Best Practices When Processing Recurring Payments
Table of Contents
- What are the downsides of a subscription model?
- Handling recurring payments the right way
- Are you misleading customers?
- Are you using effective fraud tools?
- Have you activated the "account updater" feature?
- Have you optimized billing to reduce churn?
- Do you use reporting tools for your subscriptions?
- Managing recurring payments
- How can I make recurring payments easy?
- Are there any recurring payment service providers for merchants?
- How can I drive subscriber growth with analytics?
Nothing makes a merchant’s day like a customer signing up for a subscription service with recurring payments. Even the most loyal of your one-off customers have to be coaxed back to make more purchases with new products, sales, and special promotions. With recurring payments, however, subscribers are agreeing to pay you money on a regular, ongoing schedule.
If you want a reliable, consistent revenue stream that doesn’t require constant attention from your sales and marketing teams, it’s hard to do better than offering a subscription. The upsides are obvious. However, recurring payments come with their own complications and downsides as well. By understanding them, merchants can mitigate risks, prevent chargebacks, and protect their revenue.
What are the downsides of a subscription model?
The promise of steady, predictable income that comes from offering subscriptions is complicated by the fact that consumers’ feelings about them may change over time. When they decide that they want their subscription to end, they sometimes decide that they would have liked it to have ended a long time ago—and they enlist their banks to help them get back what they’ve paid.
Some customers forget what they signed up for or suddenly realize they haven't used the service they subscribed to in months. Others decide that they don’t really want the subscription content after all once they’ve received it. Then there are customers who simply want to end their subscription, but find the merchant's cancellation process too complicated, too confusing, too hard to find, or too time-consuming. All of these situations often lead to chargebacks.
Handling recurring payments the right way
The way recurring payments are processed, how you communicate with your customers about them, and the policies you establish around them can all contribute heavily toward whether your subscriptions are a predictable passive income stream or a source of customer service issues, headaches, and chargebacks.
To avoid complaints, chargebacks, and other problems with your recurring payment billings, we recommend adhering to these best practices and being aware of these potential issues.
Are you misleading customers?
Sounds obvious, but we see it all the time.
As tempting as it can be to entice hesitant customers in with a subscription offer that doesn’t really look like a subscription offer, one of the most important things you can do is make sure cardholders are aware of your transaction terms prior to processing their initial order. Customers are justifiably angry when a purchase that they believed was a one-time transaction turns into a recurring monthly billing.
It’s true that when you’re completely transparent about your terms, you may turn off some customers who don’t want to commit to a long-term subscription. That’s for the best. Find other ways to win them over, and be certain that your subscribers really want to be subscribers. Making customers feel like they've been tricked is a surefire way to increase your chargeback rate.
For a majority of issues, most customers are comfortable contacting the merchant first to try to work things out before disputing a charge. However, if a customer feels the merchant has been intentionally dishonest, they're likely to come to the conclusion that contacting the merchant would be a waste of time, since someone trying to scam people out of their money isn't likely to just give it back when asked. Therefore, it's highly likely that they'll contact their bank to dispute the charge without even requesting a refund.
Are you using effective fraud tools?
There’s no excuse for neglecting to take the basic steps needed to weed out obvious cases of online fraud and card theft. At a bare minimum, you should configure your payment processor to only accept credit card transactions with AVS and CVV matching. This won’t stop every fraudster, but it will stop the ones who are going after low-hanging fruit.
Most merchants, however, should go beyond just those basic steps. There are a variety of modern fraud tools available which offer real-time risk analysis to red flag or automatically reject suspicious transactions, often with the ability to customize indicators and thresholds to the needs of the individual merchant. These tools do cost money, but they're also much more effective at preventing fraudulent transactions, and can save revenue in the long run.
Many merchants run into problems when cards are declined and they keep trying to run them. This can create situations where invalid transactions are processed, leading to chargebacks that the merchant has no standing to contest.
Do not process a credit card more than once if it returns a “Fraudulent” reason code.
The safer option is to ask the cardholder to contact their issuing bank and whitelist your transaction.
