What is the real impact of chargebacks and recurring revenue?


Credit card chargebacks cost companies millions of dollars every year. The cost from chargebacks and recurring revenue are especially egregious for companies that rely on subscription services or membership programs – think Lifelock, Amazon’s Prime program, the DollarShave club, even firms that create and sell apps.

Chargebacks take place when a cardholder disputes a merchant charge and a debit is made to the retailer’s account and the issuing bank then charges the retailer a fee for every chargeback received.

The chargeback process was created to protect consumers from fraudulent behavior but the unintended consequences of this protection has resulted in what has become known as “friendly fraud” making it very easy for customers to dispute legitimate charges.

Why do chargebacks happen?

Credit card charges are disputed for a number of reasons. One reason is the cardholder claims that he or she did not make the purchase. Other reasons include lack of satisfaction with a purchase. To dispute a legitimate transaction, the cardholder simply contacts the credit card company and says; “I didn’t do it.”

As mentioned above, this type of fraud puts the burden of proof on the merchant to show that the debit or credit card was used in good faith and authorized by the cardholder. What’s more, based on recent findings, 86 percent of the time, cardholders don’t contact the retailer until after filing a dispute…or not at all!

Chargebacks and Recurring revenue – a big hit

Not only does a merchant with a high ratio of chargebacks lose revenue due to the chargeback, a retailer also may receive additional fines and/or run the risk of losing its payment processing privileges all together.

There are many costs associated with chargebacks. In fact, a recent LexisNexis report estimates that merchants incur a $308 loss for every $100 in fraud losses. Most recurring payment chargebacks are due to friendly fraud, so it’s easy to imagine the considerable potential loss of revenue chargebacks can wreak on the bottom line of a company offering membership or other recurring services and products.

Contesting chargebacks is time consuming

If a membership or subscription service company is going to contest its chargebacks, it will need to be ready to spend considerable man hours on the process.

Call center staff must provide the bank evidence that proves the customer authorized the transaction and that the cardholder received value from the purchase. This is done by providing evidence usually captured in the merchant’s CRM such as:

  • Customer identity (PII data e-mail, address, physical address, name, DOB, etc.)
  • Purchase history & usage information
  • Shipping details
  • Contact history

This isn’t easy, nor is it quick: resolution will take time and sales revenue is withheld from the merchant’s account during the process. What’s more, time spent on these tasks means time is taken away from sales and customer service activities.

The above process pretty much deals with non-recurring payment chargebacks. Contesting recurring payment chargebacks can be much more involved.

Reason codes: the bane of recurring membership providers

Contesting chargebacks on recurring payments can be a particular sticky wicket due to “reason codes” used by Visa, MasterCard, AMEC, PayPal, and others. Reason codes are the “whys” given when consumers cancel a charge. Visa’s Reason Code 41 (cancelled recurring transaction) and with MasterCard’s Reason Code 4841 show up frequently. The cardholder could say he or she:

  • Withdrew permission to charge his or her account.
  • Cancelled the membership fee payment.
  • Cancelled the card’s account.
  • Didn’t expressly renew the subscription/membership
  • And many more

One of the reasons chargebacks tend to occur more often for recurring payments is because it’s just so easy for a consumer to cancel a charge! All an individual has to say is – even after months of receiving the service or product – “I never signed up for this,” and then months of payments are charged back. And the merchant takes a hit on lost revenue and fees.

In addition, because payment processors know how easy and common friendly fraud is, they often require that recurring payments retailers take on high-risk merchant accounts, which cost more than regular accounts.

When it comes to chargebacks and recurring revenue, the best offense is a great defense

To prevent so many recurring payment chargebacks, Matthew Katz, founder and CEO of Verifi, Inc. recommends the following strategies a merchant can employ to prevent recurring payment chargebacks in the first place.

PROVIDE GREAT CUSTOMER SERVICE AND MAKE SURE RETURN POLICIES ARE POSTED CLEARLY. State the return policy several times – both written and verbally, as applicable – as the customer is signing up for the service. Make sure customers can get a hold of your customer service employees quickly and easily because, of those customers who do try to contact the service provider before cancelling; most only initiate the chargeback process if they can’t get a refund or assistance from the retailer. Remember that giving a customer a refund directly is always less expensive than if that individual gets a chargeback.

IF POSSIBLE, GET THE CUSTOMER TO SWIPE THE CARD TO PURCHASE.  It’s always easier to prevent chargebacks when the customer has to swipe to buy – it easily proves that the cardholder is actually using and buying the subscription/membership.

RESPOND ASAP. If you wait to respond to notice of a chargeback in the time allotted, the bank could beat you to it and will quickly process the chargeback.

MAKE SURE TO GET A NEW AUTHORIZATION FOR EVERY BILLING. Always process a monthly subscription/membership payment with a new authorization; never with a forced or voice authorization (the customer can claim these were never authorized and can charge them back and when challenged, the merchant can’t show valid authorization.

ASK FOR CVV/CVC CODES. Doing so when ordering something online helps make sure that the person using the card has it in hand and hasn’t stolen an account number.

SEND THE CARDHOLDER AN E-MAIL PRIOR TO CHARGING THE SUBSCRIPTION. Doing so lets the customer cancel or opt out of a subscription/membership before being charged. It reminds the individual that he authorized the purchase, thus decreasing the chance that he won’t recognize it on his billing statement. This also allows the company to remind the customer of the recurring payment.

USE AUTOMATIC BILLING UPDATERS. Visa and MasterCard offer this product and it allows merchants to get seamless updates of “card on file” information.

These are just a few chargeback mitigation strategies. For more information about recurring revenue and chargebacks, contact Verifi to learn other strategies for maximizing subscriber revenue.

Verifi is a full-service provider of global electronic payment and risk management solutions for card-not-present (CNP) merchants. We believe that there is no silver bullet to combat fraud or mitigate all operational risks to an online business. Knowing this, we have built our chargeback management platform around a holistic approach to addressing each business’ unique circumstances by providing a multi-layered solution. Our products and services enable clients to gain control and transparency into the entire payment process – from global payment acceptance and processing, order screening, revenue recovery and maximization to fraud and risk management and enterprise payment security.