How Recurring Payments Lead to Chargeback Fraud

The digital revolution has brought about increased growth opportunities. However, with the enhanced profitability has come an increase of deceptive behaviours in the form of chargeback fraud.

One of the greatest profit-boosting tools has also become a friendly fraud liability. Recurring payments are both a boon and bane for card-not-present merchants.

Recurring Payments Explained

If customers agree to a recurring payment schedule, they expect to pay for products or services at predetermined, specified times. Examples of recurring payments include things like gym memberships or cable TV.

Usually, both merchants and consumers appreciate recurring payments. Customers like that recurring payments make products and services more affordable; merchants enjoy the predictive profits.

There are two very specific types of recurring payments: instalment billing and negative option billing.

Instalment payments are made for a short, fixed period of time. For example, five easy payments of €5.99. Because the payments are smaller, the products or services are more affordable.

Negative option payments are recurring payments that will continue until services are cancelled. For example, an auto-renew magazine subscription.

While all types of recurring payments are usually beneficial for everyone involved, they do open the door for chargeback fraud.

When Recurring Payments Lead to Friendly Fraud

Today’s busy consumers are always in search of a no-hassle solution to their problems. When it comes to recurring payments, filing a chargeback might seem easier than terminating services.

A customer might reach out to the bank, claiming the merchant charged the card without authorisation, increased prices without warning, or failed to honour a cancellation request. Usually these claims are false; the customer wanted to get something for free.

Another possibility is the fact you didn’t properly handle the recurring transaction and the chargeback is a result of merchant error.

Other times, the consumer might not recognise the transaction on their monthly credit card statement. Filing a chargeback might actually be a mistake.

Regardless of the motive behind the consumer’s actions, chargebacks are a threat to a business’s profits and sustainability.

How to Prevent Chargebacks for Recurring Payments

Here are nine steps a merchant can take to reduce chargebacks resulting from recurring payments.

  1. Make sure your marketing is honest and truthful. Be ready to substantiate any performance claims (guaranteed results!) and testimonials. Don’t unnecessarily imply a sense of urgency (limited time offer).
  2. Write through, yet easy to understand, terms and conditions. Don’t try to hide these on the payment page by using strange colours or smaller font sizes. Before processing the transaction, make sure the customer has read the terms and conditions. Include an “accept” button for customers to click. An even better option is to use an electronic signature page.
  3. Provide an easy out. Don’t make customers pay a cancellation fee.
  4. Check the billing descriptor. The billing descriptor is the transaction’s written explanation that appears on the customer’s credit card statement. Is it easy for the customer to associate this purchase with your company?
  5. A merchant should communicate regularly with customers. Keep your business on their radar. Build a relationship with them and they are less likely to lash out at you with a chargeback.
  6. If a lot of time passes between recurring payments (three months, a year), send a reminder before charging the card again. If necessary, give them the chance to cancel before the transaction is processes. Don’t spring a surprise charge on them!
  7. Share your contact information everywhere the customer would expect to find it—your website, email signature, print publications, shipping receipts, and anywhere else you can think of!
  8. If a customer desires a cancellation, fulfil the request immediately. If you continue to charge the card after the request has been made, you are unnecessarily setting yourself up for a chargeback. Let the customer know of the action you’ve taken and that it might take a few days for the request to be processed by the bank.
  9. If the customer desires a refund, fulfil the request immediately. Losing profits through a refund is a drag, but better than losing them to a chargeback. Again, keep the customer in the loop. Educate them about when the refund will be applied to their account.

Recurring payments have the ability to both enhance and damage your business. Take proper precautions to prevent chargebacks and these profit-boosting payment plans will lead to your success, not demise.

If you’d like additional tips for managing recurring payments, let us know. We’ll take a look at your current efforts and offer a customised plan to reduce and dispute chargebacks.