What Is Chargeback Protection: The Complete Guide For Merchants

As the name implies, this is the most obviously fraudulent type of charge, usually resulting from someone making an unauthorized purchase with a credit card. In most cases, this will be because the credit card in question was stolen. When the real cardholder becomes aware of the charges, they’ll probably call their bank and dispute the charges. This kind of fraud is best fought with prevention and, indeed, most chargeback protection services are heavily focused on identifying patterns of criminal fraud.

These are the charges that are, in some way, directly the fault of your business. Maybe you or an employee entered card information wrong. Maybe you processed the transaction twice. Maybe you failed to deliver the product the customer paid for. You may not be able to prevent every instance of merchant error, but these are the chargeback causes most directly within your control. Merchant error chargebacks are fought with best practices for shipping and fulfillment, as well as software that alerts you when you might be double-charging.

The oddly named “friendly fraud” chargebacks occur when the customer, who made the purchase with their own card, disputes the charge directly with their bank rather than with you, the merchant. Though this can happen with POS transactions, it’s significantly more frequent with eCommerce transactions and one of the major reasons those transactions are more costly. Friendly fraud, though difficult to stop, can often be mitigated with strong return policies and good customer service. You’ll also want good representation to help you argue your case during the dispute.

Measures that protect against true fraud try to preempt the use of the card in the first place.

For example, an eCommerce transaction might ask for the card’s card certification value (CVV) before accepting the transaction, or it might use address verification (AVS). Some chargeback protection services may also use behavioral data or AI to draw your attention, personally, to transactions that raise red flags.

Avoiding merchant error is more of a matter of good process. Merchant error can be avoided with best practices for inventory management, shipping processes, and a good customer management system.

Likewise, you’ll also want to be quick about refunds so your customers will come to you with complaints rather than going straight to their bank. You may be able to cut the payment processor out of the process entirely. 

Friendly fraud poses the greatest challenge in terms of prevention. As is the case with merchant error, you’ll want to have a refund system that encourages customers to come to you first. You’ll also want to familiarize yourself with chargeback representment.

When you receive notice of a chargeback–and you think the transaction is valid–you can submit that transaction to your acquiring bank. Your bank can then contest the chargeback with the issuing bank. Chargeback representment allows you to select from a series of “codes” that each describes a valid reason for overturning the chargeback. Collecting additional security measures like AVS and CVV can help establish your case.

Stripe’s (check out our Stripe review) chargeback protection system falls under the auspices of Stripe Radar. Radar is Stripe’s AI-driven fraud detection system.

The system identifies high-risk buyers during an eCommerce transaction and requires them to submit additional information. Low-risk buyers get a faster, streamlined checkout process. If the high-risk charge is flagged as a sufficient threat it might be declined. In some cases, Stripe may allow you to manually override the objection, but be aware that that transaction will no longer be eligible for chargeback protection.

If your account is in good standing and a protected charge results in a chargeback, Stripe will not hold you responsible for any chargeback fees so long as you are below Stripe’s “protection limit.” Stripe reserves the right to challenge fraudulent charges on your behalf. The current chargeback limit for American merchants is $25,000/per year.

Stripe’s chargeback protection costs an additional 0.4% per transaction.

PayPal’s (check out our PayPal review) chargeback protection offers some fraud detection features by default, but where chargeback protection is concerned, you’re probably thinking of PayPal’s Seller Protection program. PayPal normally assesses a $20 fee for chargebacks should a transaction not fall under the terms of Seller Protection.

If a transaction dispute emerges and a transaction is covered by PayPal’s Seller Protection, you can have the funds frozen while PayPal conducts an investigation. This effectively means PayPal will be leading the resolution of the dispute.

To be eligible for Seller Protection, you need to provide proof of shipment and proof of delivery. PayPal will inform merchants which transactions are eligible for protection and the terms under which protection can be invoked. Eligible transactions can get protection from unauthorized transactions and for items that haven’t been received by the buyer. Partially eligible transactions are only eligible for protection should the item not be received by the buyer.

Square (check out our Square review) provides merchants with a small amount of chargeback protection at no additional cost to their customers so long as they have an account in good standing and the transaction isn’t considered high-risk. Like Stripe, Square attempts to proactively identify patterns of fraudulent behavior. It will then notify the merchant if a transaction triggers any flags.

Square will also take an active role in any bank disputes and notify you of any information needed to fight a charge on your behalf. Additionally, Square does not charge any fees for disputes.

The free price tag makes Square’s chargeback protection a great deal for merchants who mainly deal in small transactions. Square’s chargeback protection only covers $250/mo worth of sales, however, which makes it inadequate for businesses that regularly deal in large transactions.

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