Chargeback protection is a service that shields merchants from excessive, unauthorized, and fraudulent customer chargeback claims. While credit card chargeback policies are put in place to protect customers, certain programs and technologies identify, manage, and ensure merchant rights against fraudulent transactions.
Chargebacks are a reversal of transactions made using a consumer’s credit card. Customers can, for example, raise a chargeback claim with their credit card issuer if they don’t recognize a charge in their credit card bill. Learn more about chargebacks.
Chargeback Protection: How It Works & Various Types
Businesses that have a merchant account are bound by a merchant agreement. All merchant agreements set a limit (called a chargeback ratio) to how many chargebacks a business can incur before facing increased fees, withheld funds, or even having your account terminated.
Chargeback protection helps reduce your chargeback ratio by preventing chargebacks.
But did you know that there is more than one type of chargeback protection for your small business? If you are currently just relying on your payment processor’s seller protection feature, then you’re missing out.
For physical goods, digital goods, digital services, and subscription services
A chargeback alert service notifies the merchant immediately of a chargeback claim.
Customers raise their chargeback claims with their issuing bank Bank that issued the customer's credit card when they do not recognize a charge on their credit card bill. As a result, merchants are only informed of the chargeback claim after the fact. A chargeback alert service provider monitors and pauses any chargeback claim before it reaches the merchant’s acquiring bank Bank that provides merchants with a merchant account for accepting credit card payments .
Alert services route the claim to the merchant first, who can then reach out to the customer and offer a resolution such as a refund. If the merchant’s outreach to the customer is successful, the chargeback claim is fully prevented and does not affect the merchant’s chargeback ratio.
The two major chargeback alert providers are Verifi for Visa transactions and Ethoca for Mastercard transactions. Merchants can directly sign up with both Verifi and Ethoca; however, this will also mean that merchants will have to manage any chargeback claim on their own.
Alternatively, there are third-party chargeback management companies that automatically provide merchants with both Verifi and Ethoca chargeback alert services while also managing the chargeback claim on the merchant’s behalf.
Verifi and Ethoca chargeback alerts cost an average of $40 per incident but can be lower depending on the frequency. Signing up with a chargeback management company may also end up giving you better rates, but make sure to account for the monthly service fee before deciding.
For physical goods, digital goods, digital services, and subscription services
Chargeback deflection (also referred to as “order validation”) is a service that integrates a merchant’s customer relationship management (CRM) software with the customer’s issuing bank so the latter has access to transaction details such as date of purchase, product description, shipping policy, and even merchant contact information.
Once a customer contacts their issuing bank for an unrecognized transaction in their credit card bill, the issuing bank can immediately share more detailed information about the transaction with the customer.
Most of the time, this helps the customer to recognize the purchase and withdraw the chargeback claim. Other times, this immediately allows the issuing bank to dispel any malicious claim of goods or services not received.
As with chargeback alerts, chargeback deflection services are offered by Verifi (for Visa transactions) as a product called Order Insights and Ethoca (for Mastercard transactions) as a product called Consumer Clarity.
There are no separate costs for chargeback deflection available online. As these services are offered by the same providers, it’s safe to anticipate similar costs per instance.
However, note that a chargeback deflection service requires a more in-depth tech integration to implement (between merchant CRM and customer’s issuing bank), which then may require merchants to work with third-party chargeback management services and incur additional set-up costs.
Chargeback Guarantees (with Chargeback Insurance)
For products and services and specific terms approved by the service provider
Some payment processors come with built-in fraud monitoring, detection, and chargeback management features. Others even provide insurance to protect merchants from any chargeback claims. There are also third-party fraud prevention service providers that offer similar services for a fee.
However, unlike chargeback alerts and chargeback deflection, chargeback guarantees cover only certain product or service types and only up to a certain amount. Certain requirements, such as the nature of the goods or service, shipping policies, and proof of delivery, also have to be met for each transaction to become eligible for protection.
As to where the protection applies, this is ultimately up to the chargeback guarantee service provider. There are payment processors that would only cover physical goods with certain limitations. And even if you are working with payment processors that specialize in a unique business type, it does not mean it will guarantee all your transactions.
