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Why 100% Chargeback Guarantees Can Actually Cost You Money

posted on: Fri Oct 28 2016

Like most things that sound too good to be true, 100% Chargeback Guarantees are not quite what they‘re cracked up to be.

They don’t actually prevent 100% of chargebacks and fraud. Rather, they act as a type of insurance policy that reimburses you when you do get hit with chargebacks and fraud.

The chargebacks and fraudulent transactions still occur. The only difference is that you pay per-transaction “insurance premiums” (in effect) to offset those losses. And just like any insurance policy, your situation determines whether or not these make good financial sense.

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For example, having every transaction reviewed to get a lower per-transaction “insurance premium” may sound like a good idea. But having that lower fee applied to all your transactions may actually mean your overall costs are higher than the losses you would have suffered simply by incurring the chargebacks and fraud (i.e., you pay $1,000 in “insurance premiums” to avoid $750 is losses).

On the other hand, using a 100% Chargeback Guarantee service for only those transactions that are declined/flagged for potential fraud typically requires much higher per-transaction “insurance premiums.” Once again, the cost of those “insurance premiums” can be higher than the chargeback/fraud losses you would have incurred without the insurance. Think of it this way: about 75% of transactions that are manually reviewed are eventually approved. Which means you could be paying higher “insurance premiums” on 3 out of 4 transactions that ultimately turn out to be legitimate.

Another factor to consider: chargebacks and fraudulent transactions continue to occur with these services and that could create issues for you with your processor. For example, if your chargeback rate consistently exceeds 1-2% -- even though you don’t feel the pain because you’re getting reimbursed for them -- your processor may come to see you as a higher risk and start to increase your transaction fees or possibly require escrow deposits from you.  

But the biggest area of concern: you surrender control. For example, to hold down their losses, 100% Chargeback Guarantee services may tend to decline valid transactions that only look suspicious (i.e., false positives). That spares them reimbursing you but can also reduce your revenues. Or they may screen in ways that don’t work well for your business. For instance, some 100% Chargeback Guarantee services may auto decline all orders from Afghanistan because of the high incidence of fraud associated with that country. But what if you’re selling nutritional supplements to US Army service personnel stationed in Afghanistan and can’t afford to eliminate that revenue stream?

The good news? A hybrid approach can make these types of services workable. By combining a best-in-class anti-fraud solution like Kount with these “insurance” services, you can submit only high-risk/high-cost transactions for “insurance” coverage. And ensure that the fees you pay to prevent losses from chargebacks and fraud never outstrip the actual cost of incurring those losses.

Fewer submissions/lower costs. With best-in-class fraud prevention from Kount, false positives (.i.e., legitimate transactions that only look bad) are greatly minimized. So you end up submitting fewer transactions and paying less in per-transaction fees.

Higher sales. The reduction in false positives not only saves money on fees, but Kount customers often report revenue increases of 1% to 5% after implementation. Some enjoy even larger surges in sales as they are able to safely enter international markets that were previously blocked. 

Low chargeback rate. Kount will help you maintain a chargeback rate that won’t trigger reprisals from your processor. For example, most Kount customers easily keep their chargeback rates down below 0.1% to 0.5%.

Complete control. Kount puts the power in your hands. Want to accept orders from Afghanistan but not Pakistan? You can easily set up that rule. Want to manually review all orders above $2,500? No problem. Want to review all mobile orders above $250? Easy. Want to whitelist repeat customers who you know have clean payment records? Absolutely. Kount gives you the control to run your company exactly how you want. Because no one knows your industry, your business, and your customers like you do.

Find out more about the costs of chargebacks and fraud and how they impact your sales and profits. Download our eBook "Calculating the 9 Deadly Costs of Fraud".

Ebook: Calculating the 9 Deadly Costs of Fraud

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