TL;DR: App Store chargebacks happen when cardholders dispute a bill for an app download or transaction made within a mobile app on Google Play/Apple's App Store. The most frequent App Store chargeback is In-App Purchase chargeback (also known as IAP chargeback). To prevent IAP chargeback, you must ensure that all IAP transactions are clearly labeled, use anti-fraud tools to stop scammers in their tracks -- and automate your disputes for better ROI.

In-app purchases (IAP for short) are a crucial monetization strategy for mobile app developers.

With IAP, developers can make money by allowing users to purchase virtual goods or additional features within the app. These micro-transactions often build up into a sustainable business model for developers of freemium apps or products.

Yet, as with any financial transaction, there is always the risk of chargebacks.

More so, digital goods are traditionally prone to high rates of chargebacks, which negatively affects a merchant’s chargeback ratio – leading to severe consequences like hefty penalties and loss of processing rights.

Additionally, since Google has expanded the user choice billing program for Play Store, letting users choose alternative payment systems for in-app purchases, understanding how to mitigate IAP disputes on Google Play and Apple Store is vital.

Keep reading for details on how to fight and recover app store chargebacks. We shall take a deep dive into all the essential topics such as:

• What Is App Store Chargeback?
• Why Do In-App Chargebacks Happen?
• How Can I Prevent In-App Purchase Chargebacks?
• How Can I Fight In-App Purchase Chargebacks in 2023?

Let’s jump right in.

What Is App Store Chargeback?

An App Store chargeback is when a cardholder disputes a charge on their credit or debit card for an app download or transaction made within a mobile app on Google Play or Apple's App Store.

As with other chargeback types, the card issuer will investigate the claim when a consumer initiates an App Store chargeback. If the claim is valid, the card issuer will reverse the transaction, giving a full refund to the cardholder. The app developer will lose the revenue from the sale. They may incur additional administrative costs, including chargeback fees if they wish to accept the chargeback.

Having said all that, it’s crucial to note that the most recurring App Store chargeback is in-app chargebacks. That is the main focus of this piece.

IAP chargebacks occur when the consumer claims that the purchase was unauthorized, fraudulent, or made in error. In such cases, the sources of grievance include virtual currency, like coins or gems, paid app features like ads removal, bonuses, or exclusive objects like optimized player health, player appearance enhancements, or options to circumvent time-limited functionality.

Why Do In-App Purchase Chargebacks Happen?

Both Google and Apple have established chargeback policies to protect consumers from unauthorized transactions and ensure fair play in the ecosystem. However, these policies cause frustration for app developers, as they often lead to IAP chargebacks.

For example, Google’s new policy, hinted at earlier, incentivizes developers who use third-party processing rather than the transactions being handled directly by Google.

The user choice billing program allows users to choose alternative payment systems for in-app purchases — to India, Australia, Indonesia, Japan, and the European Economic Area. With the new guidelines, Google gave a 4% discount on fees for developers using third-party billing.

While the program is advantageous for app developers, as third-party processors often have more flexible and lenient chargeback policies, the use of third-party processors also opens up the potential for fraud and scams.

App developers may work with processors with weak fraud prevention measures, which can lead to chargeback spikes. Additionally, third-party processors may not be subject to the same regulations and oversight as Google and Apple, which can also contribute to a higher rate of chargebacks.

However, what’s straightforward, what you should bear in mind is that in-app transaction chargebacks, like all CNP transactions, are the result of either criminal or friendly fraud.

Criminal fraud occurs when a scammer uses a cardholder’s credentials or card details to make unauthorized transactions. They usually pile up assets such as gems, coins, or extra game lives and then sell app access to the highest bidder on the black market.

The actual card owner realizes what’s happened and hits you with chargebacks.

The leading cause of chargeback is friendly fraud.

Even though criminal fraud is a significant threat to app developers, the real kicker here is friendly fraud, which happens when a cardholder tries to game the system to get freebies. Sometimes, cardholders commit friendly fraud unknowingly.

