What is a chargeback guarantee?
A chargeback guarantee is a contractual obligation made by a fraud protection provider to a merchant. It guarantees that the provider will reimburse the merchant for any approved card-not-present orders that turn out to be fraudulent, and thus results in a reversal, or “chargeback,” from a bank.
Without a chargeback guarantee in place, the merchant is responsible for repaying the bank and any associated fees and costs.
A chargeback guarantee protects merchants from the unpredictable costs of chargebacks by transferring liability to a fraud prevention provider like Riskified. The provider agrees to cover any chargeback costs resulting from fraud that they don’t catch.
What is a chargeback?
A chargeback is the reversal of a credit card payment due to a fraudulent transaction. For example, a chargeback is filed if an order was placed online using a stolen credit card number.
When the legitimate credit card holder notices the fraudulent purchase, they will claim their money back directly from the bank that issued the card. In turn, the bank will reclaim the funds from the merchant. The bank will take back the charge; hence, “chargeback.”
Chargebacks are one of the most costly outcomes of online fraud and are the reason many merchants implement fraud prevention solutions.
How do merchants benefit from chargeback guarantees?
Chargeback guarantees not only eliminate merchants’ chargeback costs but also deliver an array of business benefits that make them a highly effective approach to fraud management.
Chargeback guarantees eliminate the direct chargeback costs, the costs of merchandise and lost revenue, and liability for fines, fees, and penalties associated with high chargeback rates. The guarantee also enables merchants to approve more orders with confidence rather than overdeclining due to the risk of fraud. Higher approval rates can drive higher revenue and customer loyalty.
A chargeback guarantee can also improve revenue predictability for the merchant by locking in a minimum approval rate while setting a baseline cost for fraud, the latter being the fee for partnering with a chargeback guarantee provider. These are some of the reasons merchants choose to shift the chargeback liability onto an accountable fraud vendor.
A chargeback guarantee enables a merchant to avoid the unpredictability of fraud costs, which can include:
- Cost of chargebacks
- Loss of revenue
- Fees for every chargeback that occurs
- Loss of product and cost of logistics, such as shipping fees
- Administrative costs and penalties for the chargeback
- Processing costs and manual order review
Chargeback guarantees and accountable fraud prevention
A chargeback guarantee is essential to a fully accountable partnership model, in which the fraud prevention provider is accountable to the merchant not only for stopping fraudulent transactions and reimbursing chargebacks but also for delivering desired business outcomes such as high approval rates, revenue growth, and a positive customer experience.
This model requires three key components:
- An approval rate service level agreement sets a floor on the share of orders that the partner will approve. For instance, the partner commits to approving 98% of the merchant’s orders over the next two years.
- A chargeback guarantee shifts the costs of chargebacks with a fraud reason code from the merchant to the partner. This incentivises the partner to keep chargebacks low and make accurate order decisions.
- A performance-based fee structure rewards the fraud partner only for approved transactions and provides a disincentive to over-decline orders.
In an accountable model, the partner is incentivized to keep chargebacks low but is also paid only for approved transactions, which disincentivizes over-decline orders.
Combined, these three elements keep the partner’s goals fully aligned with the merchant’s objectives and deliver maximum financial and operational benefits.
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Let’s talkHow do chargeback guarantees work?
The chargeback guarantee model relies on a partner’s ability to make highly precise decisions without over-declining orders. This requires real-time machine learning to effectively differentiate between legitimate customers and malicious actors.
At Riskified, for example, our machine-learning models analyze hundreds of features per transaction, generating accurate ‘approve’ or ‘decline’ decisions that are extremely reliable because they draw on several billion prior transactions.
By guaranteeing approval rates and covering chargebacks, an accountable vendor like Riskified is incentivized to minimize fraud and maximize approvals for merchants, which in turn optimizes revenue and customer experience.
Full alignment with customer business outcomes permits the partner to act as an extension of the merchant’s in-house fraud teams, freeing those professionals to pursue value-driving initiatives instead of manually reviewing orders, disputing chargebacks, or maintaining hundreds of decision-making rules.
Chargeback guarantee vs. chargeback insurance: What’s the difference?
The difference is that chargeback insurance does not exist. It is a deceptive term circulated to confuse merchants and imply that offloading liability for chargebacks is a costly “extra” they must purchase. Learn more about the myth of chargeback insurance.
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