One of the most challenging parts of running a subscription business is handling chargebacks. The ease of building subscription businesses and recurring bill payments comes with an increasing risk of chargebacks. According to Datos Insights, the chargeback volume is expected to increase by 324 million by 2028.
So, what are the reasons for increasing chargebacks? The convenience of digital payments, merchant errors, and fraud are the prime catalysts! Chargebacks essentially impact your subscription business.
Let;s discuss chargeback tips for subscription business owners.
What you’ll learn:
- What are Chargebacks & Chargeback Types?
- How Chargeback Impacts Subscription Business?
- How to Prevent Chargebacks on Your Subscription -Based Website?
- Chargeback Mitigation Strategies
Table of Contents
What are Chargebacks?
A chargeback allows a card-holder to reverse funds which they assume are fraudulent or unauthorized.
Chargeback is a consumer protection mechanism. People often confuse chargebacks with refunds. It’s crucial to understand that both differ in many ways. Card-holders initiate chargebacks, and refunds happen through merchants.
Now, let’s look at the subscription scenario. Recurring payments are an essential part of subscription businesses. Regardless of the nature of your subscription business, customers can issue chargebacks for their monthly payments.
This leads to business loss, reputation damage, and even significant fees. That said, subscriptions are more prone to chargebacks than one-time purchases. The major reasons are auto-renewals, vague billing descriptors, and unclear refund policies.
Chargeback Types
Understanding your chargeback’s nature, helps to prevent chargebacks on subscription based websites. Below are the three chargeback types:
Merchant Error
These chargebacks are triggered by the businesses themselves. They can be caused by mistakes like an incorrect amount, duplicate charges, or lack of customer consent. Comparatively, these are easy to manage.
Criminal Fraud
A third-party or hacker starts transactions on behalf of the cardholder. Examples of criminal fraud are stolen cards, counterfeit cards, and account hacking. The prevention strategies are straightforward. You can block the transaction and avoid chargebacks.
Friendly Fraud
These frauds are the most challenging ones. A friendly fraud is when a user files a chargeback for an authorized transaction. There could be no valid reason for these chargebacks. Hence, businesses find a hard time validating them. Unwanted purchase, digital goods, and transactions from family members can cause friendly fraud in subscriptions.
How Chargeback Impacts Subscription Businesses?
Chargebacks negatively impact subscription business. The recurring nature of subscriptions make them more vulnerable to chargebacks.
Subscription businesses have 43% fraudulent chargeback rates. And this essentially impacts the profit margins in the long run.
Here’s how chargebacks hurt subscription businesses:
Financial Losses
Chargeback directly impacts the revenue of the subscription business. Payment processors might impose chargeback fees and additional operational costs. Recurring payment disputes can drain a significant portion of your profits.
Reduced Transaction Approval
High chargeback ratios lead to lower transaction approvals. If your subscription business has encountered more chargebacks for the last few months, payment processors may consider merchants as a liability.
💡Pro Tip: Businesses can check the chargeback codes to identify the reason. This helps to reduce the chargeback ratio significantly.
Reputation Damage
Social media is where brands are made and also ruined. Customers often post their negative experiences on social media, this changes the brand perception. This leads to customer churn and affects the customer loyalty overtime.
High Fraud Prevention Costs
A higher chargeback ratio demands strong prevention mechanisms. Hence, businesses need to create systems that reduce chargebacks. This involves a high investment in software, tools, and security enhancements.
9 Ways to Prevent Chargebacks for Subscription Services
To prevent chargebacks on subscription based websites:
1. Transparent and Clear Refund and Cancellation Policy
Are your subscription cancellations as seamless as renewals? If not, they need a major revamp! Customers often find it easier to file a chargeback, than navigating through vague return & refund policies. This is one of the main reasons for higher chargeback rate.
What’s the solution? Create a clear & detailed refund & cancellation policy. This should precisely cover: eligibility, refund process and exceptional cases.
In fact, FTC’s recent click-to-cancel demands a simpler cancellation policy from businesses. This keeps the customers away from the endless cancellation hoops. Additionally, businesses must process these cancellation requests promptly, reducing the wait period.
2. Improve Customer Support
Addressing the customer concerns can nip off the chargebacks early enough. A prompt and friendly customer support that answers customer queries, and resolves problems can prevent a potential escalation. This can tame the dissatisfaction and frustration related to product or service.
Businesses can enhance customer service by:
- Finding the root cause and advocating solutions
- Training the team for prompt & effective customer dispute resolution
- Incorporating an automated response for basic queries
- Providing multiple support channels like phone, email, live chat, etc.
3. Implement Fraud Prevention Tools
Identifying and preventing fraudulent transactions can significantly reduce chargebacks. There are a number of different transactions that lead to chargebacks.
Chargeback prevention tools work for specific threats.
So, it’s up to you to decide which threats you need to address. Or you can even adopt a multi-layered approach dealing with multiple concerns.
Chargeback prevention tools are divided into:
- Pre-transaction Chargeback Prevention Tool- These transactions are identified before checkout. Address verification systems, 3D secure authentication, and CVV checks are fraud screening tools.
Alternatively, AI-powered and machine algorithms can score the probability of fraud. They rate them from “low” to “high risk” transactions.
- Post-transaction Chargeback Prevention Tool – If one of the card-holders disputes a transaction, the concerned bank can use a prevention alert. You can immediately issue a refund, rather than facing a chargeback.
