The first of four myths I’ll dispel is that a retailer needs to purchase comprehensive fraud insurance, which is commonly referred to as a “chargeback guarantee.” Under this model, the insurance provider guarantees to pay the chargeback costs for any transaction they recommend to accept that ends in chargeback fraud.
This might seem enticing on the surface, as the vendor is accepting responsibility for chargebacks, returns abuse, Item Not Received abuse, and possibly more. However, the claim is largely false for the following (at least) five reasons:
The economics are typically not in the merchant’s favor
A merchant should use a chargeback guarantee to get fraud protection in a few extremely particular circumstances, such as:
- The company lacks the internal resources to consider or be in charge of fraud prevention.
- There is an ongoing dispute or fraud monitoring software within the company (with, for example, Visa).
- The company chargeback rate is higher than what issuers consider to be acceptable. The vendors would be better off with an uncovered agreement where they are still responsible for fraud
in almost every other circumstance. Why? Insurance suppliers make money as their costs are far higher than the chargeback costs (this also cracks the code of how Geico can afford Super Bowl commercials).
To put this into perspective, if businesses want a chargeback guarantee, they can pay a fraud insurance provider $10 million a year, or they can pay a technological platform $1 million a year and retain liability for $2 million in chargebacks. The significant difference between $10 million and $3 million can help companies save a lot of money.
The incentives for the solution provider may not align with company objectives
Chargeback liability is assumed by fraud insurance providers, therefore their main motivation is to reduce their risk by turning down more transactions. As a result, businesses can notice a reduction in approval rates along with chargeback rates, ultimately affecting the business’s bottom line. With this model, merchants are signing away important facets of the consumer experience when they agree to a chargeback guarantee.
Fraud prevention involves making choices that stop fraudsters from hurting organizations while nurturing legitimate customer relationships. It’s not only about lowering chargebacks. An uncovered agreement highlights this balance – between a chargeback and approval rate — to improve a company’s performance. While a chargeback guarantee only guarantees chargebacks, an uncovered agreement guarantees chargeback rate, approval rate, platform uptime, and decision speed.
The terms and conditions are never simple
One of the market’s biggest suppliers touts the ease of their “Guaranteed Fraud Protection Reimbursement Policy” as a selling point. The truth is more complex than that.
According to their terms and conditions, more than a dozen requirements must be satisfied in order to be eligible for a chargeback compensation. Following a tight procedure in the vendor’s portal, the merchant must submit proof of shipment, tracking numbers, proof of address match, mapping email addresses, and more within seven days. That is a timely process, which is presumably why this seller has a lot of 1-star evaluations from businesses whose chargeback requests were turned down.
The takeaway from this is clear: before signing any contracts, look behind the ‘guarantee’ glitter and make sure you comprehend the terms and circumstances (as well as read peer reviews).
Fraud insurance kicks the can on critical issues
The benefit insurance has is the certainty provided by transferring responsibility for policy abuse, such as abuse involving refunds and Item Not Received abuse. However, it does not address the fundamental issue: repeat offenders are not stopped. Instead, serial scammers are free to keep making purchases from retailers and return goods in violation of return policies or assert that they were never delivered.
Should this be taken advantage of, fraud insurance will eventually become more expensive, and should the business decide to assume that risk in the future, they will be inheriting a much bigger issue.
The fact is policy violators and fraudsters are fundamentally distinct groups that require different approaches. With the correct technology, the latter can be easily detected and prevented; for repeat offenders, the policy can even be changed in real-time. For instance, a customer who has previously reported an Item Not Received can make a purchase with a delivery signature demand thanks to the adjustment of unbiased technology. In conclusion, fraud insurance only serves to conceal issues with policy abuse when a true fix is required.
Fraud insurance is NOT a sustainable business model
Companies that offer chargeback guarantees have been openly challenged by shrinking margins. As one publicly traded vendor started to insure merchants working in higher-risk industries, their profits decreased from 53% to 46% year over year.
“Margins are the provider’s problem; what does that have to do with me, the merchant?” is a legitimate objection. So, for continuity, you need your supplier to be profitable and in good health. When under a financial strain, they will have to cut expenses in order to keep their margins. As a result, there will be less money spent on marketing, business success, and R&D, which will hinder innovation.
In the end, you want to make sure you are aligning yourself with a market leader that has solid foundations because you are placing important decisions in their hands. You should not take on the danger posed by the short-term business models of fraud insurance providers.