In a nutshell, what we know about why IAP-friendly frauds happen are as follows:

• A minor makes unsupervised in-app purchases, and their guardian uses the chargeback process to seek remediation.
• A cardholder makes an actual purchase but later questions their choices.
• A cardholder sees a bill they don't recognize on their card statement.
• A spouse makes a transaction, but his/her partner disagrees with the decision and files a chargeback, instead of confronting the partner.

While friendly fraud seems fun for cardholders, ​​it causes enormous damage to merchants. Industry data suggests merchants could lose $193 for a $1 chargeback this year, an increment from $34 in 2021.

How Can I Prevent In-App Purchase Chargebacks?

As we noted earlier, in-app purchase chargebacks are natively card-not-prevent chargebacks.

Consequently, one essential step for mitigating in-app purchase chargebacks is to ensure that all IAP transactions are clearly labeled. Furthermore, inform users of impending charges before billing them. Provide clear descriptions of the virtual goods or features purchased and the purchase cost. And alert a parent when a minor makes an IAP.

If your business model is such that customers or users can circumvent in-app challenges in exchange for cash, you might want to rethink that, as it could lead to buyer’s remorse. Likewise, have clear and easy-to-use refund and cancellation policies in place.

Another vital step is to implement robust fraud detection and prevention measures.

Use secure payment methods, such as tokenization, encryption, and account verification. And monitor transactions for red flags that might trigger fraudulent chargebacks – such as multiple purchases from the same device/IP address or new users. Scammers frequently use stolen cards or billing details to stock up a new app account with in-app purchases and see the access. Be proactive in identifying and blocking such suspicious or fraudulent transactions.

Also, don’t forget to keep track of your chargeback ratio, which is the percentage of transactions that result in chargebacks. A high chargeback ratio can indicate a problem with the app's billing or refund policies due to lax business practices from your processor or a lack of fraud prevention measures.

App developers with high chargeback ratios risk suspension or ban from Google Play or Apple Store.

How to Fight In-App Purchase Chargebacks

Like all digital goods, a lack of commensurate documentation that establishes the order's legitimacy means a 100% chargeback loss.

Here are some vital tips to improve your chances of winning App Store chargebacks.

1. Extract all relevant in-app purchase documentation, including the date, time, transaction value, IP address, customer's name, and contact information. Those details help you establish transaction legitimacy. You can also include screenshots or videos of the purchase process and email or text messages confirming the transaction.
2. Respond swiftly and professionally to the chargeback dispute. Tailor your response to the reason code provided.
3. Automate your chargebacks for increased ROI. Many app developers write off chargebacks because of the low-dollar values and cost of chargeback representment. With Chargeflow’s automated chargeback recovery, you’ll get EVERYTHING you need to fight, prevent, and analyze chargebacks without lifting a finger.

Benefits of Chargeback Automation for App Developers

Chargeback automation saves time and resources for developers. Instead of writing off chargebacks due to the dollar values involved, you can automate the process of responding to and managing chargebacks. You get:

1. Faster response times: Automating disputes can help you respond to chargebacks more quickly, with increased dispute recovery rates.
2. Increased efficiency: Chargeback automation streamlines the chargeback process, making it more efficient and reducing the need for excessive manual intervention.
3. Improved data analysis: When you automate your chargebacks, you can better analyze chargeback-related data, such as fraud patterns or typical reasons for disputes, thereby identifying and preventing future chargebacks better.
4. Better risk management: Chargeback automation helps you identify and mitigate potential chargeback risks, such as fraud or friendly fraud.
5. Reduced operational costs: Automating your disputes helps your business reduce overhead costs with lesser manual labor and improves the efficiency of the entire chargeback process.
6. Improved customer experience: With chargeback automation, you respond to customer disputes more quickly and efficiently, improving the overall customer experience.