Edward A. Marshall is a partner at the law firm Arnall Golden Gregory in Atlanta, representing merchant acquirers, processors and fintechs, among others, in litigation, regulatory, and commercial matters. He co-chairs the firm’s payments systems and fintech industry team.

The Federal Trade Commission’s interest in the payment processing industry is hardly new. Since 2001, there have been dozens of enforcement actions targeting merchant acquirers for supporting the processing needs of untoward merchants. And given the FTC’s increasing focus on platforms and systems, we can expect that trend to continue. For better or for worse, applying pressure to payments organizations to ferret out bad-merchant actors seems to be an effective way for the FTC to make private industry police the merchant marketplace for unfair and deceptive conduct.

Having defended clients against these enforcement activities, it is notable how diligently the FTC has worked to understand payments. The FTC’s knowledge of the industry has become increasingly nuanced. Even so, regulatory skepticism continues to result in disconnects between the way payments advocates view the industry and how regulators interpret it. One such example is the role chargeback service providers play in the payments ecosystem.

Although every enforcement action is unique, virtually every FTC lawsuit directed at a merchant acquirer has involved three attributes. First, the merchant(s) that sparked regulatory review operated in a “disfavored” merchant vertical — coaching and mentoring, debt relief, credit repair, online technical support, etc. Second, there are allegations of some opaqueness or misdirection vis-à-vis the card brands or acquiring banks. And, third, the merchant(s) in question experienced elevated chargeback ratios.

Given that reality, it is hardly surprising that the FTC looks askance at chargeback service providers — entities that either use “alerts” to help transform chargebacks into refunds or automate the process of responding to chargebacks. Although chargeback mitigation services can benefit even the most low-risk merchant categories, they are frequently used by merchants that tend to encounter higher volumes of disputes — including the historically disfavored merchant verticals. Likewise, chargeback mitigation companies are often retained by merchants experiencing higher-than-normal chargeback ratios.

Participants in the payments ecosystem have traditionally viewed chargeback mitigation services as a useful way of helping industry players reduce cost and friction while assisting merchants in the fight against chargebacks (including so-called “friendly fraud”). But, the FTC has historically taken a different view. 

Specifically, the FTC has characterized chargeback mitigation services as an artificial means to lower ratios of chargebacks to sales — a tool that would prevent acquiring banks and card brands from seeing the true extent to which a merchant might be experiencing excessive chargebacks.

Against that backdrop, the FTC’s April 2023 enforcement action against Chargebacks911 was hardly surprising. Chargebacks911 pioneered chargeback mitigation services and captured a sizable chunk of the chargeback service market. To the casual observer, it might appear that the FTC was sending a message that chargeback mitigation servicers were industry pariahs. It left many underwriters and risk-monitoring professionals wondering whether a merchant’s use of a chargeback service provider was, in and of itself, a red flag.

There were certainly elements of the FTC’s complaint that would allow one to draw that inference. In a section of the complaint entitled “Suspicious Behavior by Chargebacks911 Clients,” the FTC seemed to suggest that Chargebacks911 had acted improperly in supporting clients with monthly chargeback ratios between 1% to 6%. That seems misguided. As the FTC itself acknowledges, elevated chargeback ratios are not per se indicators of unfair or deceptive merchant conduct. And, given the nature of their business, one would expect a chargeback service provider to support clients that, well, have higher-than-normal chargebacks. Umbrella vendors tend to sell more units to people caught in the rain.

However, a more comprehensive reading of the complaint in Chargebacks911 suggests that the FTC was staking out a more moderate position. There were two practices that seemed to stoke its regulatory fire. First, the FTC alleged that the defendants were using plainly misleading information (or even manufactured information) to rebut chargebacks — e.g. attaching screenshots from entirely separate merchants to suggest that a consumer had consented to a transaction or received contested disclosures when that was simply untrue. Second, it attacked a practice of using a “Value Added Promotions” service to run bogus “microtransactions” just to artificially bring down chargeback ratios.

The case settled, so the FTC’s allegations in the case remain precisely that: allegations. But had those allegations been proven, even industry advocates would likely concede that submitting dummy transactions or manufactured rebuttal packets is a bad practice. Given the prominent role those allegations played in the case, it may be too simplistic to read the Chargebacks911 complaint as a general indictment of chargeback mitigation services (analogues of which are now being offered by the card brands themselves).

Instead, like its historical approach to the payments industry as a whole, the FTC’s perception of chargeback mitigation services seems to be skeptical but evolving. It is certainly willing to target activities by chargeback mitigation service providers that it views as unfair or deceptive. And it clearly rejects the notion that a reduction in chargeback ratios brought about only by the implementation of chargeback mitigation services is somehow indicative of a “cured” and healthy merchant. But whether the FTC views a merchant’s use of chargeback service providers as a symptom of disease, or merely a dose of ibuprofen that brings down a chargeback-ratio fever without necessarily effecting a cure, remains to be seen.

In the meantime, merchant acquirers should exercise some degree of caution partnering with, or recommending that merchants partner with, chargeback service providers. There seems to be a dawning recognition by regulators that chargeback mitigation has a legitimate and potentially valuable role to play in the payments industry. At the same time, the means by which chargeback service providers address chargebacks is important. And regulators are quick to underscore that implementing chargeback mitigation should not be the sole response to a merchant’s elevated chargeback ratios. Rather, it should be part of a multifaceted toolbox that also works to address the root cause of the chargeback phenomenon.