Are Recurring Billing Chargebacks Inevitable?
Recurring billing chargebacks are an unfortunate side effect for businesses using a recurring transaction billing model, such as a subscription service. This model gained popularity in recent years, and with good reason: it offers considerable advantages for both consumers and merchants. The system proved to work well…until it didn’t. That’s when the recurring transaction chargebacks show up.
Processing recurring payments increases your susceptibility to chargebacks. In fact, just accepting recurring transactions is enough cause for acquiring banks and processors to label you as “high-risk.” Even so, with proper management techniques, you can keep recurring billing chargebacks to a minimum.
What Are Recurring Transaction Chargebacks?
Recurring billing is among the most consistently profitable business models in the digital economy. The customer is electronically notified at a certain point during each billing cycle, after which a payment is automatically made via bank transfer or credit card charge. For consumers, these recurring transactions make products more affordable and easy to purchase. For their part, merchants enjoy a predictable cash flow and timely payments.
Because of the automated nature of the process, however, it’s easy for merchants and/or customers to forget the subscription is active. That can lead to double-billing, missed billing, or subscriptions not being canceled in a timely manner. In turn, any of those things could easily result in a canceled recurring transaction chargeback (Reason Code 13.2 for Visa and Reason Code 4843 for Mastercard).
Mastercard Changes: Navigating the Chargeback Rule Changes in 2019 and Beyond
Like Visa with 2018’s VCR, Mastercard is implementing sweeping changes to its chargeback and dispute systems. Download our whitepaper to learn what changes are coming, and how to prepare.Free Download
In simple terms, a recurring billing chargeback could happen if you process a recurring transaction, even though the transaction should’ve been canceled. There are several circumstances that could precede this:
- You don’t receive a cancellation request.
- You receive the cancellation request too late to interrupt the automatic billing.
- The credit card charge is higher than what the cardholder originally agreed to.
- You didn’t notify the cardholder of the charge beforehand.
- The transaction was unauthorized (fraud).
- The cardholder’s credit card account was closed.
- The cardholder engages in friendly fraud by filing an illegitimate chargeback.
Believe it or not, out of all the above reasons, friendly fraud accounts for a significant portion of recurring billing chargebacks. This can be the result of a customer’s innocent mistake or come from dishonest players attempting to get something for free.
Innocent Mistake…or Deliberate Scheme?
As we mentioned, purchasing items through a subscription billing model is highly convenient for consumers. You may offer physical products delivered on a set schedule, ongoing entertainment streams, software, or even access to a gaming or dating service. In any case, a recurring billing option means the customer simply purchases the subscription once and is then billed automatically thereafter for continuing service.
Unfortunately, this “set it and forget it” mentality becomes problematic when subscribers forget they made the purchase altogether. Seeing a credit card charge for a subscription they don’t remember ordering leads them to call the bank and file a chargeback.
In other instances, customers may remember buying a subscription they no longer need, but forget to actually cancel it (at least until the bill comes). Feeling they will get push-back from the merchant, these subscribers may also default to calling the bank.
In some cases, a buyer could even use chargebacks to steal goods and services. The virtual version of the “five-finger discount,” cyber shoplifting can be even more painful than standard theft.
In these cases, customers understand that they have no legitimate claim for a refund, but file a chargeback anyway. This could be premeditated; for instance, the cardholder may subscribe to a service to get an initial “starter pack” of products, with the intent to file a chargeback once the merchandise is received.
Or, the situation may come about more organically. For example, a customer may subscribe to an online dating service but enter into a personal relationship a few days later. Despite agreeing that the initial payment was non-refundable, the subscriber proceeds to file a chargeback, reasoning that it is unfair to pay for three months after using the service less than a week.
New Regulations Might Help
Card networks have implemented some protections for merchants who are victims of recurring transaction chargebacks. In most cases, subscribers only have 120 days from the date of the original transaction to request a chargeback.