To know what goods and services are covered by a chargeback guarantee, check the seller protection clause on your merchant agreement contract.
Working with a payment processor with built-in chargeback guarantee is the easiest way to start with chargeback protection but with the varying limitations and exclusions, merchants should consider third-party providers that offer more security.
Popular examples include:
- Square: Waives chargeback fees of up to $250 per month and comes with chargeback monitoring and fraud protection tools. Read our Square payments review.
- PayPal: Offers free seller protection programs but includes a long list of requirements before becoming eligible for the chargeback guarantee. Learn more about PayPal Business.
- Stripe: Provides advanced machine learning fraud and chargeback protection services for a fee. Guarantees both physical and digital goods/services for both local and international sales. Read our Stripe review.
Regardless of your chosen provider, all chargeback guarantees come with varying costs. Some will charge a specific dollar amount for the added service, while others will charge a portion of the transaction value. Other chargeback guarantee providers may say the service comes with no additional cost, but this only means that the cost is already included in their transaction rates.
- Square’s flat-rate transaction fee is not the cheapest but covers a number of added features including a chargeback guarantee.
- PayPal’s seller protection program is free but will charge $15 or $20 if the transaction does not meet PayPal’s requirements.
- Stripe charges an additional 0.4% per transaction for chargeback protection.
Third-party Chargeback Protection & Management Services
The benefit of working with third-party chargeback protection and management providers is that the service can include everything from fraud monitoring tools to chargeback representation—which means merchants do not need to worry about responding to chargeback claims on their own.
Additionally, these providers already work with Verifi and Ethoca for a complete suite of chargeback protection services.
Examples of third-party chargeback protection service providers:
Automated Dispute Management
In-depth chargeback analysis
High-risk businesses and merchants that work with affiliates
New merchants needing or switching payment gateways
Visit our guide for a complete list of our recommended chargeback protection services.
How to Choose the Best Chargeback Protection for Your Business
There are a variety of chargeback protection services available for merchants and there are no rules that you can only use one. However, most of these services mean additional costs, so it makes sense to assess what type of chargeback protection service your business needs before signing up for one (or all).
- If your business often deals with friendly fraud Unintentional fraud often resulting from customers not recognizing the charge on their credit card bill , you will likely find chargeback alerts and chargeback deflection the most useful.
- If your business frequently falls victim to malicious, unauthorized transactions, you may need a chargeback guarantee with a transaction screening service that matches your business type.
Once you have your chargeback management strategy down, you can proceed with choosing your chargeback protection service provider. While comparing providers, consider the following questions:
- How effective is the service? The provider’s website will likely show you statistics of how many chargeback claims it has successfully prevented by types of goods or services. It’s also important to note how often this data is updated.
- Does the service offer tailored solutions? Being able to offer custom chargeback protection service shows the provider’s expertise.
- What level of integration and automation is involved? The goal is for you to worry less about chargeback claims by working with a chargeback protection service that can monitor and manage this for you.
- How much do all these services cost? Comparing the additional cost of having a chargeback protection service in place is important. However, keep in mind that the goal here is not a return on investment, but protecting your revenue—so focus on creating a cost analysis and comparing each provider.
Frequently Asked Questions (FAQ)
Chargeback protection is a strategy where merchants set up processes with chargeback protection service providers to shield their business from fraudulent transactions and excessive chargeback claims.
The best chargeback protection depends on your business model. When choosing, consider your business type and identify the type of chargeback claims your business often receives. Many chargeback protection service providers can easily customize their systems to match your risk tolerance and overall chargeback management strategy.
This really depends on the chargeback protection services provider. But in general, merchants that are just switching providers would only have to wait a day or less after signing up while new merchants without any transaction history or have not previously subscribed with any chargeback protection service may take up to a couple of months (60 days).
2023 saw a rise in refund abuse and friendly fraud, which lost businesses an average of 0.56% of their transactions to chargebacks. On top of thousands of dollars in lost revenue, excessive chargebacks can also take away your ability to accept credit card payments. It is therefore imperative for merchants to understand how chargeback works and what chargeback protection is to effectively shield their business against chargeback claims.