Recurring Billing Chargebacks

Table of Contents

1. Why Is Recurring Billing Prone to Chargebacks?
2. How Can I Prevent Recurring Billing Chargebacks?
3. Get the First Transaction Right
4. Use a Clear Merchant Descriptor
5. Make it Easy to Cancel
6. Be Generous With Refunds
7. Communicate With Your Customers
8. Recurring Billing Chargeback Strategy
9. What Causes Recurring Billing Chargebacks?

What does the latest must-see streaming video service have in common with the subscription box companies that ship grooming supplies and cocktail ingredients on a monthly basis? They’re both relying on recurring billing to get paid for the goods they’re providing. Popular with merchants and consumers alike, subscription services are a fast-growing trend in eCommerce.

There’s just one drawback—they tend to attract a lot of friendly fraud chargebacks. When subscriptions are a major contributor to your revenue stream, this can quickly become a critical issue. What can merchants do to keep their recurring billing transactions safe from chargebacks?

Even if your entire business model isn’t built around subscription services, there can be good reasons to offer them. They can provide a regular and predictable source of revenue and give you a greater ROI on your customer acquisition efforts. Customers are often fond of them as well, since they avoid having to log in and enter payment details for each purchase. Many customer also enjoy the sense of anticipation and surprise associated with subscription boxes.

Unfortunately, a distressingly high number of consumers never seem inclined to deal with the recurring billing merchant again after they’ve made their initial transaction. When they want the recurring billings shut off, they just dispute the charge with their bank. Whether or not the customer understands that they don’t have a valid reason to dispute, the resulting chargeback is considered friendly fraud.

Friendly fraud chargebacks, including the kind that result for recurring billing transactions, can be successfully fought and won, but doing so costs you time and labor.

The best way to stop recurring billing transactions is to take action ahead of time to prevent them.

There are a number of common reasons behind recurring billing chargebacks. By understanding what they are and how to address them, you can eliminate many preventable chargebacks.

Why Is Recurring Billing Prone to Chargebacks?

One of the nice things about recurring billings is that the customer only has to make one initial transaction, and then they don’t have to worry about logging back in to authorize a new transaction every month to pay for the service that they’re continuing to use.

But some customers—especially if they didn’t use the service very much—will forget the things they signed up for online, and when they see the recurring billing transaction on their monthly statement, they don’t recognize it and they call their bank to file a dispute.
It’s also common for customers to happily use a subscription for many months, be entirely satisfied with it, recommend it to their friends, and then “cancel” the service by asking their bank for a chargeback. Why? Some customers are knowingly defrauding the merchant and attempting to help themselves to a “discount” of the last 120 days of the service (or however far back their card network will allow them to dispute). Other customers don’t intend to commit fraud, but they find it too difficult or confusing to cancel the service with the merchant.

Free trial periods and irregular billing cycles can also lead to confusion and chargebacks.

How Can I Prevent Recurring Billing Chargebacks?

While the chargeback process can easily be abused by consumers willing to lie about their reasons for disputing a charge, some merchants have contributed to mistrust of recurring billing processes by engaging in deceptive free trial offers, luring customers in with misleading marketing tactics, and making it difficult and time-consuming to cancel subscriptions.

Transparency, communication, and excellent customer service are the keys to overcoming these attitudes and ensuring that customers will handle complaints and cancellations with the merchant, not their bank.

Following these tips can help you screen out many preventable chargebacks.

Get the First Transaction Right

The card networks have rules about how to correctly store payment credentials and authorize the first transaction in a recurring billing arrangement. You must learn and follow these rules and keep thorough documentation of these transactions. Be sure to use anti-fraud tools like AVS and CVV verification as well.

If you can’t prove that you followed these rules when the customer made their initial purchase, you won’t be able to fight the chargeback effectively.

Use a Clear Merchant Descriptor

If the business name that appears in your customers’ transaction details doesn’t match the name of the brand they’re interacting with through their subscription, you might be causing unnecessary confusion that can lead to chargebacks.

The billing descriptor that gets set up for you when you first open your merchant account may not accurately reflect the name of your store or brand once you finally get your eCommerce site up and running. In order to minimize customer confusion, your descriptor should pull up your website as the first result when searched online, and should include a customer service phone number. That way, customers who don't recognize a charge are more likely contact your customer service first instead of their bank.

If you have multiple brands or storefronts and can’t fit them all in a single merchant descriptor field, consider including a URL to a site that can quickly and visually remind customers who you are and what the charge covers.

Make it Easy to Cancel

The worst thing you can do to encourage chargebacks is make customers jump through hurdles in order to cancel their subscription. Don’t require a phone call or confirmation by email, and don’t bury the link under multiple customer service pages. Just provide a single click-to-cancel link and make it easy to find.

If the easiest way for a customer to cancel their subscription is to dispute the charge, that's exactly what they're going to do. To avoid this, send a reminder email or text a few days in advance every time a recurring charge is due to be processed, and include a cancellation link in the email. That serves as a reminder to customers who intended to cancel but forgot, and makes it easy for people who want to cancel but aren't sure how to do so.

Be Generous With Refunds

When a customer approaches you with a problem that can be resolved with a refund, most of the time you should just give it to them. When you factor in the bank fees and other costs, a refund is always cheaper than a chargeback. And although an increase in refunds will certainly cost some revenue, the consequences of a high chargeback ratio can be dire. Even if your chargeback ratio isn't in danger of exceeding important thresholds, lowering it can sometimes provide you with certain benefits from banks and payment processors who reduce their risk assessment.

A generous refund policy can also help smooth over bad feelings and help you retain more customers in the long term.

Communicate With Your Customers

Many potential chargebacks can be averted simply by providing more advance communication with your customers about the charges they can expect. This is especially important for merchants who bill on anything other than a monthly cycle—the more time elapses between billings, the more likely the customer will forget.

As previously mentioned, reminders can be an effective tool for fighting customer amnesia. When your customer signs up, ask them to choose either email or text reminders, and send them a notification a few days before you process their recurring billing transaction. Make sure the notification reminds them who you are and what they signed up for, and include information about how to cancel as well.

Recurring Billing Chargeback Strategy

Subscriptions and recurring billing can be an invaluable source of new customers and increased revenue for merchants, but will also increase your exposure to chargebacks. Without a strategy in place to deal with them, this can cause your chargeback rate to rise to dangerous levels.

Good preventive practices can reduce these chargebacks, but the other half of the battle is fighting the chargebacks that get through via the chargeback representment process. Just remember that when chargeback management becomes too much to deal with, the right chargeback services company can help you put the right tools and methods in place to protect your business.

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