Chargebacks, Payments

What Causes Subscription Chargebacks?

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Subscription-based sales can be an excellent way to build long-lasting customer relationships and establish an ongoing revenue stream. They can also bring on some serious payment-related challenges for merchants just getting into the game. Subscription charges are particularly prone to chargebacks, for various reasons.

Each chargeback not only yanks back the revenue you were expecting to get, but also gets tracked on a “permanent record” of sorts that can negatively impact your relationship with your acquirer.

  1. Chargebacks: The Facts
  2. Chargeback Reason Codes by Industry
  3. Understanding and Preventing Subscription Chargebacks
  4. Conclusion

BNPL E-GuideSubscriptions build customer loyalty, and that’s according to the metric that matters most—sales. Customers are 75% more likely to make additional purchases from a merchant with whom they already have a subscription or similar preexisting relationship. Statistics like these have been fueling the subscription industry’s massive growth in recent years, and according to Juniper Research, subscriptions worldwide could grow by as much as 200% by 2026.

Unfortunately, increased transaction volume always brings a commensurate increase in things like fraud and chargebacks. Fraudsters deliberately target fast-growing markets, hoping to take advantage of merchants who are too busy dealing with incoming orders to look too closely for fraud indicators, and customers who are new to subscription billing models—or e-commerce in general—often file illegitimate chargebacks out of frustration or confusion.

Even if rapid sales growth makes chargebacks seem like a problem you can just write off as another cost of doing business, merchants can’t afford to ignore chargebacks. An excessive chargeback rate can get you booted from your payment processing platform and even blacklisted by acquirers. In collaboration with Juniper Research, Chargeback Gurus has authored a whitepaper that analyzes the root causes behind chargebacks and other payment challenges in the subscription market. Here are some of the key takeaways.

Chargebacks: The Facts

A chargeback is when a credit card issuer takes funds back from the merchant as the result of a customer dispute. In the US and other countries, the chargeback process is legally mandated.

Chargeback activity is tracked, and merchants who carry a chargeback rate higher than 1% per month can be penalized in various ways, up to and including account termination.

Merchants can fight illegitimate chargebacks. Each chargeback comes with a reason code that specifies the type of fraud or customer dispute it’s based on. If the dispute claims are invalid, the merchant can represent the charge, along with compelling evidence, to persuade the issuer to reverse the chargeback. When no resolution can be reached, the card network may be asked to arbitrate the dispute.

Identifying chargeback reason codes is key to analyzing the causes behind payment disputes and determining the proper response.

Chargeback Reason Codes by Industry

No two merchants will get exactly the same chargebacks for the same reasons, but there are definite patterns depending on the market you serve. Through 2021, we analyzed chargeback reason codes across various subscription-based verticals. This provided a number of insights into the typical causes of subscription chargebacks by industry:

  • Computer Software: Cancelled Services was the most common chargeback reason code, which is troubling because these should be easily avoidable disputes if you make your cancellation process quick, easy to find, and painless. Information Technology and Services had similarly high rates of this reason code.
  • Consumer Services: Fraud made up nearly two thirds of the chargebacks in this category, as was also the case in Financial Services and Retail.
  • Digital Services: These merchants had the highest rate of Fraud chargebacks at 73%, indicating that this category is a prime target for credit card thieves. While they can cause customer friction, stricter anti-fraud protocols are the most effective solution here.
  • Energy: A third of all Energy chargebacks ended up in Pre-Arbitration, which tells us that dispute outcomes in this category are not easily accepted by either party.
  • Entertainment: This category had the second highest rate of Fraud, 72%, with Cancelled Services a distant second.
  • Health, Wellness, and Fitness: Services Not Provided cracked the top three reasons for this category. It might not seem like much, but it indicates that this is a disproportionately larger problem in this sector.
  • Insurance: High rates of Pre-Arbitration and Services Not Provided prevailed here, which may point toward confusion over terms and difficulties with customer services. Marketing and Advertising  and Real Estate Services were in similar situations, but with even higher Pre-Arbitration rates.
  • Warranty and Repair Services: This was the only category where Fraud was not the most common code. Cancelled Services took the top spot here at 30%. This may be partly due to the fact that these services often bill on an annual basis, and they’re easy for consumers to forget about.

Overall, Fraud was the number one reason for disputes, accounting for more than 52% of chargebacks across all categories.

Understanding and Preventing Subscription Chargebacks

The 2021 statistics tell a number of stories about why and how chargebacks occur in the subscription economy. Most of the time, the story is fraud, and the only way to deal with fraud at scale is to block it with tougher security protocols and automated tools that can detect attacks in real time.

Manage Chargeback In-House Or OutshoreThe rest of the chargebacks center on customer disputes, and many of them can be traced back to difficulties with automatic recurring billings. Customers forget about the services they’ve subscribed to, especially when charges are annual or otherwise infrequent.

They may file a dispute because they no longer recognize a charge, or because they find it easier than figuring out how to cancel their subscription directly.

Chargebacks like these are illegitimate, and are often referred to as “friendly fraud.” Friendly fraud can also occur when customers experience buyer’s remorse, or when family members use their card without permission. With the right evidence, such as proof that they agreed to your terms and conditions or failed to make use of an accessible cancellation feature, merchants can fight these chargebacks—but it’s always cheaper and more effective to prevent them from happening in the first place.

Here are a few prevention tips for subscription merchants:

  • Make sure your sign-up, billing, and cancellation policies comply with card network regulations.
  • Make it fast, easy, and convenient for customers to cancel their subscriptions.
  • Process requests immediately and notify the customer when you have done so.
  • Always obtain a new payment authorization from returning customers—don’t just charge their card on file.
  • A few days before billing, notify customers that their card will soon be charged.
  • When subscription rates go up, notify customers in advance and obtain a new payment authorization.
  • Your merchant descriptor, the information that appears on cardholders’ billing statements, should make it easy for customers to identify you immediately and look you up online.

Conclusion

The best way for merchants to deal with chargebacks is to follow a comprehensive chargeback management plan.

This can involve ongoing data analytics, a strategic approach to representment, and partnerships with vendors who have a deep understanding of both your own industry and the electronic payments ecosystem.

By taking the time to understand the origins of your chargebacks, subscription merchants can implement effective prevention measures to keep their revenue safe and improve customer relations.

Thanks for following the Chargeback Gurus blog. Feel free to submit topic suggestions, questions, or requests for advice to: win@chargebackgurus.com

Chargebacks 101