Fighting Chargebacks - Credit Repair Companies

Table of Contents

1. Why Do Credit Repair Companies Get More Chargebacks?
2. What Are the Most Common Reason Codes for Credit Repair Chargebacks?
3. How Can Credit Repair Merchants Fight Chargebacks?
4. How Should Credit Repair Merchants Handle Chargebacks?

Credit scores have become an integral part of the financial industry, but research conducted by Consumer Reports found that more than a third of credit reports contain errors. Most of these mistakes are related to personal information, such as an outdated address or a misspelled name. However, mistakes related to financial information can have a significant negative impact on a person's credit score.

Identity theft is also a growing problem, especially in the United States. When a fraudster opens an account using someone else's personal information, that account wind's up on the victim's credit report.

Whatever the source, removing inaccurate information from a credit report can be a frustrating and time-consuming process, which is why many people turn to credit repair companies. Unfortunately, not all of those customers are satisfied with the work these companies do, which has led to a high rate of chargebacks in the credit repair industry. What do credit repair merchants need to know about how to prevent disputes, fight illegitimate chargebacks, and protect their bottom line?

Due to false promises made by some credit repair companies, customer dissatisfaction in the industry is high, and customer trust is low. This has resulted in heavy regulation for the industry in various states and increased chargebacks for many of these companies.

While industry trends in chargebacks are always changing, there are three main reasons why credit repair companies tend to get hit with chargebacks more often than merchants in other industries. Let's break down each in more detail:

Customer Expectations

Credit repair companies give their best effort to improve credit scores, but they sometimes fail to clearly disclose the terms and conditions of their service to customers. Customers often expect that their credit score will improve within a short period of time, but no credit repair company can completely guarantee a credit score improvement.

While incorrect information can almost always be removed, the customer's current debts and any new debt they get into during the term of service may negatively affect their score.

Methods of Payment

A large portion of sales in the credit repair industry happen over the phone. This makes it challenging for credit repair merchants to verify the customer's identity and can expose them to chargebacks due to fraud.

Using AVS/CVV matching and ensuring the name of the cardholder matches the name given by the person on the phone can prevent some instances of fraud, but when conducting transactions over the phone, the available tools for fraud prevention are much more limited than online or in person.

Lack of Industry Standards

The credit repair industry doesn't have a major governing association or influential publication that can provide its members with information about best practices, laws affecting their business, or compliance guidelines stipulated by federal agencies. There are no universal industry standards, and there's no centralized place for industry merchants to network with and learn from each other. The organizations that do exist are either small or fairly new with few members.

This industry is still in its early stages, so we may see an industry organization of some kind develop in the near future, but the current circumstances lead to certain merchants behaving irresponsibly, sometimes simply out of ignorance.

Credit repair merchants are quickly learning that chargebacks can threaten their very survival. When you factor in transaction fees, operational costs, marketing and acquisition costs, and chargeback fees, the “true cost” of a single chargeback can be 2.5 times the transaction value.

Here's how the percentages of break down for these three reason codes:

Merchants can fight chargebacks through a process called representment. To do so, they must provide evidence to the issuing bank that the chargeback is illegitimate. The issuing bank will evaluate the evidence and decide to either uphold or reverse the chargeback.

Though the card networks may stipulate the guidelines for payments and dispute resolution, not all chargebacks are evaluated by issuing banks the same way.

Because the evaluation process is manual and unique for each issuing bank, merchants must present the right compelling evidence in a structured way so that the issuer can make an informed decision. 

Here are some examples of common pieces of evidence a credit repair merchant might submit in representment:

• Signed copy of service agreement with the cardholder outlining the deliverables, performance, and cancelation terms.
• Order invoice containing the fees, length of service, card holder email, and billing address information.
• Transaction receipt from your payment gateway showing AVS and CVV match.
• Communication between the merchant and the card holder.
• Copy of a refund or partial refund receipt if a prior refund was issued.
• Cover letter explaining the reason for disputing the chargeback.
• Website checkout page showing included terms of service information.

Not Disputing Chargebacks

Many merchants accept chargebacks as a cost of doing business, often because they don't have the expertise or time to respond to them. This can lead to revenue losses of up to 40% if disputes are not handled on time. Plus, under the latest card network rules, merchants must acknowledge all disputes. Failure to do so might lead to an additional penalty.

Fighting Chargebacks In-house

If you have 50 chargebacks or less per month, have staff with experience fighting chargebacks, or have a recovery/win rate of more than 60%, fighting chargebacks in-house might make sense. Having an in-house team doesn’t come without its own set of challenges, however.

For example, during peak chargeback season, if critical team member goes on vacation or quits, chargebacks won't be fought on time. Plus, in-house teams usually recover a lower percentage of chargebacks because they lack experience disputing them.

Hiring a Chargeback Management Company

Outsourcing to a chargeback management company has its pros and cons. If you're looking for a partner who can provide analytics to identify root causes of chargebacks and increase your chargeback win rate, with a dedicated team of experts and tools to overcome your chargeback challenges, outsourcing might make sense.

Merchants should consider the options carefully when selecting a chargeback management company, however. Not all chargeback management firms can provide a positive return on investment, and they also provide widely varying levels of service and expertise.

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