Subscription Businesses Aim Tech at Credit Card Chargebacks and Churn

subscriptions, chargebacks

Subscription merchants are turning to tech to help reduce credit card chargebacks that eat up revenue and increase churn.

The latest “Subscription Commerce Conversion Index: Subscribers Seek Affordability And Convenience,” a PYMNTS and sticky.io collaboration, found that 22% of subscribers think it is very or extremely likely they will cut one or more subscriptions in the next year, with 21% more saying they are somewhat likely to drop subscriptions. Time is short to get this right.

Discussing the predicament with PYMNTS, sticky.io Senior Product Manager and Integration Specialist Logan Hug elaborated on common problems subscription merchants encounter and how to avoid them. Topping the list are chargebacks that come in a few different forms.

Noting that when consumers click “subscribe” they’re granting merchants authorization to process transactions on their behalf on a recurring basis, Hug said, “The nature of this kind of relationship and relinquishing the payment processing responsibility to the merchant inherently leads to naturally increased chargeback rates, and more specifically, friendly fraud.”

That creates cascading problems, from higher customer acquisition costs to churn to a merchant having transacting privileges suspended by banks. Transparency helps avoid all this.

It starts with a clearly articulated billing policy.

“The consumer needs to know exactly what they’re opting into, when the payments will process and what products they would expect to receive,” Hug said. “All of that must be clear up front. They need to know what’s going to happen downstream after they click that submit button.”

Clear payment descriptors are a key strategy. When subscribers don’t recognize descriptors on their bank statements, it can lead to chargebacks, even from those who don’t wish to cancel. Platforms like sticky.io handle this with dynamic descriptors. Some gateways also “allow for you to pass in a dynamic value based on the relevance of the transaction to your business,” he said.

Together with clear descriptors are notifications, and Hug said perhaps the most important notification a merchant can send is right before the recurring payment happens. “In advance of the rebill, they’re going to have something in their inbox making them aware that a billing event is upcoming.” That means no surprises on statements — and fewer chargebacks.

Get the report: Subscription Commerce Conversion Index: Subscribers Seek Affordability And Convenience

The Subscription Merchant Toolkit

Consumer control over the subscription is another cornerstone strategy, including making it easy to cancel. Many services make canceling a chore, which is a mistake because it discourages people from returning down the line when they’re ready to reengage.

Returns are yet another area where subscription merchants have a choice: make it easy and have a shot at winning back the subscriber, or make it difficult, almost assuring they won’t return.

“We had a client that included the return label in the original shipment so if you don’t like it, put it right back in the same box, slap the label on it, and ship it back to me,” Hug said. “That led, believe it or not, to a decrease in their return rate.”

Hug said events like chargebacks are a form of churn, and that’s valuable business data. “That’s kind of the silver lining is that although these are having a negative impact on your business, it’s also informing you as a business owner as to what you can change to improve your business.”

Another good idea is enrolling in an alert service, which he called “basically a real-time notification to the merchant before a chargeback occurs. It’s a notification that a chargeback is imminent, not that it’s already been filed and executed upon.”

At that point, the merchant can issue a refund or fight it, but the latter risks losing a subscriber and eating chargeback fees that can be headed off before they ever reach that stage.

He added that merchants can dispute chargeback claims by providing evidence to the bank that they have upheld their end of the transaction. This can help reduce associated costs from chargebacks when the bank agrees with the merchant.

Major card networks like Mastercard and Visa have standardized chargeback reason codes, so in the event of a chargeback or even a cancelation, it’s useful information for the business.

More like this: Subscription Merchants Use AI to Create New Bundles, Reduce Customer Churn

Automate for Problems, Focus on Solutions

The most frustrating kind of churn is involuntary because it often happens with those who have no wish to cancel; plus, it’s preventable.

Stored card credentials can be declined for any number of reasons, from insufficient funds, expired or canceled credit cards, or the consumer moving to a new billing address and not updating the merchant. Platforms and automation are effective tools to prevent this.

Hug said, “there are a couple of critical features within your subscription platform that I would highly recommend using. One would be account updater services. Account updater automatically updates subscriber credit card information in between billing cycles.”

Also useful is dunning. “Dunning is retrying that payment at a later date and time. What I would recommend is a machine learning version of dunning because this can be very complicated,” he said. “If you do not have any form of dunning on a subscription when a decline occurs, you’re effectively canceling the subscription.”

What’s important in all these situations is using automation and gathering data on chargebacks, declines and related events.

“Instead of worrying about all of these declines from insufficient funds, expired cards, and whatever it might technically be, you could shift your focus to why are consumers canceling subscriptions intentionally,” Hug said. “You can focus on the voluntary churn, and you’ve automated the involuntary churn so that you don’t have to worry about it.”