US Agency Accuses Chargeback Mitigation Firm Of Aiding Scammers

April 14, 2023
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Chargebacks911, a US firm specialising in protecting merchants from bogus chargeback claims, is facing legal action in the US for allegedly helping scammers to defeat chargeback attempts by defrauded consumers.

Chargebacks911, a US firm specialising in protecting merchants from bogus chargeback claims, is facing legal action in the US for allegedly helping scammers to defeat chargeback attempts by defrauded consumers.

On Wednesday (April 12), the US Federal Trade Commission (FTC) and Florida attorney general Ashley Moody accused the chargeback mitigation company and its owners, Gary Cardone and Monica Eaton, of using unfair techniques to prevent consumers from successfully winning chargeback disputes.

Consumers can initiate chargebacks to dispute a charge on their credit card when they believe that they have been subject to fraud or unfair business practices.

The complaint filed in federal court alleges that Chargebacks911 used misleading information to contest chargebacks on behalf of its customers, which included numerous companies that the FTC had previously sued for deceiving consumers, including Apex Capital, F9 Advertising and AH Media.

Chargebacks911 disputed tens of thousands of chargebacks on behalf of each of those companies.

For instance, the company often submitted screenshots of webpages to show that consumers were informed of terms and conditions that appeared on those pages, even when consumers made the disputed purchase on a different webpage.

According to the FTC, there were clear warning signs that the website screenshots were misleading but Chargebacks911 ignored them.

The complaint also challenged Chargebacks911’s service called Value Added Promotions (VAP), which enabled its clients to artificially lower their overall chargeback rate by running small-value transactions and inflating the total number of transactions going through the merchant’s account.

The percentage of chargebacks a company faces plays a role in the level of scrutiny a company receives from credit card companies. A higher percentage will likely lead to more scrutiny, according to the agency.

The VAP service hence enabled fraudulent merchants to evade or delay chargeback monitoring programmes, fines and account terminations designed to protect consumers from fraud.

A large share of cost of fraud rests on merchants

Although chargebacks are a major part of consumer protections related to the use of credit cards, they are a significant cost for merchants.

Estimates vary greatly as to how much merchants lose on chargebacks, but the costs are generally believed to be two to three times the value of the disputed transaction. However, it is worth pointing out this total cost is not entirely related to the chargeback fee itself, but the fact that consumers are returning goods.

Chargeback Gurus, another firm dedicated to fighting illegitimate chargeback claims, estimates that a chargeback related to a $100 purchase costs around $207 for merchants, taking into account the chargeback fee, transaction fee, operation costs such as shipping, and others. Meanwhile, LexisNexis calculated that cost to merchants averages $3.75 for every $1 chargeback.

Chargebacks911 was designed to help merchants reduce these costs by ensuring that they pay chargeback only on legitimate requests, therefore cutting back on what it calls “post-transactional fraud” or “friendly fraud”.

Friendly fraud happens when cardholders abuse the credit card chargeback system by filing a chargeback on a legitimate transaction.

These types of fraud have spiked 75 percent since the beginning of 2022, Eaton told a media outlet last week, and the effects could be devastating for merchants.

On another occasion, Eaton pointed out that regulation developed by the Consumer Financial Protection Bureau (CFPB) “doesn't typically take the merchant's perspective into account”.

“Instead, the focus falls overwhelmingly on the side of greater consumer protections, resulting in greater costs for merchants.”

“Protecting consumers against fraud and abuse is the right thing to do,” she said, noting that “the problem is that as cardholders have gotten more comfortable with the dispute process, they’ve learned ways to abuse the system”.

Advocates argue that chargebacks are a valuable consumer protection, and although not a legal right, merchants significantly benefit from the trust that means consumers are comfortable to pay by card knowing that they are protected in case something goes wrong.

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