In-App Purchase Chargebacks
Digital app and game publishers have learned that to earn a customer’s loyalty, you sometimes have to be willing to give some things away for free. In a crowded and fast-moving marketplace, consumers can be reticent to spend money up front to try out a new digital product.
The freemium pricing model grants consumers immediate free access and earns money for the publisher through in-app purchases for additional features. The downside is that a few small in-app transactions can quickly spiral into a huge chargeback problem. What do digital merchants need to know about dealing with in-app purchase chargebacks?
- What Are In-App Purchase Chargebacks?
- Why Do In-App Purchase Chargebacks Occur?
- What Can Merchants Do to Prevent In-App Purchase Chargebacks?
There are lots of ways to implement a freemium pricing model, or supplement paid software with add-on purchases.
Some programs include advertisements that can be removed with the payment of a one-time fee, others lock desirable features behind a paywall, and some—usually video games—offer endless perks and goodies for users to buy. Microtransactions like these are a significant revenue stream for software publishers.
Nearly half of all mobile app earnings come from in-app purchases, amounting to $380 billion per year worldwide. Unfortunately, microtransactions can also cause buyer’s remorse for users who lost track of how much they were spending. It’s very common for digital merchants to receive chargebacks on their in-app purchases, and while some of them may be based on legitimate disputes, many are not.
Whether you transact directly with your customers or run all of your purchases through Apple or Google’s app stores, chargebacks can take a massive bite out of your revenue and cause all sorts of additional headaches. If you’re going to offer in-app purchases, it’s important to know what you’re up against—and how you can protect yourself.
What Are In-App Purchase Chargebacks?
An in-app purchase chargeback refers to when a customer disputes a transaction they made within a mobile app, game, or any other type of software program. They will usually claim that the transaction was fraudulent, or that they didn’t get what they paid for.
When a chargeback is processed, the funds from the transaction are taken back from the merchant and returned to the customer. The merchant also has to pay an additional chargeback fee, and can face additional consequences from the card network if their monthly chargeback ratio gets too high.
When in-app purchases are made through platforms like Apple’s App Store or the Google Play Store, the chargeback may be against the platform rather than the app publisher. However, if the chargeback is accepted, the platform will have a contractual right to recoup their funds from the publisher. They may also choose to remove an app from their store if it generates too many chargebacks.
Why Do In-App Purchase Chargebacks Occur?
In-app purchase chargebacks occur for a variety of reasons, including true fraud, buyer’s remorse, miscommunication between the app user and the cardholder, or failure to recognize the transaction when it shows up on a bank statement.
Fraudsters have been known to target apps that offer microtransactions, especially games. They’ll open an account, load it up with purchases using a stolen credit card, then put the account up for sale. When the cardholder discovers the fraudulent transactions, they will have a legitimate basis to dispute them.
The most common cause of in-app purchase chargebacks, however, is friendly fraud. This refers to chargebacks that are based on false or erroneous dispute claims. The classic example is when a parent lets a child play with their device, then is horrified to discover that the child placed hundreds or even thousands of dollars’ worth of in-app purchases.
Misunderstandings can also occur between spouses and other shared account holders. These purchases are not considered fraud and are not legally eligible for chargebacks, but many cardholders will try to dispute them anyway.
It’s also very common for customers to regret their own excessive in-app purchases and make up false claims to dispute them later. Customers may also fail to recognize microtransaction charges on their bank statement, especially if they show up under the name of the publisher rather than the app itself. When this happens, they may wrongly assume they’ve become victims of fraud and mistakenly attempt to dispute the charges.
What Can Merchants Do to Prevent In-App Purchase Chargebacks?
Proactive communication and reasonable safeguards can help digital merchants minimize the risk of in-app purchase chargebacks.
One of the most effective things you can do is send an immediate purchase notification after each transaction. If the account holder’s family members are making purchases without permission, this can quickly put the brakes on things.
Merchants also have the right to represent and fight friendly fraud chargebacks, and these notifications can serve as proof that the customer was informed about the purchases at the time they were being made.
It’s also very important to use clear billing descriptors so the customer will immediately recognize your charges when they review their bank statement.
To prevent true fraud chargebacks, digital merchants should look for technological solutions to prevent unauthorized account access and restrict suspicious purchases and account transfers. One way to do this is to require users to link their accounts to a validated social media profile. You can also consider limiting purchases until an account has reached a certain age.
When you have to fight an illegitimate chargeback, data can be your best ally. If you can prove that the customer used their own device to make the purchase, downloaded the content, and logged into their account to use it, you will have a very strong case to make to the issuing bank about the validity of the charge. Record and save all relevant data pertaining to purchased content.
There’s no such thing as a good chargeback, but in-app purchase chargebacks can be especially pernicious because they can stack up so quickly. When every chargeback comes with a separate fee and an incremental uptick to your chargeback rate, several $1 chargebacks can be a lot worse than a single chargeback for a much larger dollar amount.
If in-app purchase chargebacks are getting to be an overwhelming problem, it can be helpful to work with chargeback experts who have experience with the strategies needed to deal with microtransactions and digital merchandise disputes. The right chargeback service provider will have the know-how to lower your chargeback rate, fight off friendly fraud, and preserve the integrity of your revenue stream.