There are also some new regulations from card networks that may help. As of this year, Visa is updating rules related to recurring transactions. These new requirements, created specifically for merchants that offer free trials or introductory offers as part of an ongoing subscription service, mean the merchant must:
- Gain express consent from the customer
- Provide a copy of the terms and conditions to the cardholder at the time of subscription
- Provide more detailed transaction receipts
- Designate the charge as a “Free Trial” (on the cardholder statement and other locations)
- Simplify cancelations
In addition to these merchant requirements, Visa is also expanding dispute (chargeback) rights in specific situations. See our posts on Visa’s free trial billing rules, and on Mastercard negative option billing, for more details.
Cyber Shoplifting Could Cost You!
Click to learn how our no-obligation ROI analysis could save your revenue
Disputing Recurring Transaction Chargebacks
It is possible to dispute a recurring transaction chargeback—if the case meets the card networks’ particular conditions:
|The merchant can prove the transaction was not part of a recurring payment plan. For example, it was an installment billing transaction instead.||The merchant can provide documentation that proves the services were not canceled.|
|The cardholder failed to meet the cancelation terms of the signed contract.||The merchant can provide documentation that proves neither the acquiring bank nor the merchant was notified that the account was closed.|
|The merchant can prove the services were provided and used after the cancelation date.||Outside of Europe, the merchant also provides documentation proving the transaction was not previously charged back.|
|The cardholder agreed to clearly defined terms and conditions.||The merchant can prove the services were provided and used after the cancelation date.|
|The cardholder agreed to clearly defined terms and conditions.|
Again, there are also specific regulations regarding merchants who offer free trial periods (see the links above to learn more).
Preventing Recurring Transaction Chargebacks
While some recurring billing chargebacks may be disputable, the process takes time, energy, and money. Plus, you still get hit with nonrefundable chargeback fees even if you win. It makes more sense to focus on preventing these chargebacks where possible, and the best way to do that is to adhere to business best practices:
- Before completing the initial purchase, make sure the cardholder knows what is involved in the recurring payment process. Ask the cardholder to agree to the terms of service by signing or clicking “accept.”
- Print the words “Recurring Transaction” on the sales receipt, near the transaction date and amount that will be billed.
- Process the first recurring payment like a normal CNP transaction: send AVS information, the card security code, and the expiration date along with the authorization request.
- Disclose all additional fees and restrictions, including any termination fees.
- If you’re offering a free trial, make it very clear upfront. Tell users the exact length of the free trial; send them a notice when the end of the trial is approaching.
- Use all the complimentary tools at your disposal, including Visa Account Updater. VAU shares new account information after updates have been made, to help prevent processing with outdated information.
- If the recurring transaction amount will deviate from the norm, let the cardholder know—in writing—at least 10 business days before the transaction is processed.
- Engage in customer service TLC. Communicate regularly with the cardholder to keep the business and brand fresh in the customer’s memory.
- Offer a simple and customer-friendly cancelation policy. Grant cancelation or termination requests promptly.
- Share contact information in various locations (the website, emails, marketing materials, shipping receipts, etc.). Make sure it’s easier for the consumer to contact YOU than to call the bank.
- Finally, if you DO receive a canceled recurring billing chargeback, act on it immediately. You’ll only have a limited timeframe, so go ahead and respond ASAP.
Can You Manage Recurring Transaction Chargebacks?
Subscription payment plans can be a boon for all parties. They make for happier customers while ensuring a steady revenue stream. However, recurring transactions only increase revenue if risk is minimized.
Merchants are trying to cope with an exponential rise in friendly fraud cases, including more and more illegitimate recurring transaction chargebacks. The situation underlines the need for a multi-tiered chargeback management strategy that can address this threat from all angles.
If you’re experiencing problems with recurring billing chargebacks, let us know. Chargebacks911® offers services specifically designed to address your business’s needs. We can help ensure your recurring transactions boost profits and position you for the future.