How to Minimize Chargebacks For Subscription Payment Processing

Chargebacks can be parasitic to your subscription revenues, forcing you to not only refund payments, but pay steep fines to do so. In worst

Chargebacks can be parasitic to your subscription revenues, forcing you to not only refund payments but pay steep fines to do so. In worst-case scenarios, your merchant account can be frozen, making it impossible to do business. Read on to discover the four ways chargebacks can affect your bottom line, how to handle the three main types of chargebacks when you should contest a chargeback, and when you don’t need to worry.

What are Chargebacks?

Chargebacks occur when a customer directly calls their credit card company, such as MasterCard, Visa, American Express, or Discover, to contest a charge. The credit card company then contacts your payment processor to initiate a refund. If a customer calls you directly to cancel a purchase/subscription or request a refund, that is not a chargeback.

Therefore, credit card companies consider chargebacks to be an indication of merchant malfeasance. However, they can also be indications of fraudulent activity by identity thieves (more on that below).

Chargebacks can be issued for credit, debit or pre-paid cards. They are not issued for PayPal accounts. Banks can stop-payment on a check, e-check, or line of credit, but this is not considered a chargeback.

4 Ways Chargebacks Affect Your Bottom Line

Chargebacks can affect your bottom line in four major ways:

  1. Admin Costs: For each chargeback, not only do you lose the money you thought you had, you also entail a fee from your payment processor for each chargeback. That fee can be as steep as $25 per chargeback. In addition to the fine, credit card companies can charge you a transactional fee. Plus, you’ll have to waste one of your employees valuable time by having him respond in writing to each chargeback notice.
  2. Lost Opportunities to Save an Account: If a subscriber calls you directly to cancel or receive a refund, a skilled customer service team can “save” up to 25% of these cancellations or refunds with special offers or personalized care that doesn’t harm your reputation. In today’s hyper-connected world, you want to make sure your cancels and refunds are satisfied customers as well.
  3. Account Flagging: Chargebacks are tracked for each type of credit card. Therefore, you can be flagged by Visa but not by American Express. Also, if you have multiple merchant accounts with a payment processor, chargebacks are tracked by each card for each account. So if one of your sites has a high chargeback rate, so long as you have separate merchant accounts for each site, your other sites/accounts should not be affected or flagged.If you receive a high number of chargebacks, credit card companies will usually flag your account as possible fraudulent, especially if you are selling virtual products and services. A flagged account usually gets fined and has higher processing fees going forward. In extreme cases, your merchant account can be frozen.

    What constitutes a “high” number of chargebacks can vary by credit card company or payment processor:

    • Visa: To be deemed a possible fraudulent merchant by Visa, you need 100 individual chargebacks in a month, and those 100 chargebacks should be 1% of more of your total transactions. If you have low volume–anything less than 10,000 transactions–you could hit the 1% rate and still be OK. Your chargeback rate is calculated by dividing the total number of chargebacks in a month by the total number of transactions in the same month.
    • Discover: Same process as Visa.
    • MasterCard: 50 individual chargebacks in a month will get you flagged by MasterCard. They don’t seem to have a 1% requirement like Visa and Discover, but they do take volume into account as well. MasterCard calculates a chargeback rate as the total number of chargebacks in a month divided by the total number of transactions in the previous month.
    • American Express: Has a complex algorithm based on volume of transactions and types of charges. It’s hard to get a specific number from them, but it’s estimated to be around 3%.
  4. Mergers & Acquisitions: If you are looking to sell your site or company in the future, your chargeback rate will be considered as part of the financial health of your company. This is a good reason to keep your chargeback rate under 1% if possible, says Paul Larsen, a leading payment processing consultant.

How to Handle the 3 Types of Chargebacks

When you receive notification of a chargeback by postal mail, the letter will indicate why the chargeback was requested. These reasons fall into three main categories, each of which is avoidable.

#1. Technical:

These types of chargebacks usually occur because of a software or clerical error, such as duplicate billing, incorrect amount billed, or not issuing a refund.

This is a stupid way to lose money. Make sure your technology is working smoothly and that your accounts receivable team has clear procedures for processing and auditing your revenues, as well as clear ways of handling refunds and cancellations.

#2. Customer Confusion:

Customer confusion is often a reason for needless chargebacks. Here are some of the most common reasons for confusion and solutions to resolve them:

    1. Customer claims they never received the goods purchased.
      If you offer a physical product, proof of delivery is usually enough to contest this type of chargeback, but it is a time-intensive task and you may want to forego the process. For online goods and services, you have little recourse; it’s best to refund the customer unless he/she does it on a repetitive basis, in which case you should contest. However, if you see someone is repeatedly buying a subscription and then cancelling, you can work with your tech systems to prevent them from making any future purchases.
    2. Customers feel they can’t access the online product or service.
      The #1 way to resolve this complaint is to email your subscribers their ID and password as soon as they sign up. You should also monitor how long it takes the usual subscriber to use the site, and if a new subscriber hasn’t used the site in that amount of time (maybe a day or week), email them their ID and password again.
    3. Customer is dissatisfied with product or service.
      Never use misleading marketing or advertising tactics that make subscribers feel like they’ve been victims of a bait and switch. You can also consider offering a money-back guarantee. Always make it easy to cancel (a cancellation is just lost revenue; a chargeback is lost revenue and a fine).Also, new subscribers are less likely to be confused if they are given a hard offer and no free trial. If you find that a lot of your chargebacks are due to customer confusion, consider changing your free trial to a non-refundable$1 trial. (See our Case Study about Subscription Site Insider‘s free trial for more information on this technique.) However, according to Larsen, “Visa and MasterCard have recently taken a strong position against $1 pre-authorizations,” which are refundable $1 trials. They have mandated the migration to $0 pre-authorizations, and there’s a nickel penalty for every non-$0 pre-authorization (called “Misuse of Authorization Fee”). Expect that fee to continue to rise until merchants convert to $0 pre-authorizations.

