In 1968, the “Truth in Lending Act” legislation was passed, giving consumers the right to dispute credit card billing errors. While this act intended to protect customers against fraudsters’ purchases, it created a new challenge that now costs businesses billions of dollars every year: Chargebacks.
For merchants that offer recurring or subscription billing — including such subscription services as Netflix, Spotify and StitchFix — chargebacks are a major problem that can hit hard. How can subscription-based merchants 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 merchants. Advantages can include:
- Enhanced customer retention
- Easier payment collection
- Additional recurring revenue
- Improved month-on-month growth
- Protection against cyclical market fluctuations
- 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 becomes problematic for merchants, 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.
While a merchant’s chargeback risk can’t be eliminated entirely, it can be managed. And with the cost of managing chargebacks and chargeback fraud reaching $40 billion yearly for e-commerce merchants, getting a handle on this challenge is critical.
Here are seven steps merchants can take today to minimize their risk of recurring billing chargebacks.
1. Be Clear About Free Trials
Many merchants 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 merchants who they 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 lets customers 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 merchant’s refund policy. That’s why it’s important for merchants to make their policies clear and easy to find. Merchants 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 merchants 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, merchants can quickly find themselves out the time, effort and money they’ve spent fighting a chargeback.
Merchants 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
E-commerce is on the rise, and subscription-based billing models are too, offering e-commerce 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 merchants.
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 e-commerce business. Contact the fraud analysts at ClearSale today to see if our 100% chargeback guarantee is right for your business and can help you balance the benefits of recurring billing with the financial risks of chargebacks.