Subscription services have boomed in recent years thanks to the millennial generation but have been accompanied by a problem with friendly fraud. Some 92 percent of millennials possessed active subscriptions in 2017, according to a study by merchant acquirer Vantiv. The appeal of the subscription model to millennials and merchants alike makes sense: millennials get the convenience of regular service with a “set it and forget it” payment approach and merchants get stable, regular cash flow and strong customer retention. However, the likelihood that the customer forgets they have a subscription also means an increased probability that they will file a chargeback when they see the bill.
The problem of customer forgetfulness can be worsened by longer subscription periods. For example, an annual subscription means that when the service comes up for renewal the subscriber has had a year to forget they bought the subscription in the first place. Subscribers may even intend to cancel their subscription before their next billing date, but they forget in the interim. The bill received for the new subscription period then becomes a reminder that they meant to cancel and a push to request a chargeback.
Merchant pain points specific to subscription chargebacks also exist. For example, there is no proration for a chargeback. The customer can be significantly into their subscription period before requesting a chargeback. As a result, the merchant faces not only chargeback fees but also the expenses related to the product or services already consumed.
Another issue with subscriptions is the use of free trials that auto-convert to paid subscriptions after a specific timeframe. Even if you’ve asked for subscribers’ credit card details during the free trial sign up it doesn’t mean they are aware that they will automatically be moved to a paid plan after the trial ends. This confusion can quickly escalate into a chargeback request.
All of the above problems with the subscription model mean that acquirers typically consider merchants that operate based on recurring payments to be high-risk. Subscription-based merchants pay higher transaction processing fees as a result. They are also at a greater risk for entering the credit card networks’ chargeback monitoring programs, which have increased chargeback fees.
There are five steps that merchants that utilize recurring payments can take to lower the risk of friendly fraud chargebacks:
The summary gives the customer the opportunity to confirm all the above information, and their confirmation of these pieces of information can help protect you if a chargeback is filed.
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