How to prevent and fight auto-renewal chargebacks

Oct 17, 2019, 9:09:00 AM

Chargebacks Blog

Subscription-based services depend on auto-renewal for forecasting and continued revenue. However, when customers don't know that they're being charged on a recurring basis, they are more likely to initiate a chargeback for a refund of their money.
In 2017, $31 million was lost due to chargebacks, and even more in fees. While customers should only file chargebacks if they cannot resolve the issue with the merchant, 80% were filed because the consumer didn't have time to request a refund from the seller. Understandably, B2B and B2C companies hate chargebacks because of its financial cost, but also because of its reputational cost. Businesses can begin to develop a poor reputation with banks/financial institutions, as well as with customers who rapidly take to social media to air grievances and are quick to leave one-star reviews online.

Most companies just accept chargebacks because they feel ill-equipped to contest them. Fighting chargebacks requires excellent recordkeeping, which most businesses lack. Companies like AdoreMe, Fabletics, and Bumble have all experienced massive amounts of litigation due to chargebacks. And while there is no fool-proof way to prevent them, there are certain strategies you can implement to reduce the likelihood significantly.

What is a chargeback?

A chargeback is the process by which a bank returns money to a cardholder who has filed a dispute against a merchant. Chargebacks are a common way cardholders to get back their money from merchants when they received faulty or wrongly-advertised product, in the event of fraudulent charges, or if they simply want a refund. Chargeback fraud, also known as “friendly fraud,” occurs when a cardholder initiates a credit card chargeback despite intentionally purchasing a product.

The true cost of chargebacks is wild. Not only do issuing banks refund the cost of the item to the cardholder, but the merchant also spends millions on fees. Further, past a certain threshold, chargeback fees increase, or issuing financial institutions can prevent the merchant from transacting. In fact, every $1 in chargebacks actually cost $2.40 in associated fees, effectively more than doubling its financial impact.

Despite the cost, businesses don't often fight chargebacks because they lack necessary documentation to prove that a purchase was intentionally made. The chargeback process is kinder to cardholders than to merchants, giving the latter between one to two weeks to file the paperwork necessary to contest the chargeback. Even more, businesses don't have the time or employ the technology needed to strategize around which disputes to contest and which to leave be. But there with better recordkeeping and sufficient conspicuous notice, you can prevent and fight credit card chargebacks more efficiently.

How chargebacks work

The chargeback process is a super complex one that is skewed in favor of the consumer rather than the merchant. After a cardholder files a chargeback claim with their bank, the merchant can either accept or reject it.

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When merchants accept the chargeback, the money is refunded and the merchant pays the chargeback fee. If a merchant decides to contest the chargeback, however, then the merchant often has less than 2 weeks to review the claim, gather evidence, and present their documents to the acquiring bank.

There are fare more steps involved with varying levels of complexity, and unless a business keeps excellent records that they can pull up with a moment's notice, it's hard to fight chargebacks.

How to prevent chargebacks

Fighting chargebacks may be difficult, but not impossible. When a customer uses your subscription-based service, it is important that they know they are signing up for monthly payments. This seems like it goes without saying, but you may be surprised by the number of companies that don't notify customers of recurring charges.

Conspicuous notice

Like any contract you enter, both parties need to be clear on the terms of engagement, otherwise the likelihood that one party will bring a dispute against another increases significantly. This has been the case for Bumble, Fablethics, AdoreMe, and a host of other subscription-based services that don't notify customers when they will receive a recurring charge. These companies often failed to provide conspicuous notice of auto-renewal, which left customers confused about charges to their account and eager to initiate chargebacks. Transparency goes a long way in helping merchants keep their money.

Including language about your auto-renewal in the text below/near your sign up or check out button is another conspicuous way to notify customers that will be charged multiple times. This way, before they complete their purchase and get your hopes up, they have a chance to reconsider, or at least become aware of your recurring charges.

Agreement Design

Some companies include notice of a recurring charge inside their Terms of Use, which are hyperlinked near the sign-up/check-out buttons. However, most consumers don't bother reading the Terms before making a purchase, and this is therefore not enough to provide notice of recurring charges.

Rather than hide crucial terms about your auto-renewal policy in your clickwrap Terms of Service (which may or may not be enforceable), make the auto-renewal clause its own clickwrap. That is, during the sign-up or check-out flow, in addition to having users accept your Terms and Conditions and Privacy Policy, include another clickwrap agreement which users check to indicate that they understand they are signing up for a recurring fee.

Hiding information about your auto-renewal policy can end up costing even more in the long run. Back in 2017, AdoreMe was ordered by the FTC to pay back $1.3 million to customers affected by their shady chargeback practices.

How to fight chargebacks

Though implementing these changes can help reduce chargebacks significantly, there is no way to get rid of them completely, especially because of the prevalence of “friendly fraud.” But rather than just accepting all the chargebacks disputes brought against you, be prepared to fight them via representment with excellent recordkeeping.

Representment is the process of contesting a chargeback. In order to successfully dispute a chargeback, merchants must be prepared to present compelling evidence proving that the purchase was intentional and that there was no error on your part. Evidence includes:

    • Information about the credit card
    • Order forms
    • Data stamps with IP addresses that can be cross-referenced with past transactions.
    • Information about any terms or contracts accepted as part of the checkout process.

However, depending on the credit card or bank, merchants typically have less than two weeks to gather sufficient evidence to challenge a chargeback. Because the turn around time is so small, most merchants don't bother to challenge the dispute. This is why it is crucial that businesses have robust recordkeeping with the ability to pull records quickly. If you're listing auto-renewal terms in your checkout flow, for example, you need to prove what the screen that displayed your terms looked like.

Without these records, you will have a hard time recouping the money you'd lose to chargebacks.

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Read more about why the design of your screen and your agreements matters: 

Are my online agreements valid: Clickwrap

Are my online agreements valid: Sign-in-wrap

Terms of Service Design No-Nos Part 1: Lack of Notice

Terms of Service Design No-Nos Part 2: Lack of Recordkeeping

 

Gizelle Fletcher

Written by Gizelle Fletcher

Gizelle leads the content team at PactSafe. She's driven by content that relays the significance of technology in legal departments and is always look at how consumer behavior influences new technologies.