Chargeback Debt Collection

September 10, 2021 | 7 min read

Chargeback and debt collection

Representment or Debt Collection: Which is the Best Path to Revenue Recovery?

Is debt collection the same thing as chargeback representment? While both methods focus on recovering revenue, there are considerable differences between the two.

Merchants can use a debt collection agency or chargeback representment to recover funds in cases when customers can’t—or won’t—pay their bills. Choosing the best method depends on the circumstances at play. To understand how the two methods work, and when to deploy them, it’s helpful to take a general look at your recovery options.

Why Challenge Invalid Chargebacks?

Let’s say that a cardholder makes a false claim, then uses the chargeback process to claw back their funds from a transaction. What should you do?

There are two key reasons you should challenge any chargebacks based on false cardholder claims. The first is entirely pragmatic: you stand to recover at least part of the revenue lost to disputes. That loss can be substantial. According to the 2021 LexisNexis True Cost of Fraud study, for every dollar lost to fraud, you end up losing an additional $2.60 in fees, merchandise, and other costs.

You won’t be able to reclaim that entire total. However, a reversal can still positively impact your bottom line.

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The second reason for contesting chargeback abuse is as a long-term deterrent. Some invalid chargebacks may happen by innocent mistakes, but there is a growing number of consumers deliberately trying to steal from you through “cyber shoplifting.”

Fighting back against all such disputes can make cardholders think twice before filing illegitimate chargebacks against you in the future. You’re sending a clear message to fraudsters—and to banks—that you are not an easy target.

Representment & Debt Collection: Compared

Both debt collection and chargeback representment help merchants fight back against unwarranted customer disputes. Chargeback representment asks the issuer to reevaluate the consumer’s claim, based on evidence you provide. Debt collection, on the other hand, usually means following-up outside the payments process to resolve outstanding debts.

The two approaches are similar in other ways, too:

  • Both processes are regulated: Debt collection agencies are primarily governed by the Consumer Financial Protection Bureau. Chargeback representments must adhere to rules established and monitored by the card networks (Visa, Mastercard, etc.).
  • Both processes require a valid case. In neither situation can you expect to win a case where the consumer has a legitimate claim, such as non-delivery of merchandise. Keep in mind, however, that claims may only appear to be valid, if the cardholder is filing under false pretenses.
  • Both processes are complex: Since both methods are heavily regulated, it generally takes a great deal of experience and expertise to profitably negotiate either process. Many merchants find that it is far more cost-effective and profitable to hire a 3rd party service provider in both cases.
  • Both processes come at a cost. As we mentioned, you won’t be able to recover all your lost revenue. Chargeback fees are non-refundable, even if you win a reversal. Going through the representment process requires an investment of time and money, even if you do it yourself. A debt collection agency requires less work on your part, but they may charge as much as 40% of the amount they are able to recover.

Which Method is Better for Challenging Chargebacks?

When it comes to a choice between the two recovery methods, one of the first things to consider is timing. Representments must be performed under very strict timelines developed by the individual card networks. Missing one of these deadlines can shut down your entire case—even if the delay was caused by a bank, processor, or other party in the representment chain.

That said, representment is still the better option. It’s more efficient and more cost-effective, assuming you receive the chargeback advice letter in a timely manner. So, you should opt for that route first.

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Timing offers another reason for trying representment first whenever possible. Challenging a chargeback with the bank has a “hard-stop” deadline; debt collections do not. That means if you lose the representment case, you can still try to collect the debt through the legal process later.

Many consumers don’t understand this aspect of filing a dispute with the issuer. Even if the chargeback is not reversed, the merchant may still be able to sue for the disputed amount (assuming the amount is significant enough to justify this action).

This is particularly true if you have evidence showing that the cardholder called the bank without first giving you a chance to resolve the situation. The Fair Credit Billing Act requires the customer to make a “good faith attempt to obtain satisfactory resolution of a disagreement or problem relative to the transaction” from the merchant before filing a dispute.

Can I Pursue Both Options?

It is possible to engage in both chargeback collection and chargeback representment at the same time. Debt collection is essentially a legal matter, while chargebacks are the domain of banks and card networks. The two intersect, but they are not mutually exclusive.

If you win a chargeback reversal, the issuing bank will return the funds. With chargeback collections, the merchant will have a legally-enforceable mandate ordering the customer to pay.

It’s important to note, however, that a chargeback pertains only to the cost of the original transaction. You don’t get to recover the fees associated with a chargeback issuance. In contrast, debt collection may allow you to recoup operational fees, attorney fees, collection fees, and more. The drawback, again, is that you will lose a large percentage of the recovered amount to the agency that conducted the collection on your behalf.

Debt Collection & Chargeback Management Strategy

Chargeback debt collection and representment can be very effective as complementary processes, working hand in hand as part of an overall revenue recovery plan. But while both have advantages, neither is capable of reclaiming all the funds lost to customer disputes. From that perspective, you’re much better off if the chargeback never happened in the first place.

That’s why you need a full-scale, custom-designed strategy for chargeback management—one that encompasses chargeback prevention,  revenue recovery, and more. That typically adds up to a lot of work, but we can help. Our end-to-end technology platform prevents more chargebacks, wins more reversals, and maximizes your ROI. For more information, contact Chargebacks911® today.


Can a chargeback be sent to collections?

Absolutely. Both debt collection and chargeback representment help merchants fight back against unwarranted customer disputes. Because of the high collection fees, however, using a collection agency may not be cost-effective.

Is it possible to engage in both chargeback collection and chargeback representment at the same time?

Yes—merchants can initiate consumer collections before submitting a chargeback rebuttal. Doing so reduces the risk of missing representment deadlines.

Is it better to use representment or debt collection?

Assuming you have the right compelling evidence, representment through a professional provider is enough in most situations. Chargeback collection can be used if you can’t meet the rebuttal deadline (a good provider will be able to turn claims around quickly), or if you wish to sue for additional costs beyond the transaction amount.

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