      If you see that a lot of chargebacks are coming from one affiliate, contact that affiliate immediately to see how they are presenting your product or services. If the high chargeback rate continues, end your affiliate agreement and refund all the charges made through that site.

    4. Customer can’t get in touch with a company to cancel a subscription (or they’re too lazy to do so).
      Credit card companies are supposed to check to make sure customer have requested a cancellation or refund before initiating a chargeback, but customers sometimes lie. Either way,  you should follow these best practices:

      • Set up your Merchant Account with your payment processor so that the charge line has the name of your site (not your payment processer or parent company) and a phone number. For example, our parent company Anne Holland Ventures, Inc. has separate merchant accounts for each of our publications. When a customer buys a subscription to our sister site, WhichTestWon.com, his credit card statement will read “WhichTestWon 401-354-7555.”
      • Make sure a telephone number is listed on your site. Also, make sure someone answers that number, especially on the weekends and evenings, as that is when most people are reviewing their household bills. (A lot of times someone will call because their spouse doesn’t know they made the charge. Having a live person to resolve this will go a long way.)
      • Create a “Manage Your Account” section on your site so people can cancel without calling.
      • Send a notification to customer before renewal so that they know they’re going to be renewed and can cancel instead of issuing a chargeback. (Note that this last tip can lead to an increase in cancellations which otherwise would have continued to recur, so balance the risks and costs carefully).

#3. Fraud:

These types of chargebacks occur when a consumer tells their credit card company that they didn’t authorize the charge. This often occurs because the consumer is the victim of identity theft.

To prevent fraudulent activity on your site, require customers to enter the CVV code on their card (the 3-digit number on the back of Visa and MC cards, and the 4-digit number on the front of an Amex card). Also require they enter their billing address for verification. You should also be using an encrypted and secure server for all payment processing.

However, even if you follow all these best practices, you might still receive chargebacks due to fraud. That’s because of a technique called “carding” used by identity thieves, to which subscription sites are particularly susceptible. The thief looks to charge an innocuous amount on a stolen card to see if the card has been cancelled yet or not. Since the thief doesn’t need a physical product, just real-time processing, web site subscriptions and charitable donations are often used for carding purposes.

Some payment processors are aware of this technique. But one payment processor also told us that one merchant went from one to two chargebacks a month to 400 in one month because his site became known as a “cardable” site.

If you see these types of chargebacks dramatically on the rise for your site, upgrade your fraud setting instantly. If the problem still exists, cut off the source from which they’re coming, such as an affiliate or a certain country. The absolute last resort is to delay your credit card processing by one to two hours or even a day. That means your new subscribers won’t have instant access, but it will keep you in good standing with your payment processors — which can keep you in business. Consider sending new subscribers onboarding materials during the delay, such as a welcome video and/or personal phone call.

Getting Back in Good Standing

If you are flagged for too many chargebacks, your payment processor will usually call you to help you employ more of the best practices mentioned above. They should also review the types of chargebacks you’re receiving (Confusion v. Fraud), where they’re coming from (one IP address v. many) and your transactional volume.

Individual card issuers also have programs. For example, Visa issues a one month warning. If you continue to have high chargebacks, they will enter you into a “rehab” program and eventually begin to fine you. They may even terminate your account. MasterCard, on the other hand, will fine you right away and continue to fine you, not doing much to get you back in good standing nor ending your account privileges.

Should You Contest a Chargeback?

Every merchant has the right to contest a chargeback. If you’re sending something in the mail, and have proof of delivery, you will have a stronger case than if you have a virtual product. But it takes time to contest. And, as Larsen states, very little is to be gained by doing so since the loss of goodwill can hurt your reputation tremendously, especially in the online environment, where blogs and social media document customer dissatisfaction instantaneously and permanently.

Overall, prevention, not retaliation, will serve you best in reducing chargebacks.

To contest a chargeback you will need to gather all documentary evidence — such as proof of delivery, images of customer account set-up, and subscriber access logins. You’ll also need to do a screen capture of the payment authorization screens for the transaction in question. Contact your payment processor if you need guidance on how to access these screens within your particular system.

Once you have everything you can think of which might help you prove your case, complete the chargeback notice form which arrived in the mail. Mail or fax it back to the company processing your chargebacks (it may be a third-party vendor used by your payment processing provider). Frequently by the time the letter arrives at your office, there may only be a day or two left in the challenge window, so make sure you have a time-responsive system in place to deal with all chargebacks.

Processing a Chargeback

If you’re not contesting a chargeback, your payment processing will automate the deductions from your merchant account. Usually, refunds are given right away and fees and transactional costs are deducted on a monthly basis.

You should call your payment processor to find out how much they charge per chargeback and how much the credit cards you accept charge as a transactional fee. Also, you’ll want to watch your merchant account carefully and make sure there’s enough of a prudent reserve in it to cover these fees on a monthly basis.

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