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