Recurring Billing Chargebacks

June 17, 2022 | 9 min read

recurring billing chargebacks

Respond to & Prevent Recurring Billing Chargebacks to Defend Your Bottom Line

Subscriptions can be a win-win for merchants and cardholders alike.

As a merchant, you enjoy a steady revenue stream and predictable sales, letting you avoid a backstock of unsold goods and services. At the same time, your customers gain access to the things they want without paying exorbitant up-front costs.

That said, the subscription model isn’t all sunshine and rainbows. It can have unforeseen complications. Take recurring billing chargebacks, for example.

In this article, we’ll discuss what recurring billing chargebacks are and why they happen. We’ll also explain why they are so common, what the card networks are doing to help, and how you can fight back and win.

What are Recurring Billing Chargebacks?

The recurring billing model is among the most consistently profitable business strategies 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.

However, because of the automated nature of the process, it’s easy for customers to forget the subscription is active. That can lead to subscriptions not being canceled on time. Other issues like double-billing or missed billing cycles may also occur. Any of those things could easily result in a recurring billing chargeback (Reason Code 13.2 for Visa and Reason Code 4850 for Mastercard).

Processing recurring payments increases your susceptibility to chargebacks. Accepting recurring transactions is enough cause for acquiring banks and processors to label you as a “high-risk” merchant.

Why Do Recurring Billing Chargebacks Happen?

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. As a tradeoff, though, it made merchants more susceptible to chargebacks.

In simple terms, a recurring billing chargeback could happen if you process a recurring transaction, even though the transaction should’ve been canceled. Several circumstances 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 the cardholder originally agreed to
  • You didn’t notify the cardholder of the charge beforehand
  • The transaction was unauthorized (i.e. fraud)
  • The cardholder’s credit card account was closed

Despite all the above reasons, the truth is that friendly fraud accounts for a significant portion of recurring billing and subscription chargebacks. This can result from a customer’s innocent mistake. Or, it may happen when dishonest players attempt to “get something for free.”

Why Would Buyers Abuse Recurring Billing Chargebacks?

As 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.

There are many reasons why this arrangement can lead to friendly fraud chargebacks. For example:

Customer Forgot About the Charge

Unfortunately, the “set it and forget it” mentality becomes problematic when subscribers forget they made the purchase. The buyer might see a credit card charge for a purchase they don’t recognize, or which they don’t remember authorizing. This will lead them to call the bank and file a chargeback.

Customer Forgot to Cancel on Time

In other instances, customers may remember buying a subscription they no longer need but forget to cancel it (at least until the bill comes). The buyer believes they will get push-back from the merchant if they try to cancel through proper channels. So, the subscriber defaults to calling the bank.

The Customer Believes They Shouldn't Have to Pay

A customer may subscribe to an online dating service, but then meet someone a few days later. The subscriber agreed during enrollment that their initial payment was non-refundable, but files a chargeback anyway. The buyer reasons that it is unfair to pay for three months after using the service for less than a week, even though they agreed to those terms up front.

The Buyer is Deliberately Abusing the Process

In some cases, a buyer could even use chargebacks to steal goods and services in a premeditated manner. 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. The virtual version of the “five-finger discount,” called cyber shoplifting, can be even more painful than common theft.

Stop chargebacks…regardless of their source.


Industry Changes to Prevent Recurring Billing Chargebacks

Card networks have implemented some restrictions for recurring transaction chargebacks. For instance, subscribers only have 120 days from the date of the original transaction to request a chargeback in most cases. This is the same as with any other chargeback scenario.

There are also some new regulations from card networks that may help. Back in 2020, Visa updated their 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 now:

  • 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 cancellations

These requirements put more responsibility on your shoulders. However, they only serve to enshrine best practices as rules.

In addition to these merchant requirements, Visa also expanded dispute (chargeback) rights in specific situations. Mastercard took similar action around the same time.

Merchants Can Fight Back

Even if you take the above steps, there’s a good chance that the occasional recurring billing chargeback will still slip past your defenses. We have good news, though: it’s still possible to fight a recurring transaction chargeback through representment.

Of course, a case must meet the card networks’ particular conditions before you can fight it:

Recurring Billing Chargebacks Recurring Billing Chargebacks
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).

11 Tips to Prevent Recurring Transaction Chargebacks

Some recurring billing chargebacks may be disputable. The process takes time, energy, and money, though. You still get hit with non-refundable chargeback fees even if you win.

It makes more sense to focus on preventing these chargebacks where possible. The best way to do that is to adhere to business best practices. The following tips can help you optimize processes and prevent disputes on recurring transactions.

  • Before completing the initial purchase, ensure 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 standard 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 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.

Chargeback Management Could Be the Answer

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 you can minimize risk.

You’re facing an exponential rise in friendly fraud cases, including 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 manage your business’s needs. We can help ensure your recurring transactions boost profits and position you for the future.

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