Sending Customers that Chargeback to Collections - Is This a Good Idea?

First, some general info about CBs. Realistically, chargebacks should affect less than 1% of a merchant’s overall revenue; if they affect more than 1% of revenue, the merchant must address their anti-fraud and chargeback management issues prior to worrying about a revenue recovery plan. 

 

In most cases, merchants that consider the collections route are struggling with their CB rates, might be victims of fraud rings, need to improve upon some of their business practices, and often experience friendly fraud - all at once. They are FRUSTRATED, and debt collection seems like an obvious way to fight back. While I understand their struggles, I know that there are other steps these troubled merchants should take first in order to reduce their CB rates and deal with fewer fraudulent transactions. Optimizing anti-fraud practices and reducing CBs via smart risk management can make all the difference for these merchants, helping them get out of the CB “danger zone” and removing the need to consider collection agencies at all.

 

On the other hand, I’ve worked with some merchants who had all those potential problem areas managed, right down to their excellent refund policies. When those merchants have approached me with the suggestion of attempting debt collection, I have not been entirely opposed to the idea, mostly because in those cases, we have had the data to prove friendly fraud had occurred. Additionally, their Payment Processor had provided the required cardholder (CH) documentation (docs) for all CBs filed, so we could see further evidence the CH was using the CB dispute process to recoup money they had spent.  

 

Let me illustrate this sort of clear-cut friendly-fraud case with an example: A CH (let’s call him Chuck) files a CB claiming fraud. In Chuck’s docs, however, he states that he gave his child (let’s call him Chaz) permission to use Chuck’s credit card to sign up for an online game. Chaz then let his friends use Chuck’s credit card to buy weapons, coins, etc. in the game, as well. Chuck did not give Chaz’s friends permission to make these purchases, and Chuck feels that Merchant X (the game company) took advantage of poor Chaz.

 

In the case above, we disputed the CB and won, but the bank threatened to take the case to arbitration, stating that Visa doesn’t honor agreements with children. I pressed back and pointed out that the “child” in question (our friend Chaz) was 16, the parents had initially provided permission for Chaz to use the card, and these same parents could file a police report if they were concerned with theft. If they did not pay, we would take legal action. 

 

Ultimately, the above CB was reversed; if it hadn’t been, though, I could easily see taking it a step further. 

 

So why not play the debt collection/legal action card every time? Here’s the concern: it’s not always as clear-cut as Chuck and Chaz’s case. Collection agencies might go after someone who was a victim of fraud just because it “looks” like they engaged in the transaction. Pursuing a customer with debt collection actions when they have been victims of true fraud could spell disaster for an overzealous merchant, though. If the collection agency doesn’t know how to interpret online activity, if data isn’t passed along properly, and if the merchant’s Payment Processor does not provide CH docs from the initial CB, there may not be enough evidence to prove friendly fraud.

 

How many CBs are really cases of friendly fraud? According to Bob Botelle of Litle & Co, for merchants with a 1% CB rate, roughly one-third of that 1% is made up of friendly fraud. That is what drives merchant completely bananas, and rightly so – but because of the difficulty in proving friend fraud cases, don’t be too quick to throw customers to the wolves.

 

In my opinion, before a merchant can use a “hammer”-like approach to the chargeback dispute process, the company’s Executive Staff needs to ask themselves some serious questions. Here are the questions for you - be honest in your answers!

 

How’s our CB Rate? If it’s above 1%, why? (note: If it’s way above 1%, you have serious issues and need to focus your efforts elsewhere! Revenue recovery should come later.)

 

Are we doing a great job in customer service? Do we listen to our CS Team? Can we improve? Where?

 

What fraud/risk management areas do we need to address? Do we have the right resources and technology allocated to this area of our business, or do we need to invest more money here? Are we throwing out good transactions with the bad? Are we tracking customer behavior?

 

Are we adhering to best practices in ALL areas? Do we listen to the experts on our teams, as well as outside resources? What changes can we make?

 

How will taking debt collection actions affect our reputation? Are we ready for any potential fallout once a collection letter is published?

 

In the end, merchants who consider the debt collection route are seeking revenue recovery. If a merchant were to ask me for a solid revenue recovery plan, I would first have them ask themselves the above questions and optimize their own risk management and best practices, then tell them to contact a processor like Litle or Chase Paymentech in order to implement a solid dispute process for the merchant. At least then, if the merchant does decide to pursue the collections process, they’ll have the CH docs in hand to back up their claims of friendly fraud. As I noted above, that documentation is key to a successful CB dispute – but ONLY after the merchant has already gotten all of their anti-fraud ducks in a row!