The Complete Guide To Chargeback Protections & Management For Merchants

Giving your customers the option to pay with credit cards will help sales if you’re doing business face-to-face and they are all but necessary to engage in eCommerce. This convenience comes at a price, however, as disputed charges can quickly add snowballing costs to your business.

There are, however, ways to limit your exposure to fraudulent charges and sometimes even avoid the fines that come with a credit card transaction reversal. Need chargeback protection for merchants? Read on for a breakdown of what chargeback protection is and where you can get it.

Why Chargebacks Are A Big Problem For Merchants

Chargebacks add unwanted expenses and complications to a merchant’s retail operations. A chargeback is defined as a transaction wherein the customer’s bank forcefully reverses the charges of a credit card payment that is considered fraudulent in some way.

Merchants generally end up absorbing much of the cost related to chargebacks, with each instance costing somewhere between $15 and $100 depending on the payment processor. Worse yet, if your business starts to accrue a large number of chargebacks, it can face additional penalties and fines. You may even lose your merchant account, and losing your account results in your business being placed on the dreaded MATCH list — essentially a blacklist banks use to avoid problematic merchants.

Visa and Mastercard both have systems in place that classify merchants according to the number of disputes and chargebacks they incur. You do not want to end up classified as a high risk.

Chargebacks are broken down into three causal categories.

True Fraud Chargebacks

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.

Merchant Error Chargebacks

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.

Friendly Fraud Chargebacks

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.

What Is Chargeback Protection?

Chargeback protection refers to any service, procedure, or feature designed to reduce instances of fraud and/or protect merchants from chargeback fees.

What Does Chargeback Protection Include?

Chargeback protection can involve both preempting fraudulent charges and mitigating the fallout from fraudulent charges.

If you look at the causes of chargebacks covered above, you’ll notice that they each have different causes which means they will require different solutions. Measures that protect against true fraud, for example, might ask for the card’s card certification value (CVV) before accepting the transaction, or it might use address verification (AVS). It may also draw your personal attention to transactions that raise red flags.

Merchant error can be avoided with best practices for inventory management, shipping processes, and a good customer management system. 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.

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.

How Do You Find A Chargeback Management System?

Dealing with card-based fraud can be a lot to take on. You’ve got a business to run, after all. One way to offload the burden is to use some kind of chargeback protection system. These can be broken down into three broad categories.

Proprietary Systems

Many payment processing services offer some kind of chargeback protection either as a default or a premium feature. You’re most likely to encounter this with an “all-in-one” service like Stripe. The advantage of this type of system is that you can be assured it’s well-integrated into the infrastructure of your payment service. The downside is that if you prefer a different service specifically for fraud protection it may not be compatible with your processor.

Software Partners

Sometimes your payment processor doesn’t directly offer a chargeback protection program but instead offers one (or several) through an approved partner. This is more or less chargeback protection as an integration. You may either have to pay for this service independently, or it may be offered through your payment processor as part of a package.

Third-Party Services

This category includes software and services that are designed to be added on to your payment processing activities. They’re distinct from software partners in that they aren’t necessarily recommended or built into your payment processor. You’ll need to handle any integration issues yourself, but it does free you of the constraints of your payment platform.

Noteworthy Chargeback Protection Programs For Merchants

So what do chargeback protection services look like in practice? Let’s take a look at how some of the bigger names handle it.

Stripe Chargeback Protection

Stripe’s 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.

Square Chargeback Protection

Square 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 will 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.

PayPal Chargeback Protection

PayPal’s 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.

Kount

So far we’ve looked at first-party chargeback protection services that are directly offered by payment processors. Those aren’t the only options, however. Services like Kount frequently partner up with payment processors to offer fraud protection.

Kount offers AI-driven fraud detection tools to identify problem accounts and limit your exposure to fraudulent transactions. Kount’s API seems to play well with a number of payment processors, including Braintree. Kount offers 100% coverage of chargeback fees for any transaction that isn’t screened out by its detection system.

Kount does not disclose its pricing publicly, meaning the cost probably varies based on transaction volume and risk factors.

Chargebacks911

Chargebacks911 is a standalone service that can be integrated with many backend processors, including FirstData, which means it’s a potential solution for Clover users.

Like the other examples we’ve covered, Chargebacks911 has both fraud prevention and a fraud mitigation component, with software designed to analyze patterns of fraud and chargeback presentment. Somewhat uncommon here: Although much of the process is automated, you’ll also have a dedicated account representative you’ll get to help manage your case. The company guarantees a minimum 40% reversal rate on chargebacks.

Like Kount, Chargeback911 does not disclose pricing in advance. It’s probably out of the price range for smaller businesses, but if you’re a higher volume business that has a lot of problems with chargebacks, it might be worth investigating.

Get Better Chargeback Protection & Management For Your Business

Chargebacks can potentially turn the convenience of card-based transactions into an expensive hassle. If chargebacks having been eating into your profits, you’ll want to find a cost-effective solution that’s suited to your transaction volume and budget. Luckily, solutions are available at scale.

Remember that chargeback protection is just one aspect of transaction security. For more on security-related topics check out The Quick Guide To PCI Compliance For Small Businesses.