themselves from the financial fallout of disputed transactions - especially in high-risk, card-not-present environments.
There are two other solutions also available: chargeback protection and chargeback prevention.
Although these three terms are often used interchangeably, important distinctions exist between them. I’ll make these differences clear in this article.
Let’s look at chargeback insurance, chargeback prevention, and the best ways to prevent chargebacks to increase your revenue, reputation, and security.
How Does Chargeback Insurance Work?
Chargeback insurance functions like any standard insurance policy. You pay a fee - monthly, annually, or per transaction - and in return, you may be reimbursed for certain chargebacks.
But only specific types are covered.
Most policies apply only to confirmed criminal fraud, such as stolen card use. Once a chargeback is finalised, you can file a claim. If it meets the policy’s terms, the insurer covers the loss - sometimes including fees.
Friendly fraud and customer disputes typically aren’t covered, so it’s important to understand your policy’s limits before relying on it as a safety net.
Advantages of Chargeback Insurance
Chargeback insurance works like most other insurance. You pay a fee monthly, annually, or per transaction, and under certain circumstances, you can get your money back when you receive a chargeback.
Chargeback insurance is available for Card-Not-Present (CNP) transactions.
If a brick-and-mortar store processes a transaction with a physical card (Card-Present), it doesn’t need chargeback insurance. It is legally protected from fraud liabilities.
This protection does not extend to CNP transactions.
Because of this exposure, insurance companies sell policies that mitigate a merchant’s online CNP fraud losses.
The trick is to find insurance policies that cover the kind of chargeback fraud you will likely get based on your market and customer base.
Disadvantages of Chargeback Insurance
It’s important to know this about chargeback insurance: it only covers criminal fraud. There is no friendly fraud insurance.
If the cardholder files a fraudulent dispute—intentional fraud or not—your insurance won’t reimburse you. Your losses are not covered. You lose revenue, and you pay chargeback fees on top of that.
Your chargeback ratio also goes up. If it increases too much, you pay stiffer penalties until it is reduced. Additional fines can range up to $75,000 per month for extreme cases.
Finding the Right Chargeback Insurance
Finding the best chargeback insurance for your business isn’t as simple as picking the first option you see. It takes research, comparison, and a clear understanding of your risk profile.
Policies vary widely - some cover only basic fraud, while others offer more robust protection with tighter conditions. Vendors are often eager to sell you coverage, but that doesn’t mean the policy fits your needs or budget.
And chargeback insurance isn’t cheap.
Rates are based on a variety of risk factors, and those can quickly push costs up. Understanding your own exposure is the first step toward choosing the right policy.
Start by assessing your business:
- What industry are you in? High-risk categories - like electronics, digital products, travel, adult services, or luxury goods - tend to face more fraud and disputes. Insurance premiums reflect that.
- Do you sell high-ticket or subscription-based services? The more complex the purchase model, the higher the likelihood of customer confusion or misuse, which can lead to chargebacks.
- How many transactions do you process? A higher transaction volume means more exposure, and insurers factor that into your rate.
- What’s your current chargeback ratio? If it’s already high, expect to pay more - or be denied coverage altogether.
Each of these factors influences your risk tier—and your premium. Merchants with lower chargeback history and simpler business models may qualify for better rates. Those in high-risk spaces or with ongoing dispute issues will face tighter terms and steeper costs.
The key is to weigh the cost of the policy against the value of the coverage you’re actually getting. In some cases, investing in stronger chargeback prevention tools may deliver a better return.
What is Chargeback Protection?
Chargeback protection is a broader safety net. It includes services and guarantees provided by payment processors, banks, or third-party vendors to protect the merchant from financial repercussions from chargebacks after they happen.
Note: After they happen.
Insurance is a component of chargeback protection. It is part of the safety net for post-chargeback revenue losses. It adds an additional layer of security. If chargebacks have already occurred, the financial risks are managed effectively.
Types of Chargeback Protection
An entire range of tools is available for chargeback protection.
Insurance is one of them. Here are several more.
Fraud detection tools: Advanced technology and AI analyse transaction patterns and flag potential fraud.
Address Verification Service (AVS): This real-time tool compares the customer’s billing address with that on file with the credit card issuer.
Card Verification Value (CVV) Checks: The customer must enter the three-digit CVV code found on the credit card.
3D Secure Authentication: An authentication step to confirm the customer’s identity.
PCI DSS Compliance: The Payment Card Industry Data Security Standard protects cardholder data from security breaches.
Chargeback Alerts: A crucial early-warning system provided by networks like Visa, Verifi, and Ethoca alerts merchants to disputed transactions before they become chargebacks. Effective third-party chargeback prevention platforms like ChargebackStop use this system.
What is Chargeback Prevention?
No reputational damage or revenue loss can occur if a potential chargeback situation is identified and prevented. This is what chargeback prevention is all about—stopping chargebacks before they happen.
Note: Before they happen.
Like insurance and protection, chargeback prevention is a significant part of your overall chargeback strategy.
Intelligent tools and services that prevent chargebacks are available from the card networks and specialised third-party vendors.
Our service, ChargebackStop, offers a comprehensive platform for chargeback prevention. We utilise dual alert mechanisms based on our own data analysis and external chargeback alerts from networks like Visa and Mastercard.
The process is intelligent, fast, and takes place in real time.
ChargebackStop’s platform monitors your transactions 24 hours a day, every day.
When we detect or are alerted to a potential chargeback situation, we automate the steps needed to prevent the chargeback.
You will receive a notification. If your input is required, you are presented with the relevant options, such as an immediate refund to the customer. Just click to approve the action, and it will be taken on your behalf.
That’s all the time and effort it takes.
Looking Forward
Chargeback insurance, protection, and prevention are all necessary in today’s online world. Investing in prevention is the best way to save on insurance and protection.
ChargebackStop reduces your chargebacks by 99%.
To see our chargeback prevention platform in action, visit ChargebackStop.com and sign up for a free demo.
Do you still have questions? We’re happy to help you figure all this stuff out.
Visit ChargebackStop.com/contact-us for sales or support.
FAQ: Chargeback Insurance, Protection, & Prevention
How does chargeback protection differ from insurance?
Chargeback protection includes services and tools aimed at preventing or reducing the incidence of chargebacks, whereas insurance provides financial reimbursement after a chargeback occurs.
What is friendly fraud, and is it covered?
Friendly fraud occurs when a customer wrongfully disputes a legitimate charge; most insurance policies do not cover this.
Do all businesses need chargeback insurance?
It’s most beneficial for businesses in high-risk industries or those with a high volume of credit card transactions.
Can implementing strong customer authentication affect chargebacks?
Yes, it can significantly reduce chargebacks by ensuring that the legitimate cardholder authorises transactions.
How do chargeback alert systems work?
They notify merchants of disputed transactions in real time, allowing them to address the issue directly with the customer before it escalates into a chargeback.
