In June 2019, Stripe announced a new chargeback protection program. For an additional fee, Stripe will cover the cost of some disputed transactions. That sounds good, but is it actually worth it?
There are a few important considerations:
- The chargeback protection program costs 0.40% per transaction. That’s not exactly cheap.
- Not all chargebacks are eligible. In fact, quite a few types are ineligible.
- “Risky” transactions will require use of 3D Secure anti-fraud tools. 3D Secure already shifts liability in the case of chargebacks.
In this article, we’ll take a look at these factors in greater detail. But first, let’s quickly review what chargebacks are and how much they cost your business.
- What are chargebacks?
- Cost of Chargebacks
- Stripe’s Chargeback Protection Program
- The Rub for “Risky” Businesses
- Is Stripe Chargeback Protection a Good Deal?
- Questions to Ask Yourself Before Signing Up for Stripe Chargeback Protection
What are chargebacks?
Chargebacks occur when a customer disputes a transaction. This can happen for a number of reasons. In some cases, the customer didn’t make the transaction (the card was lost / stolen / used without authorization) or the customer doesn’t recognize the transaction.
In other situations, the customer may dispute a transaction when they’re unhappy with the goods or services they received from your company. Some customers choose this option when they feel that you have not addressed their complaints.
In extreme cases, the customer may be engaging in a form of “friendly fraud” where they claim the transaction was not authorized in order to try to keep a product and their money.
Cost of Chargebacks
Chargebacks can cost you money in two ways: 1) the loss of the sale and 2) dispute / chargeback fees your processor charges.
When you receive a chargeback, the money typically comes out of your account right away while the banks investigate the situation. You’ll get the money back if the banks find in your favor. You will not get the money back if you lose the chargeback.
Regardless of the outcome, most processors impose chargeback fees. The actual amount varies by processor, but typically ranges from $15 – $25 per chargeback. However, some processors (like Vantiv) charge monthly, imposing a chargeback service fee regardless of whether you receive chargebacks in that month.
A more nebulous “cost” is the time cost associated with chargebacks. If you choose to fight a chargeback, you (or a member of your staff) will need to provide supporting evidence. Collecting and submitting that evidence can take time.
Stripe’s Chargeback Protection Program
Unlike other chargeback programs, Stripe does not expect you to fight the chargeback by providing evidence of a legitimate transaction. Instead, the company will simply cover the costs for you.
Ordinarily, when you receive a chargeback, you have the option to fight it or accept it. If you choose to fight it, you’ll need to submit evidence to your processor that it’s a legitimate transaction. It’s then up to the banks to determine if you or the customer is correct. If you “lose” the chargeback, the customer gets their money back.
What Stripe has done is eliminate the need to fight chargebacks. You don’t provide evidence and you’re not involved in the dispute process. Instead, Stripe will reimburse you for the disputed transaction and waive any chargeback fees. (Stripe can choose whether to fight the chargeback on your behalf, but your participation is not required.)
That sounds good, and in some cases, it can be. However, it’s crucial that you crunch some numbers to determine if it’s a good deal for your business. In many cases, it’s not. That’s because several common types of chargebacks aren’t covered. Even when they are, the per-transaction fee is steep.
Stripe’s website specifies that any business using Stripe can use Chargeback Protection. That includes businesses with digital or physical goods and transactions of any size. However, it only applies to transactions where your customer enters their card details. It does not apply to recurring payments.
It’s also important to note that it only covers chargebacks for fraud. It does not cover chargebacks that customers initiate because they’re dissatisfied with the product or claim they didn’t receive the product. It also does not cover transactions that you manually approve.
|Fraud chargebacks on one-time transactions where a customer enters their card details||Recurring payments / subscriptions|
|Manually approved transactions that were flagged by Stripe|
|Non-fraud chargebacks, such as “item not received” disputes|
Manually Approved Transactions
As part of the Chargeback program, Stripe’s machine learning fraud tools can flag transactions it thinks have a higher risk of fraud. If you disagree and want to manually approve those transactions, you will waive your right to chargeback protection on that transaction.
You can choose to add customers to an “allow” list, but any of those future transactions will not be covered.
Valid “Fraud” Chargebacks
Every chargeback has a “reason code.” Only certain reason codes are eligible for the Chargeback Protection program. Specifically, Stripe limits it to particular fraud-related reason codes, excluding any codes that relate to customer dissatisfaction.
