The Rise of Subscription Model Chargebacks: Handling Recurring Payments

Imagine signing for the free trial of a popular streaming service. Naturally, you are excited to watch all the movies and shows (and for a great price). But in your haste, you skip right past the detail page. Without realizing it, you agree to the membership auto-renewal.  

A month later, the trial expires. And as signed for, the second payment charges to your account. Of course, from your perspective, this auto-renewal is a surprise and completely unexpected. So out of dissatisfaction, you file a dispute. The dispute is an honest expression of your emotions—but also a false claim leading to a subscription chargeback.

For merchants, these cases of subscription-based chargebacks will likely only grow in volume, simply because use of the recurring payment business model is skyrocketing. Experts estimate that subscription revenues for media and digital products will increase by 13.5% annually till 2025. And at least 40% of Millennials have at least one retail product description. The subscription-based business model is gaining popularity. In turn, so will the use of chargebacks.  

So what can the average merchant do? How can you limit these disputes? Let’s explore subscription model chargebacks.

Understanding Chargebacks in Subscription Models

Chargebacks have the same purpose in the subscription model as all other commerce sectors: to protect the consumer. The usual problems that lead to disputes happen the same with subscriptions. Fraudsters still hack accounts, and billing errors still occur. Consumers have the right to fix these issues via disputes.

But subscriptions do have a notable difference: payments are recurring. A dispute does not occur for just a single, one-time purchase. Instead, it affects an entire billing cycle.

This creates some novel scenarios. If your digital service goes down for a day, is a customer entitled to a dispute? Or what about when a customer files a chargeback after they cancel their subscription—is that valid? Chargebacks related to renewals, product delivery, cancellations, and refunds all need new strategies for those who use membership-based services and payments.

And maybe most importantly, the lifetime sales value of a customer changes with the subscription model. One mishandled dispute jeopardizes multiple recurring payments. That strongly alters which false claims you wish to fight. Subscription chargebacks do require some changes to your usual defenses.

Challenges in Managing Subscription Chargebacks

How exactly does the subscription model alter payment and chargeback conditions? Here are some examples to consider:

• Extended customer communication: Recurring payments and services mean the frequency of interactions increases. For many merchants, this is a benefit. But if you have no resources to handle the uptick in customer service needs, chargebacks will flourish.  
• Complex billing cycles: Recurring services usually involve complex payments. Tiered pricing, trials, and add-ons all create confusion. If you don't set up simple billing systems, expect chargebacks related to mistakes and consumer uncertainty.
• Expectation management: A recurring service means you must deliver ongoing value. That can be a tough task, as you must deliver that quality while you update, maintain, and digitally secure your product. If you cannot manage these expected services, chargeback volume can grow.
• Churn management: Retaining customers is a challenge. Customer needs change—and rapidly. If you don't have service flexibility or strategies to entice back dissatisfied customers, expect more chargebacks. The last thing you want to do is alienate customers with your business model.

Strategies for Preventing Chargebacks in Subscription-Based Businesses

So what options do merchants have? Here are some best practices that can help you limit subscription chargebacks

• Focus on transparent communication: The more info you supply to a customer, the less likely they will resort to a dispute. So be upfront in all communications. For example, give ample notice for payments. Or offer clear cancellation terms before the customer signs up. Ask for explicit consent before adding a user to a recurring payment. And clearly state pricing tiers. These are a few small ways to set proper membership expectations. An informed customer has less need to use a chargeback.  
• Invest in customer service: Timely support can divert most issues, thereby limiting the need for chargebacks. So provide users with easy means to contact service reps (e.g. social media, email, chat, phone). Customer response teams should also work with empathy and understanding. And when needed, personalize the resolution (offer refunds, discounts, store credit, etc). Fix customer issues before they escalate into disputes.
• Optimize your billing descriptors: A clear and recognizable billing label means far less confusion for customers. By extension, that leads to fewer disputes or misunderstandings. So, write legible billing descriptors. That means using your known business name (not the government identification). If possible, add service or product data. Avoid acronyms or industry terms. Add in contact information. These are simple ways to provide clarity to your customers.
• Perform audits: Subscriptions involve constant payment cycles, so engage in regular reviews. Look for double charges, overbilling, or incorrect pricing. If need be, reverify users for extra security. Track suspicious account activity. These are proactive ways to limit chargebacks due to error.
• Invest in fraud prevention: Subscriptions involve recurring revenue, and those longer-term gains attract bad actors. So protect your users and their data with good fraud prevention. Multi-factor authentication is always a good practice. You can also invest in monitoring tools. Fraud screening solutions are good for discovering account activity for anomalies. These are just a few ways to secure your service (and limit chargebacks).

Enhancing Subscription Chargeback Management With Chargeflow

In addition to the above-stated best practices, consider using chargeback management tools. A technical solution is highly compatible with the set-it-and-forget nature of subscription services. That makes digital solutions ideal for managing recurring payment disputes.  

For example, consider the benefit of automation like Chargeflow provides. You already deliver your services rapidly via digital means—any manual chargeback processes would only slow you down. Automation is what drives efficiency. Most merchants see a notable return on investment automating their chargeback defenses.

Or, consider proactive fraud defenses. A subscription service contains valuable (and hackable) customer data, accounts, and payment resources. That's why Chargeflow is helpful in preemptively identifying suspicious activity. It's not about static responses but about anticipating criminal intentions. We address the risks before they materialize.

And think about those transactions that do manage to surpass any preventative efforts. For those instances, Chargeflow offers data-driven fraud identification. Rich data sets rapidly detect incoming fraudulent activity, helping you mitigate any possible damage.

In addition, those same datasets help you plan for the future. Discovered patterns or trends show you what is working and what is not. Our tools find weak points and then offer ways to improve those vulnerabilities. Refine your strategies to better protect your digital service.

In short, chargeback management tools are a viable support for your subscription business. And it results in several clear benefits. Our solutions are known to provide improved win rates. You also earn significant revenue recovery from chargebacks. And with automation, those advantages come with considerable time and resource savings.

Conclusion

Subscription chargebacks pose a unique challenge for merchants. Recurring services introduce a new payment dynamic. Those new conditions also demand novel strategies. As the subscription model grows in popularity, merchants must prepare for this particular chargeback.

Luckily, there are ways to protect yourself. Several best practices can help you address the issues related to subscription chargebacks. Those who are proactive now can secure their business as consumers demand more and more membership-based services.

Want to know more ways to limit subscription chargebacks? Contact Chargeflow to speak to our representatives.  ‍