How Subscription Merchants can Prevent Chargebacks on Recurring Payments

There’s no denying that the subscription economy is booming. In fact, the financial services firm UBS projects that the market will hit $1.5 trillion by 2025. Yet despite that robust figure, there is a looming challenge for merchants — chargebacks. 

So what exactly are chargebacks? Chargebacks occur when funds are withdrawn from a merchant’s account due to a customer dispute. They can severely impact revenue and tarnish a merchant’s reputation. Typically, these disputes arise from fraudulent activities, billing issues, unmet expectations or technical errors like duplicate charges. 

Given the impact chargebacks can have, understanding and preventing them is crucial for maintaining profitability and customer loyalty.

Addressing the Issue

So where should merchants start when combatting this issue? For starters, effective communication is key. Pre-billing reminders help keep customers informed about upcoming charges, significantly reducing the likelihood of chargebacks, especially for annual subscriptions. Customers often forget about these charges and dispute them when they appear on their statements.

It’s also essential to notify customers about any changes in their subscriptions, such as rate increases or service alterations. This transparency reduces misunderstandings. Clear and recognizable invoices and billing descriptors play a crucial role too. Customers who can easily identify charges on their statements are less likely to file chargebacks.

Streamline Cancellations to Cut Chargebacks

One effective way to reduce chargebacks is by simplifying the cancellation process. When customers find it hard to cancel their subscriptions, they get frustrated and often resort to chargebacks. 

The solution is straightforward: design a user-friendly and transparent online cancellation portal. Process these requests quickly and send confirmation emails to reassure customers their cancellations are honored. This approach dramatically reduces disputes. Additionally, offering prorated refunds for early cancellations can prevent “Service Not Provided” disputes.

Review and Compliance of Policies

Regular policy reviews are essential to ensure compliance with card network regulations and to manage customer expectations effectively. Clearly stated terms and conditions about billing, cancellations and refunds help prevent misunderstandings. During the purchase process, getting explicit customer consent via a signature or checkbox ensures customers are aware of and agree to the terms, thus reducing disputes. Using the recurring billing indicator to distinguish recurring transactions for issuers also can minimize unnecessary declines and chargebacks.

Boosting Fraud Prevention

It goes without saying that fraud prevention is critical for merchants. Utilizing tools like the Address Verification System (AVS) and Card Verification Value (CVV) checks during customer signup helps to detect and prevent fraudulent transactions. Device fingerprinting and IP address matching can monitor devices and spot suspicious activity or unauthorized access, adding another layer of security. These measures are crucial in combatting both external fraud and friendly fraud, where customers dispute legitimate charges.

On top of this, using account updater services can prevent declines due to outdated payment information, reducing related chargebacks. These services — offered by card networks and payment gateways — automatically update expired or reissued cards on file, ensuring payment details remain current. This reduces the likelihood of declines and subsequent chargebacks, as customers do not need to manually update their payment information.

There are other ways to combat fraud as well. For instance, maintaining detailed records of customer interactions, usage logs, and evidence of customer agreements and communications is also vital for defending against disputes. Usage logs can demonstrate the customer benefited from the subscription during the disputed period, while cancellation and refund records provide proof that requests were processed as required. Also, keeping records of subscription agreements and confirmation emails serves as evidence of customer consent, helping to dispute chargebacks effectively.

Optimizing Payment Processes

Optimizing the merchant descriptor is another important step in preventing chargebacks. When customers see an unfamiliar charge on their statement, they are more likely to dispute it. Ensuring the descriptor is clear and recognizable, using a brand name customers will instantly identify, can prevent such disputes. Including contact information such as a phone number or URL in the descriptor allows customers to reach out with questions or concerns, further reducing the likelihood of chargebacks.

Intelligent payment routing also can optimize transaction approvals and reduce costs. Machine learning and advanced routing techniques can select the optimal payment rails for each transaction, minimizing declines and boosting approvals. These systems also can alert merchants to high-risk transactions likely to be declined, allowing proactive customer engagement to resolve issues before they result in chargebacks.

Handling Chargebacks

When it comes to fighting unfair chargebacks, having a robust strategy for chargeback representment is crucial. Merchants need to understand the various reason codes for chargebacks to craft a precise response and gather pertinent evidence. This can include signed agreements, detailed usage logs and records of cancellations, all of which can validate the transaction and counter the chargeback effectively. 

Merchants can greatly reduce the risk of chargebacks by adopting these comprehensive strategies. By doing so, they can maintain steady revenue streams and foster stronger customer relationships in a rapidly growing market. 

Ultimately, the subscription economy offers vast growth opportunities, but chargebacks remain a persistent threat. By prioritizing clear communication, simplifying the cancellation process and upholding transparent subscription policies, merchants can significantly lower the chances of disputes. Implementing these strategies will help maintain consistent customer relationships and reliable revenue streams.

Tim Tynan is a seasoned senior executive and business leader with extensive experience delivering financial and operational results across the payments, financial services, and technology industries. He currently serves as CEO for Chargeback Gurus, a leader in chargeback prevention and recovery services for ecommerce payments. Tynan is the former CEO of Bank of America Merchant Services, one of the largest payments and fintech organizations in the United States. Prior to Bank of America Merchant Services, Tynan was at Citigroup, where he served as the COO of the Global Transaction Banking business, which included payments treasury solutions. Before Citigroup, he held management positions and various leadership roles at IBM. Tynan has worked with various nonprofit organizations and is currently on the boards of Borough of Manhattan Community College and A Chance in Life, and is the Co-Chairman of the New York Hall of Science. Tynan serves on the Board of Directors for Brink’s Inc., and Engage fi, and is the former President and Chairman of the Electronic Transactions Association.