We had a conversation with a colleague recently about merchants who invest in chargeback insurance, and whether it’s worth the investment. For some merchants and industries it may be, but there are some crucial factors to consider:
Does chargeback insurance guarantee merchant services account protection, even if the merchant’s chargeback rate is hovering as high as 2-3 percent of sales per month? In the interest of full disclosure, we’re not very familiar with chargeback insurance, but we’re going to guess that it has some limits, when it can no longer help merchants hampered by excessive chargebacks.
Or, is it for those merchants whose chargeback levels hover near or over the 1 percent of sales/100 chargebacks per month threshold, who, frankly, don’t want to deal with mitigating?
Recently, we’ve blogged incessantly about the new Visa Claims Resolution – Visa’s new two-channeled chargeback dispute protocol – as well as the card brands steps in recent years to crack down on businesses plagued by chargebacks.
We’re not convinced chargeback insurance is the wisest financial decision for a high risk e-commerce merchant.
Why we’re lukewarm about high risk merchants and chargeback insurance
Fundamentally, we believe that merchants who engage in the best policies and procedures to mitigate chargebacks are, simply, better merchants. That alone consists of:
- Prioritizing customer support, which is a major factor in reducing chargebacks
- Taking the proactive steps (clear, prominent billing descriptor and refund policy) to avoid chargebacks
- Communication during and after the purchase
And none of these three points costs anything more than a merchant’s time. We suppose this is why we’re not convinced chargeback insurance is a viable solution to protect a merchant services account.
Secondly, until about five or maybe six years ago, the overwhelming perception regarding chargebacks was that they were simply the ‘cost of doing business,’ nothing more than a monthly loss that most merchants accepted. That perception can now cause a business to lose its merchant services account. By investing in chargeback insurance, we feel, a merchant is somewhat buying back into that perception; that merchants are merely accepting and deferring the problem to a third party.
Apologies to all chargeback insurance companies, but we simply think there are better alternatives for a merchant to protect his/her business.
How merchants can better protect their merchant services account
Firstly, there are no bigger advocates of the aforementioned proactive measures than we are. Defending a business from chargebacks and fraud begins with the merchant.
- Communication: We came upon some statistics recently that we found very telling and productive: When contact is initiated between a merchant and consumer, there is a positive resolution nearly 60 percent of the time. In 28 percent of disputes, the issue is resolved when the merchant replaces the product or issues a refund to the consumer. Only 16 percent of cases with direct contact fail to result in a favorable outcome.
- Machine learning and AI: There is no silver bullet to stop chargebacks and fraud, but the use of machine learning and artificial intelligence to examine suspect transactions has been a major breakthrough in the last several years, saving merchants not only money, but valuable time.
Alas, we understand that in certain industries, chargebacks are common and can come in waves, causing the merchant to seek third-party help.
- Chargeback mitigation/prevention firms: For merchants in industries with typically high chargeback rates – tech support, nutraceuticals or anything subscription-related — rather than investing in chargeback insurance, we recommend channeling your money into a chargeback and fraud management firm. There are several successful, reputable firms proven to prevent and mitigate chargebacks, and even a select few that will educate merchants on best practices, so they can eventually solve the issues in-house.
More than a merchant services account
We’re advertised as being in the merchant services account business, but we prefer to think we’re in the people business, furnishing the best domestic and international merchant account solutions we know. Our merchant services experts are always up for a conversation – in fact, we prefer to speak with you – to find out more at 1-800-530-2444.
