The discipline of fraud prevention has changed dramatically over the past five years and continues to evolve rapidly. Consequently, former truths about fraud prevention are increasingly becoming outdated myths. Legacy vendors propagate these myths to maintain relevance, but industry leaders understand the distinction and are moving forward. With their help, we’re taking these myths head-on in a four-part series. Check out the other three parts on reason codes, manual overviews and chargeback guarantees.
In this piece, the myth we’ll tackle is that a merchant should buy fraud insurance to cover everything — this is typically touted in the market as a ‘chargeback guarantee.’ On the surface, the simplicity is appealing; the vendor is taking liability for chargebacks, returns abuse, Item Not Received abuse, and potentially more. But the statement is very much a myth for (at least) five reasons:
The economics are usually unfavorable for the merchant
There are very specific situations in which a merchant should purchase fraud insurance via a chargeback guarantee, including:
- You don’t have the internal resources to think about or own fraud prevention
- Your business is in a dispute or fraud monitoring program (with, for example, Visa)
- Your chargeback rate is above thresholds that issuers deem acceptable
In nearly every other situation, you would be better with an uncovered agreement in which you, the merchant, retain liability for fraud. Why? Simply put, the insurance cost greatly exceeds the cost of the chargebacks — that’s how insurance vendors make money (and how Geico can afford Super Bowl commercials). To be more concrete, you can pay a fraud insurance provider $10 million annually for a chargeback guarantee, or you can pay a technology platform $1 million annually, plus retain liability for $2 million in chargebacks. $10 million vs. $3 million is a stark contrast, and a means to save your business a lot of money.
The incentives for the solution provider may not align with your objectives
Fraud insurance providers assume liability for chargebacks, so their primary incentive is to minimize their risk by declining more transactions. So, you might see your chargeback rate decline, but so does your approval rate, costing you customers and revenue. With Forter’s Fraud Management solution, we focus on reducing false declines to prevent fraud, recoup revenue and provide a better customer experience. When you sign a chargeback guarantee, you sign over critical aspects of your customer experience.
Fraud prevention isn’t only about reducing chargebacks; it’s about making decisions that prevent fraudsters from harming your business while ensuring legitimate customers always have a positive experience. An uncovered agreement emphasizes this balance — between chargeback and approval rate — to optimize your business outcomes. While a chargeback guarantee only guarantees chargebacks, an uncovered agreement guarantees chargeback rate, approval rate, platform uptime, and decision speed.
The terms and conditions are never simple
One of the loudest vendors in the market sells the simplicity of their ‘Guaranteed Fraud Protection Reimbursement Policy.’ The truth is not so simple.
The terms and conditions on their website require more than a dozen conditions be met to receive reimbursement for a chargeback. The merchant must provide proof of shipment, tracking numbers, proof of address match, mapped email addresses, and more — all within seven days, following a strict process in the vendor’s portal. There’s nothing simple about that — which is probably why this vendor is saddled with numerous 1-star reviews from merchants whose chargeback requests have been denied.
Of course, the process could be simple. At Forter, we trust our technology and our customers, so we don’t have to protect against chargebacks with excessive terms and conditions. Hopefully, the message here is simple — look past the guarantee glitter and ensure you understand the terms and conditions (and read peer reviews) before signing any contracts.
Fraud insurance kicks the can on critical issues
Sure, shifting liability for policy abuse — such as returns abuse and Item Not Received abuse — offers peace of mind. But it does not solve the underlying problem. The fundamental problem is that repeat abusers are not stopped; they are allowed to continue buying from you and then return items outside of policies or claim those items were never received. And that means that your fraud insurance will get increasingly expensive over time — and at some point down the line, should you want to take on that liability, you will be inheriting a much larger problem.
The truth is that fraudsters and policy abusers are fundamentally different and must be treated as such. The latter can be readily identified and blocked with the right technology; you can even adjust policies in real-time for repeat offenders. For example, an individual who has claimed Item Not Received in the past can purchase with a delivery signature requirement. In summary, fraud insurance only masks policy abuse problems when you need a real solution.
Fraud insurance is NOT a sustainable business model
Chargeback guarantee companies have very publicly faced challenges from declining margins. For example, one publicly traded vendor saw margins drop from 53% to 46% year over year as they began insuring merchants operating in higher-risk industries.
It’s reasonable to point out that “margins are the provider’s problem; what does that have to do with me, the merchant?” Well, you need your provider to be healthy and stay in business for continuity. When facing financial pressures, they’ll need to reduce costs to maintain margins. That means less investment in customer service and success and less investment in research and development, which slows innovation.
The bottom line is that you’re betting critical decisions on a solution provider, so you want to ensure you’re aligning yourself with a market leader company that has strong fundamentals. Fraud insurance providers lack a long-term business model, and you should not absorb that risk.
This myth has a LOT to unpack since it is so widely trafficked. So, we’re always happy to have an informal conversation about the pros and cons of chargeback guarantees vs. uncovered agreements. After all, we’re the only provider in our space with the flexibility to start you on a chargeback guarantee and shift you to an uncovered agreement over time. That’s because we don’t want to guarantee your chargebacks; we want to guarantee your outcomes.