Sarah Elizabeth
If a consumer isn’t happy with a service or product received or didn’t authorize a credit card payment, legislation gives them the right to dispute billing errors. On the road to protecting customers against fraudsters’ purchases, a new challenge has been created that costs businesses billions of dollars every year: chargebacks.
For businesses that offer recurring or subscription billing — like streaming services, subscription boxes or meal kits — chargebacks are a major problem that can hit hard. How can subscription-based businesses avoid these transaction reversals in the first place?
The Pros and Cons of Recurring Billing
Automatically charging customers for previously agreed-to goods and services can be quite lucrative for businesses. Advantages can include:
- Enhanced customer retention
- Easier payment collection
- Additional recurring revenue
- Improved month-on-month growth
- Protection against cyclical market fluctuations
- Predictable and stabilized cash flow through automated payments
- Increased lifetime value of customers
What’s not to like?
But while “set it and forget it” subscriptions are convenient for customers, the “forget it” part is what can become a problem for businesses, when these forgotten subscriptions turn into costly chargebacks.
Customers often sign up for a service and then forget they’ve done so, especially when billing happens only yearly or semiannually. Or customers are sometimes unaware that their credit cards will automatically be charged at the end of a free trial unless they specifically cancel the service.
Whatever the reason for disgruntled customers’ chargebacks, the result is the same to businesses: damage to their bottom line, risk to their business services account and damage to their reputation.
While a business’s chargeback risk can’t be eliminated entirely, it can be managed. And with chargebacks costing online businesses around US$125 billion, getting a handle on this challenge is critical.
Recurring Billing Fraud That Can Lead to Chargebacks
Because payments for subscriptions tend to be smaller-ticket periodic transactions versus larger one-time ones, businesses may feel they don’t need to worry about fraud protection. But in reality, there are several ways in which fraudsters can take advantage of subscription services.
Friendly fraud
One issue ecommerce businesses face with recurring payments is friendly fraud. This happens anytime an account holder disputes a valid transaction – either because they forgot about their purchase or recurring charge, they don’t recognize your business name on their report, or they simply have buyer’s remorse and don’t want to go through the proper channels to cancel their subscription.
ATO fraud
Account takeover (ATO) fraud is another go-to for fraudsters and the perfect way to take advantage of subscription-based businesses. Thanks to data breaches and hacks of big banks and social media giants, criminals get access to sensitive information for hundreds of thousands of consumers and can easily pretend to be valid customers.
Like businesses, consumers may miss this type of fraud on a credit card statement because the subscription cost is low. They may not even notice it until months in. And because most banks allow up to a year for a consumer to request a chargeback, online merchants may not recognize they have a problem with fraud until long after the first fraudulent purchase is made.
Gift card fraud
Related to ATO fraud is gift card fraud. Criminals commit ATO or card-not-present fraud to buy gift cards online. Then they use those gift cards to make purchases — even ongoing purchases — if the gift card value is high enough.
Because gift cards are generally untraceable, it’s the perfect crime. The legitimate account holder has no way of cancelling the gift card, and the business has no way of knowing whether the gift card was purchased honestly or through fraudulent means.
The bottom line is that regardless of the type of ecommerce business you’re running, no one is immune from the attention of fraudsters, and their techniques get more sophisticated every day. That’s why proactive efforts are crucial to protecting your profitability and reputation from the impact of fraud and the resulting chargebacks.
How to Prevent Recurring Billing Chargebacks
Here are seven steps businesses can take today to minimize their risk of recurring billing chargebacks.
1. Be clear about free trials
Many businesses ask for a credit card number at the beginning of a free trial. But is this necessary? After all, customers who really enjoy the product or service will still happily submit their credit card data at the end of the trial. And enabling free trials without requiring a credit card number eliminates the risk of chargebacks from the customers who intend to cancel after the trial period but forget.
For businesses that must require credit card information for a trial, be clear about how long the free trial is and what happens at the end of the trial. As the trial expiration date nears, inform the customer of the time remaining and make sure the customer understands whether their card will be billed and what they must do to prevent that from happening.
2. Offer tiered pricing levels
A one-sized-fits-all subscription plan just doesn’t always work for customers. Offering a pricing structure with alternatives to “all or nothing” subscriptions allows customers to downgrade their service and reduce their costs without having to resort to chargebacks.
3. Have a clear refund and return policy
Sometimes, customers file chargebacks because they’ve missed a return window or simply didn’t understand a business’s refund policy. That’s why it’s important for businesses to make their policies clear and easy to find. Businesses should highlight these policies prominently on checkout pages — even requiring customers to check a box saying they’ve read and understand the policies.
4. Be transparent
If customers are signing up for a recurring subscription, make sure they know it. Consider adding the words “recurring transaction” to the order confirmation, and spell out the frequency of charges, the date(s) of future transactions and the amount to be charged. The summary lets customers confirm the subscription details before the transaction is processed.
Then before each transaction date, remind them of the service, billing date and purchase total. After the transaction is processed, send the customer a confirmation email that reminds them of the charge they’ll see on their statement.
5. Make it easy for customers to cancel
If businesses don’t make it easy for customers to cancel a recurring subscription, they may turn to chargebacks to recoup their money and stop future charges. And because credit card companies generally favor customers in a chargeback dispute, businesses can quickly find themselves out the time, effort and money they’ve spent fighting a chargeback.
Businesses must make cancelling an order easier than filing a chargeback. One way to do that is by making “Cancel Now” buttons obvious and easy to use.
6. Encourage customer communication
If customers have questions about their subscriptions or charges, make it easy for them to contact a customer service department — whether that’s calling a 24/7 phone line, emailing a monitored email account, or sending messages via an online form or chatbot.
Having contact information easily accessible from website pages, email communications, order confirmations and more can help you provide prompt, excellent customer service to customers and help prevent them from turning to chargebacks for resolution.
7. Implement the right chargeback solution
Ecommerce is on the rise, and subscription-based billing models are, too, offering ecommerce businesses countless ways to increase revenue and gain long-term customers. Unfortunately, customers are increasingly using chargebacks as an easy way to correct a purchasing mistake — like forgetting to cancel a recurring order — which can be costly mistakes for businesses.
While not every chargeback can be prevented, the right fraud protection solution has robust tools to help you minimize the financial and reputational effects of fraud on your ecommerce business. Contact us today to see if our chargeback solutions are right for your business and can help you balance the benefits of recurring billing with the financial risks of chargebacks.