Currently, the eligible fraud-related reason codes are:
- 4 Other Fraud – Card Absent (Visa)
- 4837 – No Cardholder Authorization (Mastercard)
- 4804 – Fraudulent Processing of Transactions (Mastercard)
- UA02 – Fraud, Card Not Present Transaction (Discover)
- FR2 / FR4 – Fraud Full Recourse Program / Agreement (American Express)
- F29 – Fraudulent Transaction, Card Not Present (American Express)
- 4534 – Multiple Records of Charge, Cardholder Denies Participation in Charge (American Express)
- 4540 – Card Not Present, Cardholder Denies Participation in Charge (American Express)
Chargebacks with other reason codes are not protected under the Stripe Chargeback Protection program.
Reason code list subject to change at Stripe’s discretion.
How much does it cost?
Stripe’s chargeback protection program costs 0.40% per transaction on top of the standard Stripe rates. It may be tempting to shrug off the cost, but keep in mind that it will apply to every successful transaction you process.
If you’re on Stripe’s standard pricing plan of 2.9% + 30 cents per transaction, adding the Chargeback Protection turns that into 3.3% + 30 cents.
Stripe Chargeback Limits
Currently, Stripe limits the chargeback payouts to $25,000 per calendar year. The actual dispute amount and any waived dispute fees count toward the limit. Stripe reserves the right to adjust the chargeback limits at its discretion.
The Rub for “Risky” Businesses
There’s also an important caveat for “risky” business types. Stripe may require you to use 3D Secure (such as Verified by Visa and Mastercard SecureCode) anti-fraud tools. These tools can be helpful in reducing fraudulent transactions, as they require an additional level of cardholder authentication.
However, using 3D Secure already cuts down on the likelihood of chargebacks and shifts liability from your business when used correctly. So, if you’re already more protected by using 3D Secure, what’s the incentive to pay the extra 0.40% per transaction to Stripe?
Is Stripe Chargeback Protection a Good Deal?
For the majority of businesses, no. It’s too expensive as a per-transaction fee, adding a full forty basis points.
Looking at how it applies in general situations shows the lack of value. For businesses with dissatisfaction chargebacks (such as for custom goods), those transactions won’t be covered.
Businesses with high-dollar-value fraud chargebacks are likely making enough money to warrant a dedicated merchant account as opposed to a more expensive flat rate solution like Stripe.
On the flip side, businesses with low-dollar-value fraud chargebacks are unlikely to amass enough of them to cover the 0.40% per transaction fee.
Likewise, businesses with infrequent fraud chargebacks won’t recoup the amount they spent paying for the program.
If there’s a sweet spot for this service, it’s businesses with chargebacks often enough and large enough to exceed the fees, but not so large or infrequent as to run afoul of Visa or Mastercard’s chargeback guidelines. That’s a pretty narrow set of businesses.
Online credit card processing fees aren’t cheap, and tacking on 0.40% more just to be reimbursed for an occasional “valid” chargeback is not a great solution.
However, if you’re still considering the program, here are some questions to help you determine if it’s the right fit.
Questions to Ask Yourself Before Signing Up for Stripe Chargeback Protection
Still not sure if this service is right for your business? Here’s what you should think about.
- Do you receive primarily fraud chargebacks, or chargebacks for goods / services not as expected?
If you receive chargebacks from customers that claim a product / service is not as expected or not received, Chargeback Protection isn’t for you. The service will not cover you for those disputes. It solely applies to unauthorized / fraud chargebacks.
- Do you receive enough chargebacks to warrant an extra 0.40% on every single transaction?
Many businesses don’t. In order to help make that determination, take a look at your past chargebacks. How many were there, and for how much? From there, you’ll need to look at your monthly credit card sales, and calculate an additional 0.40% on that amount.
Here’s a chart of how much you would pay per month for the Stripe Chargeback Protection program at various monthly volumes.
|Monthly Credit Card Sales||Monthly Cost for Stripe Chargeback Protection|
It’s up to you to determine whether the monthly cost is a good value for the amount of eligible chargebacks you receive and the totals.
If you process $25,000/month in credit cards and sign up for Stripe Chargeback Protection, you’ll pay $100 / month just for the chargeback protection. However, many businesses don’t receive many chargebacks. If that’s your business, it can be easier to calculate by looking at a year.
For a $25,000/month business, you’d pay $1,200 / year for Stripe Chargeback Protection. Did your eligible chargebacks for the year cost you more or less than $1,200? If it’s less, this won’t be a good deal for you.
And remember, only certain chargebacks are “eligible.” Stripe won’t reimburse you for common non-fraud chargeback types.
Cost Isn’t the Only Factor
I also want to stress the importance of not becoming complacent about chargebacks. Something like this service can make it easy to think “out of sight, out of mind.” However, the card brands set maximum thresholds of chargebacks. As you get close to those thresholds, processors may terminate your account or you may be placed into a chargeback monitoring program.
Chargebacks can be a source of frustration for businesses, but it’s in your best interest to work to limit them in the first place and to stay on top of them rather than simply pay extra to avoid them.