The first blog in this series looked at the wider chargeback landscape, and why transaction disputes are on the rise. It also discussed the growth of subscription service businesses with regular and recurring payments and deliveries and how the subscription business model can open the door to a wave of chargeback claims.
In this article, we dig deeper into the specific challenges facing subscription services, looking at the contribution of fraud and customer confusion to the growing threat of chargebacks.
Fraud in subscription services
Fraud is endemic in a digital world. The US-based National Retail Federation estimated that retailers would lose $3.68 billion to returns fraud alone after the prior holiday season1. Gift card fraud, the most common type of fraud, typically caused losses of more than $228 million in 20222.
Subscription services are as vulnerable to criminal scams as any other online business. Account takeover (ATO) attacks are a common threat to subscription service profits. This is where fraudsters take over an account after a data breach and order expensive downloads or products. It’s estimated that nearly a quarter of US adults (22%) have been victims of an ATO attack3. Again, chargebacks are a common form of redress.
Promotional offers for subscription services are everywhere, particularly around holidays, and they are also popular with criminals. Fraudsters create fresh IP addresses or synthetic IDs to open multiple accounts with the same business, potentially harvesting hundreds or thousands of free gifts, trials, and downloads.
The challenge of friendly fraud
One problem for subscription service companies is that genuine customers can also indulge in some of these activities, albeit on a far smaller scale. So-called first-party misuse might see a long-term subscriber open a second account simply to make use of an introductory offer.
Friendly fraud takes several different forms. A subscriber might dislike the contents of a regular gift box or recipe pack and claim that it was never delivered. To make things worse, they may instigate a chargeback to cancel the payment. Similarly, a customer signs up for a second subscription due to a promo offer, when a change in pricing or delivery frequency makes a subscription service less appealing, consumers might think it easier to call their bank and instigate a chargeback – claiming fraud – than work through the provider’s sometimes lengthy cancellation process.
This first-party fraud – carried out by customers rather than criminals – is widespread. According to one study, for US merchants, the figure is 23% and UK merchants estimate that 40% of their chargebacks are the result of first-party fraud. 4
Confusion, regret, and chargebacks
The same study found that another major trigger for chargebacks is customer confusion. US merchants think over half of chargebacks are the result of this, with UK merchants putting the figure at over a fifth5.
Customer confusion and regret can be a particular problem for subscription service providers. Customers need to know exactly what they’re subscribing to, especially if you offer different levels of service. They also need to understand the frequency of payments and, if relevant, deliveries. Subscription customers must be fully informed of what to expect and when.
Customer churn is another significant cause of chargebacks for subscription services. A customer may forget to cancel a payment after a promotional period. Someone who subscribes to a few subscription services may fail to recognise a payment in their banking app. Both eventualities can trigger chargebacks.
Finally, subscription services that deliver physical items are susceptible to the same issues that all online merchants face. Goods can get lost on route or damaged in transit. Customers may find they do not make use of a recurring item at the rate they expected to, or their expectations of the item not met. In these circumstances, customers would ideally seek redress through a customer service process but often see chargebacks as an easier and quicker win.
The subscription experience is a differentiator
The dilemma for subscription service businesses is that customers expect a premium experience in return for recurring payments. According to a recent study, customer loyalty is more dependent than ever on good experiences, with more than a quarter of consumers ditching a brand in the previous year6.
That’s likely to be even more true when the experience repeats every week or every month. Unexpected disruptions – a broken down delivery truck, extreme weather, supply chain issues – can lead to requests for chargebacks, even if the merchant is not at fault.
Providers need to make it easy to alter or cancel subscriptions and offer clear channels of communication if changes are requested or services are interrupted unexpectedly. However, the pre-eminence of customer service also makes it difficult to challenge chargebacks. In a competitive sector, the last thing subscription services need is disgruntled customers taking to social media to slam heavy-handed responses to refund requests, particularly when the sums in question are small.
So how do providers keep customers on board and stem the damaging tide of chargebacks? The short answer is through a combination of excellent customer service, smart data management, and chargeback automation. Learn more about subscriber chargeback management. We’ll discuss all of those in details in the next blog.
- National Retail Federation. 2023. https://blog.wholesalecentral.com/many-unhappy-returns-fraud-set-to-cost-retailers-billions-this-season/
- Federal Trade Commission. 2023. https://datainnovation.org/2023/03/the-ftc-should-improve-data-collection-to-mitigate-gift-card-scams/
- Security.org. 2022. https://www.security.org/digital-safety/account-takeover-annual-report/
- Aite-Novarica Group. 2022. https://datos-insights.com/reports/first-party-fraud-conundrum-how-protect-financial-institutions-and-merchants/
- Aite-Novarica Group. 2022. https://datos-insights.com/reports/first-party-fraud-conundrum-how-protect-financial-institutions-and-merchants/
- PwC. 2022. https://www.pwc.com/us/en/services/consulting/business-transformation/library/customer-loyalty-survey.html