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Why Recurring Payments Lead to Chargebacks for Subscriptions

A subscription-based model is profitable and one of the best ways to ensure continuity of sales in your business. Since customers just need to sign up once and they get billed every month for a service, it cuts down your marketing costs by a significant margin and you could predict your earnings from these subscriptions.

But subscriptions can also pose a high-level threat to your business, especially when it comes to chargebacks for subscriptions. Here’s what you need to know about recurring payments and why they’re very prone to disputes.

What Is a Recurring Payment?

A recurring payment happens when a customer is charged automatically for a product or service that’s delivered to them on a regular basis and based on a contract. 

More popularly known as a subscription, recurring payments can last for a few months up to years depending on the service being provided. There are different steps that the customer needs to fulfill before they get signed up for such a service.

After choosing the product or service, the customer will be asked to read the terms and conditions, enter their credit card information, and authorize a recurring payment on that account. This means that the customer should expect an automatic monthly charge until they cancel their subscription. 

Why Are Recurring Payments Prone to Disputes?

As a high-risk merchant account that offers recurring billing, you need to learn the most common reasons for disputes related to this type of service:

Friendly Fraud

This is one of the most common causes of disputes that could put your business at risk for high chargeback rates. Friendly fraud is essentially a type of dispute where a customer mistakenly questions a transaction that they authorized. And the reason why is because they didn’t recognize the business name on the bill or because they didn’t expect that they would be charged for a service due to the lack of a checkout process after signing up.

Chargeback Fraud

This happens when a customer intentionally files a chargeback complaint after being billed for a product or service in an attempt to get their money back without returning the goods. Some customers also commit chargeback fraud because they forgot to cancel their subscriptions or simply forget about it altogether and are then surprised after being billed for it.

Real fraud

This is an illegal offense that involves a fraudster using another person’s credit card details to make purchases from a merchant’s store. These fraudulent transactions will be tagged by the real cardholder and a dispute will be filed in most cases to cancel these transactions.


Mitigate the Risk of Chargebacks for Subscriptions 

As a business, it’s very important to understand why recurring billing business models are considered high-risk and how you can mitigate the risks involved. 

Investing in fraud detection measures is one of the most critical payment industry trends that will only become more important as online sales continue to grow. Aside from these measures, though, you should also train your employees to explain your subscription-based offerings clearly to customers and make sure that they understand the part where they will be automatically charged, especially after a free trial expires. 

These steps will help you mitigate the risks of chargebacks for subscriptions while making sure that you enjoy the benefits of recurring payments in a subscription-based business model. 


Contact us to learn more about how First Card Payments can help your high-risk business manage these situations with our chargeback prevention tips.


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( Merchant Account Specialist )

Mitchell Fardell is a highly experienced payment processor who has worked for First Card Payments since 2019. In that time, he has worked on large accounts, small accounts, and everything in between.

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