What is chargeback insurance? How to protect your business from disputes

Key takeaways:

• A chargeback occurs when a customer disputes a transaction, and the merchant has to refund the payment.

• Chargeback insurance typically covers fraud-related disputes and the costs associated with disputed transactions.

• However, you may not even need chargeback insurance as a payment service provider can offer highly effective chargeback prevention measures.

Chargebacks are an important part of the payments ecosystem. They help protect customers from fraud and encourage fair business practices. But as online sales continue to grow, so do chargebacks. In fact, chargebacks could reach 337 million by 2026, a 42% increase from 2023.¹ In particular, friendly fraud, where valid charges are disputed, accounts for as much as 80%.²

Chargeback insurance has become a recent response to fighting rising chargebacks. Chargeback insurance can provide you with a financial safety net against the costs and losses associated with chargebacks, letting you focus on growth without the constant worry of chargeback losses.

However, while chargeback insurance can provide financial protection, the proactive nature of chargeback protection from a payment service provider (PSP) can offer a more comprehensive and efficient solution for managing chargebacks.

In this article, we’ll break down how chargeback insurance works, and how choosing a PSP like Airwallex can help you stay ahead of chargebacks before they happen.

What's chargeback insurance?

Chargeback insurance, also known as a chargeback guarantee or chargeback warranty, provides financial protection when a customer disputes a transaction. It typically covers the transaction amount, chargeback fees (usually US$15 to US$50), and lost revenue – whether the dispute stems from fraud, merchant error, or customer dissatisfaction.

How chargeback insurance works

Chargeback insurance is a financial protection tool designed to help merchants manage the risks and costs associated with chargebacks. Here’s how it works. 

1. Select a provider: Look for insurance providers that offer chargeback insurance. Consider the cost, the ease of integration with your existing systems, and the comprehensiveness of the coverage.

2. Meet reimbursement eligibility requirements: Some policies may require you to use pre-approved payment gateways and implement fraud filters.

3. Implement fraud screening: The insurance provider’s technology will automatically screen each transaction to identify and flag potential fraudulent activities;

4. Submit reimbursement claims: Gather and submit documentation, and follow the provider’s claim process. If the claim is approved, you'll receive reimbursement for the transaction amount.

To qualify for coverage, you’ll typically have to:

• Document existing chargeback rates and risk factors

• Gather the necessary documentation

• Customise the policy to your business needs

• Submit the application and iron out any remaining details

What does chargeback insurance cover?

Chargeback insurance policies typically cover the transaction amount, chargeback fees, and lost profits you'd have made from the transaction. Sometimes it may cover legal expenses related to defending against the chargeback.

What doesn’t chargeback insurance cover?

Most chargeback insurance policies don’t cover claims transactions that deviate from standard processing. Policies will typically exclude orders that were modified after the initial fraud screening, manually approved transactions that were previously flagged as suspicious, and cases where proper verification documentation is lacking.

Benefits of chargeback insurance for merchants

The protection provided by chargeback insurance can help safeguard your business and help you focus on the ‌core of your business.

Chargeback insurance can help you with:

• Mitigating financial losses from chargebacks

• Improved cash flow management as losses are covered by insurance

• Enhanced operational efficiency as you’ll be spending less time managing disputes

While insurance can be helpful, you can give yourself even greater peace of mind by choosing a payment provider that prevents chargebacks before they even happen. Payment service providers offer proactive prevention, and real-time risk assessment, which can help you avoid chargebacks altogether. This is often more cost-effective and less cumbersome than relying on chargeback insurance, which only reimburses after a loss.

Limitations of merchant services chargeback insurance 

It's worthwhile noting the limitations of chargebacks so you can make an informed decision about whether chargeback insurance is the right choice for your business. Here are some disadvantages that you should be aware of:

• High-volume businesses face significant costs for chargeback insurance

• Chargeback insurance policies have exclusions and limitations

• Complex claim processes consume a lot of time.

• High dispute rates can damage relationships with card networks.

By contrast, a payment processing solution is a cost-effective solution that can manage chargebacks before they happen, keeping your dispute rates low, while simplifying dispute management.

Signs you need merchant chargeback protection

Chargeback protection isn’t just a nice-to-have. It could be a smart move for your business. However, deciding whether you need chargeback protection, chargeback insurance, or both involves evaluating your business’ needs and risks.

• Assess your chargeback rates: If you have low to moderate chargeback risks, chargeback protection offered by PSPs may be sufficient to reduce the instances of chargebacks.

• Evaluate the financial implications: If the financial impact is minimal, protection might be enough to manage the situation. However, if they're causing substantial loss, a combination of chargeback insurance and chargeback protection may be required.

• Consider industry risk: If you operate in a high-risk industry like travel, online gambling, or pharmaceuticals, both chargeback protection and chargeback insurance are advisable. However, chargeback protection from a PSP is sufficient to manage chargebacks from businesses in lower-risk industries.

Take charge of chargebacks before they happen

Chargebacks might seem like a cost of doing business, but they don’t have to be. The real opportunity lies in preventing disputes altogether, using tools that help you detect fraud early, respond quickly, and protect your revenue without relying on limited insurance.

Airwallex helps you do just that. With real-time fraud monitoring, customisable 3D Secure authentication, and early warning alerts, you gain control over every stage of the payment journey. You can automate dispute responses, submit evidence with ease, and manage chargebacks from one unified platform.

When your protection is proactive, not reactive, your business will benefit in the long run.

Chargeback insurance frequently asked questions

Is chargeback insurance worth it?

Chargeback insurance can have limitations, so choosing to invest in proactive chargeback protection through a payment service provider can help online businesses prevent fraud and maintain stable cash flow.

What's a chargeback policy?

A chargeback policy outlines how a business handles payment disputes, including prevention measures, documentation requirements, and dispute resolution procedures.

Do merchants have rights with chargebacks?

Merchants can dispute illegitimate chargebacks by providing evidence of transaction validity, proper authorisation, and service delivery within the card network’s time limits.

Sources:

1. https://www.mastercard.com/news/press/2024/march/mastercard-and-worldpay-join-forces-to-fight-payment-fraud-globally/

2. https://www.chargeflow.io/reports/psychology-of-chargeback