Chargeback Guarantee Explained
What is a chargeback?
Before we jump into the chargeback guarantee discussion, let’s zoom out a bit to chargebacks in general. A chargeback is often the direct outcome of a successful card not present (CNP) fraudulent transaction. It is a reversal of a credit card payment that’s issued directly from the bank, at the request of the legitimate credit card holder. Unlike a refund, a chargeback lets the customer bypass the retailer and claim their money back directly from the issuer. The bank then reclaims the funds from the retailer rather than the customer having to deal with it.
Chargebacks are often considered the most costly outcome of online fraud and are the reason many merchants implement fraud prevention solutions. While this process is in place to protect consumers against fraud, it is important to note it can also be abused by bad actors. You can read more about that here.
What is a chargeback guarantee?
A chargeback guarantee is a fraud detection and prevention model designed to prevent fraud – enabling merchants to accept more orders without incurring the risk of costly chargebacks. In this model, a provider uses various technological tools to distinguish bad actors from legitimate online shoppers and intercept fraudulent transactions, taking financial responsibility for missed fraud incidents and the resulting chargebacks. For fraud prevention providers who rely on machine learning technology for instant approve/decline decisions, the chargeback guarantee model offers a critical feedback loop on decision accuracy.
Online merchants dealing with fraud incur, in addition to chargeback, loss of merchandise and revenue as well as liability for fines, fees, and penalties associated with high chargeback rates. Down the line, if and when chargeback rates increase to a certain point, a merchant’s credit card network may place them in an excessive chargeback program, bringing more fees along with it. They may also be forced into opening a high-risk merchant account with higher processing fees. In extreme cases of fraud mismanagement, merchants are in jeopardy of account termination, which bars them from securing a new account for at least a few years. That is why many merchants choose to shift the chargeback liability onto a third-party provider.
It is also important to note that while chargebacks are a way for individuals to protect themselves in the turbulent eCommerce landscape, chargeback fraud has also become an inevitable reality for both consumers and merchants. Every eCommerce merchant has experienced the challenges that come with fighting chargebacks issued by bad actors.
Why implement a chargeback guarantee solution?
A chargeback guarantee is necessary for merchants who want to avoid the unpredictability of fraud costs, which include:
- Cost of chargebacks
- Loss of revenue
- Fees for every chargeback that occurs
- Loss of product and cost of product, also includes shipping fees
- Administrative costs and penalties for the process
- Processing costs and the costs associated with keeping an in-house fraud prevention and customer care teams
- Double refund chargebacks
How does a chargeback guarantee work?
Created to enable frictionless fraud management for eCommerce businesses, chargeback guarantee solutions use machine-learning models to approve legitimate orders and reject fraud in real-time.
Pioneered by Riskified, the chargeback guarantee is a business model under which a fraud prevention provider assumes liability for every approved order in case of fraud. The chargeback guarantee is typically offered in parallel to an instant order decisioning engine powered by machine learning technology. The component of chargeback liability allows greater cost predictability, ensures an alignment of the interests between merchant and third-party provider, and enables merchants to approve more orders with confidence rather than err on the side of caution and end up over-declining.Learn more about Chargeback Guarantee