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Education

Chargeback insurance damages, is out of the policy's scope and would be picked
up by a different type of policy. An acquirer-level policy
explained provides broad coverage. That's why it's a red flag if an
acquirer seeking a policy immediately brings up policy
exclusions or says the coverage seems too restrictive. This
indicates the acquirer has poor underwriting in place and
routinely boards merchants with excessive chargeback
histories. Such acquirers typically create an environment
of adverse selection, eliminating controls because they
have insurance, which is the antithesis of best practice and
indicative of a company no insurance carrier would want
to do business with.

Conditions
It is essential for an insurer to know who is being covered
By Kevin Mendizabal in a chargeback policy; hence the condition of reporting.
Frates Insurance and Risk Management Reports include merchant identification numbers and
sales volumes. While most merchant categories are
isinformation abounds when it comes to automatically included without additional information
chargeback insurance policies for acquirers, from the acquirer, certain types of merchants may require
which are for ISOs that contractually assume additional detail before the underwriter agrees to add
M chargeback liability. In this article, I will dis- them to the policy.
cuss what the acquirer-level chargeback insurance policy Cost
does and clarify some misconceptions. Merchants seeking
"chargeback insurance" are typically looking for charge- The cost, or rate, of the policy is a function of a few factors:
back remediation solutions. Merchant-level chargeback portfolio composition, transaction size, policy limits,
programs exist for card-not-present merchants who pay deductible, underwriting practices and loss history. This
losses for fraudulent transactions, but those are outside information is provided on the application, which gives
the scope of this article. . the underwriter a snapshot of what is being covered.
What it does Individual merchants or certain groups of merchants can
also be covered as opposed to an entire portfolio.
A chargeback policy pays chargeback losses the acquirer
is held liable for if its merchant(s) are unable to pay or A policy's cost can become negligible when compared to
do not pay. Some loss scenarios stem from merchant reserves and the additional revenue potential afforded
insolvency, fraudulent merchants, merchants bankrupted by the policy. Because upfront and rolling reserves have
by fraudulent transactions, or merchants shut down by a negative impact on a merchant's return on assets and
a regulator. The cause of loss does not dictate whether a revenue, reducing or eliminating them can help give an
claim will be paid; coverage is triggered when a merchant acquirer a competitive advantage. Additional revenue can
fails to pay the chargeback liability. also be achieved by exploring new verticals and increasing
processing capacity while still mitigating risk. Further,
What it does not do merchants with reduced reserve requirements may be
willing to pay a premium to do so.
Just like the card brands and banks set rules for the
payments industry, insurance providers set the conditions Claims
and exclusions for insurance. Dispensing with these would
be akin to the card brands and banks permitting any type As long as merchants have been previously approved or
of merchant to be boarded without standard underwriting are reported to the underwriter, there is no reason why a
practices, such as reviewing financials, chargeback history claim would not be paid. Essentially, all the underwriter
or the MATCH list. requires from the acquirer is to know whom it is insuring.
Given how competitive the payments industry is, any tool
Exclusions clarify and limit a policy's scope of coverage. For that gives acquirers a competitive advantage should be
example, a general liability policy will have a professional explored.
liability exclusion. This is because general liability is Kevin Mendizabal, Director of Financial Institutions at Frates Insurance
neither designed nor rated to cover such losses; hence the and Risk Management, specializes in the electronic payments industry.
need for a separate professional liability policy. Exclusions Prior to joining Frates, Kevin was part of the Financial Institution divi-
on a chargeback policy limit the scope of coverage to sion at AIG. Previously, he held underwriting and leadership roles in the
transactions. If a merchant has unpaid chargebacks of $1 mortgage banking sphere, as well as at Bank of America. Kevin has a
million, the policy covers the $1 million in transactions.
Subsequent liability, however, such as being sued for degree in computer science from Rutgers University. You can reach him
at kevin.mendizabal@fratesinsurance.com or at 405-290-5610.
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