If you authorize a fraudulent transaction, the cardholder will dispute the charge, and you'll have no choice but to accept that chargeback. While some amount of fraud is inevitable, it's important to regularly analyze the effectiveness of your anti-fraud measures to ensure you're not leaving yourself more exposed than necessary.
Have you activated the "account updater" feature?
A frequent issue with recurring payments is that the card on file will end up expiring or getting canceled, and customers forget to provide new payment credentials to the services they’ve subscribed to. Credit card networks have created a helpful workaround for this situation, which is referred to as the "account updater" or "card updater" depending on the network.
Use the card updater feature when you face “Invalid Card” reason codes.
It will automatically connect to the issuing bank to obtain up-to-date payment credentials. If you don’t have this feature activated yet, talk to your gateway provider.
Merchants who receive “soft” declines may be tempted to try rerunning the card on the chance that a typo, glitch, or some other temporary error was the cause. Where this is allowed by your payment processor and the card networks, there’s no harm in doing so, but make sure you understand exactly when and how often you are allowed to re-run a declined card. As a general rule, do not attempt to process a declined card more than four times when you’re getting non-fraud reason codes.
Note that Mastercard has some rules that differ from Visa’s and other card networks. You are not allowed to process certain Mastercard transactions more than once. Be sure to familiarize yourself with the policies, decline codes, and permissible actions for Mastercard and any other card brands you accept.
Remember to communicate clearly and as often as necessary with your customers after they’ve made their initial transaction. Many card networks require notification of recurring billing charges before you process them. Even if doing so it not mandated for you, any information you can give your customers about what they’re about to be charged, how much, and why, will help you avoid confusion and disputes.
People forget about their subscriptions all the time. Reminder emails can prevent frantic phone calls to banks and keep subscriptions active longer, and even if that’s not the case, a canceled subscription is better than a chargeback.
Have you optimized billing to reduce churn?
When regular subscription customers lose their subscription due to non-payment, this is called churn. Instead of keeping churn as a regular part of your business, however, you can develop best practices around reducing churn.
When payments are processed on a regular basis, that transaction has to work every single time. As is often the case, these recurring payments can come back as declined for a variety of reasons. Maybe the cardholder didn’t remember to make funds available in time, or maybe there was a technical problem with the bank, the card network, or your payment processing software.
You can avoid these problems by implementing a retry process for subscription-based payments. Whether that is an automatic email or other notification, having an easy-to-follow re-subscribe and repayment feature will help you maintain customers and reduce churn.
Do you use reporting tools for your subscriptions?
Subscriptions, whether new or maintained, should be your bread and butter for determining success. Accordingly, you can’t understand the costs or health of your business without understanding subscription numbers and churn.
Use a subscription analytics tool to gain important insights into your business. Good tools will include some level of customization for your unique needs, and help you track activity based on criteria like monthly revenue, churn, new subscriptions, refunds, or even forms of fraud. Analytics will also help you measure your Monthly Monthly Revenue (MMR), a unique measurement of revenue based on compounding recurring payments that can help you calculate your cost per customer.
Managing recurring payments
While subscriptions and recurring payment plans may present more challenges than ordinary one-off purchases, merchants shouldn’t be afraid of them. Well-managed subscription plans can be an excellent way to give customers what they want, maintain their interest and loyalty, and create a consistent and dependable source of ongoing revenue.
For companies that sell digital services, consumable goods, or media, subscriptions may be the most viable way to deliver their products to their customers. For companies in these markets, shutting down subscriptions over chargebacks and customer service issues isn’t even an option. These companies have no choice but to adjust their policies and business operations until their subscriptions are no longer causing problems.
That said, even the most ethical and well-run companies can find themselves targeted by excessive chargebacks, especially in certain industries that—for whatever reason—attract fraudsters and dishonest customers. For those chargebacks that can’t be prevented despite your best efforts, remember that merchants can and should fight back against illegitimate chargebacks, and when you do it right, you can expect to win.
How can I make recurring payments easy?
Are there any recurring payment service providers for merchants?
How can I drive subscriber growth with analytics?