Refund-based preventions are effective against friendly frauds.
👉Important: Verifi and Ethoca are popular chargeback prevention tools.
- Chargeback Source Detection Tool – A majority of chargeback detection tools are temporary “band-aids” to douse the blaze. Policy review, chargeback categorization, evaluating source codes and detecting the trouble spots are few strategies.
4. Streamline Payment Process & Billing
A streamlined payment process can prevent chargebacks on your subscription-based website. Choose a reliable payment gateway or make your product & pricing page clearer. This could reduce your chargebacks.
A robust subscription payment system includes:
- Automated payment gateways like Stripe, PayPal, Square
- Diverse payment methods like debit cards, credit cards, PayPal, digital wallets
- Easy cancellation, upgrades, or downgrades
- Automated receipt & invoice generation
- Explicit consent during purchases
- No-hidden cancellation charges
- Advanced mechanisms like currency & localization
5. Provide Clear Statement Descriptors
Does your subscription business appear familiar on bank statements? If not, then it could be the source of those increased chargebacks.
Use a billing descriptor name that easily relates to your business. So, people won’t get confused and initiate a chargeback. Preferably, start with your business name. Next include your product/ service.
If possible, include your contact information like website or phone number to reach out. For instance, “Netflix.com Basic Subscription” is a clear example.
6. Active Reminders Before Every Billing Cycle
A timely reminder before every recurring subscription cycle prevents an impending chargeback. A scroll-wrap agreement and “I agree” doesn’t assure awareness! But, a well-timed email notification does!
Send a friendly email reminder before two, one weeks, or few days. This offers documented proof, transparency, and reduces disputes! The result? A smoother billing cycle and long-term relationship.
Higher renewal rates, reduced churn, and policy compliance are some of its benefits. Further, trial ending reminders ensures a smooth transition experience!
7. Using Data Analysis
Chargeback data often reveals significant information. It helps to find the source of discrepancies. You might wonder — can my business rely on guesses and hunches? Or even false positives and unstructured data?
But there’s more than that! You can always involve analytics for data-driven decisions. Identifying patterns and trends is an essential win!
These systems often capture information like transaction amount, reason for chargeback, location, etc.
Next, it organizes data into relevant categories: merchant data, chargeback codes, and fraud scores. Finally, you can co-relate the data to significant patterns and insights.
For example, shipping or billing glitches could trigger chargebacks.
This could be billing a wrong or damaged product. Such chargebacks are detected soon after a purchase.
8. Delay Billing Cycle
“Non-receipt of merchandise” is a major trigger to file a chargeback. Imagine your customer’s reaction when they receive an invoice, but haven’t got the products yet.
Avoid this by delaying the release of your invoice. Push it until the product is delivered. A delayed billing cycle reduces potential delivery disputes.
9. Offer Free Trials Actually
When did a free trial last convince you to purchase a subscription? Often or maybe sometimes!
Offer an opt-in for extending the subscription after the free trial ends. You can reduce the chargeback volume and its associated costs. However, many customers might drop off, eliminating automatic billing benefits over the long run!
A transparent process wins credibility and fosters trust!
Well, that’s everything on how to reduce chargebacks on recurring payments!
How to Deal with Chargebacks Once They Occur?
Chargebacks are inevitable, so preparing for mitigation strategies is the key.
Businesses need to provide compelling evidence to prove the dispute is unwarranted. This is called representation.
Follow these steps to win a chargeback dispute:
- Gather proof of purchase – Transaction data like delivery confirmation, usage history, AVS and CVV codes, etc.
- Be aware of the timeline to dispute – Typically 10-35 days
- Collect compelling evidence – Rate your evidence’s strength – customer ID or biometric confirmation (strong) and order confirmation (weak).
- Provide the evidence with a rebuttal letter – Proves how the customer’s dispute is invalid.
- Wait for the final decision – Whether the chargeback is denied or approved.
Final Thoughts
When you own a subscription business, reducing chargebacks is crucial. An effective prevention and mitigation strategy avoids revenue loss. More importantly, you can’t afford to risk your reputation.
Your end goal should be to prevent chargebacks on subscription-based websites. Seek legal advice to adopt the best practices to avoid a chargeback.
FAQ-Related to Prevent Chargebacks on Subscription-Based Websites
1. Is there a way to prevent chargeback?
Yes, you can prevent chargebacks while running a business. Clear refund & cancellation policies, excellent customer service, fraud detection tools, and data reduces chargebacks.
2. Can you charge back a subscription renewal?
You can file a chargeback for a fraudulent or unauthorized transaction. This might occur when you forget to cancel your subscription or when the platform processes the payment without your consent.
3. Is it possible to deny chargeback?
Yes, businesses can deny chargebacks. When a customer initiates a chargeback, the banks contact businesses to inform them about the request. At this time, businesses can deny illegitimate chargebacks with evidence.
4. What are the tools for detecting or preventing chargeback?
There are several chargeback detection and prevention tools, including:
- Address verification services
- Card Verification Value (CVV)
- Using 3D Secure authentication tool
- Chargeback alerts initiating refunds
- Fraud Blacklist
- Using Data Analysis & Insights
5. What are the best customer service practices to reduce chargebacks?
Follow these best practices to reduce chargeback requests:
- Mention multiple & clear contact details
- Train your customer service team for prompt response to queries
- Implement clear & transparent payment policies
- Record all customer support communications
- Provide effective dispute resolution