Editor's Note:Edward A. Marshall is a partner at Arnall Golden Gregory LLP in Atlanta, representing merchant acquirers, processors, and fintech companies in litigation, regulatory, and commercial matters. He co-leads the firm's Payments and Fintech Industry Team.

The FTC's Longstanding Focus on the Payments Industry

The Federal Trade Commission's (FTC) focus on the payment processing industry is nothing new. Since 2001, there have beendozens of enforcement actions against merchant acquirers, aimed at curbing their provision of processing services to bad merchants. Given the FTC's increasing focus on platforms and systemic levels, this trend is expected to continue. For better or worse, pressuring payment institutions to screen out bad merchants appears to be an effective way for the FTC to encourage self-regulation in the private sector and curb unfair or deceptive practices.

The FTC's Understanding and Perceptual Gaps Regarding the Payments Industry

In defending clients against these enforcement actions, it is noteworthy that the FTC has made considerable efforts to understand the payments business. The FTC's understanding of the industry has become increasingly nuanced. Even so, regulatory skepticism still leads to a perceptual divide between payments industry advocates and regulators. The role of chargeback mitigation providers in the payments ecosystem is a prime example.

Three Common Characteristics in FTC Enforcement Actions

Although each enforcement action is unique, nearly all FTC lawsuits against merchant acquirers involve three common characteristics:

  • First, the merchants that trigger regulatory scrutiny typically operate in "disfavored" verticals—such as coaching and consulting, debt relief, credit repair, and online tech support.
  • Second, there are allegations of undisclosed or misleading statements to card networks or acquiring banks.
  • Third, the merchants involved typically have high chargeback ratios.

The Role of Chargeback Mitigation Providers and FTC Scrutiny

Given the above realities, it is not surprising that the FTC is skeptical of chargeback mitigation providers—entities that use "alerts" to convert chargebacks into refunds or automate chargeback responses. Although chargeback mitigation services can benefit even the lowest-risk merchant categories, those who use such services tend to be merchants prone to higher dispute volumes, including historically disfavored verticals. Likewise, chargeback mitigation companies are often hired by merchants with higher-than-normal chargeback ratios.

Participants in the payments ecosystem have traditionally viewed chargeback mitigation services as an effective tool to reduce industry costs and friction while helping merchants manage chargebacks (including so-called "friendly fraud"). However, the FTC has historically held a different view.

Specifically, the FTC characterizes chargeback mitigation services as a means to artificially lower chargeback ratios—a tool that prevents acquiring banks and card networks from understanding the true extent of excessive chargebacks a merchant may be facing.

The Chargebacks911 Case: Signals and Misreadings

Against this backdrop, the FTC's April 2023 enforcement action against Chargebacks911 was not surprising. Chargebacks911 is a pioneer in chargeback mitigation services, holding a substantial share of the chargeback services market. To the average observer, the FTC's move seemed to signal that chargeback mitigation providers are the "outcasts" of the industry. This led many risk and compliance professionals to question whether a merchant's use of a chargeback mitigation provider is itself a red flag.

The FTC'scomplaintdoes contain some content supporting that inference. In a section titled "Unusual Behavior of Chargebacks911's Clients," the FTC appears to suggest that Chargebacks911's support for clients with monthly chargeback ratios between 1% and 6% was improper. That view seems off-base. As the FTC itself acknowledges, higher chargeback ratios are not a per se indicator of unfair or deceptive merchant behavior. Moreover, given the nature of their business, chargeback mitigation providers are expected to support clients with higher-than-normal chargeback ratios—umbrella vendors tend to sell more umbrellas to people who get rained on.

Two Core Types of Alleged Misconduct in the Complaint

However, a more comprehensive reading of the Chargebacks911 complaint reveals that the FTC actually takes a relatively moderate stance. Two types of conduct truly triggered its regulatory concern:

  1. Using misleading or fabricated information to rebut chargebacks:The FTC alleged that the defendants used clearly misleading (even fabricated) information to rebut chargebacks—for example, attaching screenshots entirely from other merchants to imply that consumers had agreed to transactions or received disputed disclosures when they had not.
  2. Using "value-added upsell" services to conduct fraudulent "micro-transactions":The FTC alleged that the defendants used such services to artificially lower chargeback ratios.

Industry Interpretation After the Settlement

The case ultimately ended in asettlement, so the FTC's allegations remain just "allegations." But if those allegations were proven, even industry advocates would likely concede that submitting false transactions or fabricated rebuttal materials is bad conduct. Given the prominence of these allegations in the case, reading the Chargebacks911 complaint simply as a wholesale rejection of chargeback mitigation services may be too simplistic—especially since the card networks themselves now offer similar services.

Instead, consistent with the FTC's historical approach to the payments industry as a whole, its view of chargeback mitigation services appears to be "skeptical but evolving." The FTC is certainly willing to take action against chargeback mitigation provider activities it deems unfair or deceptive. At the same time, it explicitly rejects the notion that merely implementing chargeback mitigation services to lower chargeback ratios indicates a merchant is "cured" and in a healthy state. Whether the FTC views a merchant's use of a chargeback mitigation provider as the "disease" itself, or merely as an ibuprofen that lowers the "fever" of chargeback ratios without necessarily curing the underlying condition, remains to be seen.

Compliance Implications for Acquirers

In the meantime, merchant acquirers should exercise a degree of caution when working with chargeback mitigation providers or referring merchants to them. Regulators appear to be gradually recognizing that chargeback mitigation plays a legitimate and potentially valuable role in the payments industry. At the same time, how chargeback mitigation providers handle chargebacks is critical. Regulators are also quick to emphasize that implementing chargeback mitigation should not be the sole measure in response to a merchant's high chargeback ratio. Instead, it should be part of a multi-dimensional toolkit, alongside efforts to address the root causes of chargebacks.