It sometimes felt like last year was the year of the chargeback. It’s been estimated that the cost of chargebacks to the payments industry is likely to have topped $1 billion in 20231.
The growth of these damaging transaction disputes is driven by the rocketing popularity of online commerce. Global e-commerce sales are increasing at an exponential rate, fueling an unprecedented rise in cancelled payments2.
Chargebacks are often a result of consumers being confused by charges, forgetting auto-renewals, or fraud on their accounts.
Subscription services are a growing sector in the e-commerce mix and a big problem when it comes to cancelled payments. The global online subscription market is expected to top $904 billion by 20263.
In this blog series, we’ll examine chargebacks specifically in the subscription space, discussing the challenges service providers face and how automation can help them cut costs and improve chargeback management. First off, let’s look at the growing problem generally and what it means for online subscription services.
The growing threat of chargebacks
A chargeback happens when a consumer asks their bank to cancel a payment to a merchant. That can happen for a variety of reasons, and while it’s a relatively pain-free process for consumers and banks, it’s an increasingly painful one for merchants.
Chargebacks are a business risk that needs to be managed, since in an online world, these kinds of payment cancelations are happening with growing frequency4. Maybe that’s because goods don’t turn up or are damaged when they do or because consumers simply change their minds. In the subscriptions space, customers may trigger a chargeback to cancel an auto-renewal payment they had forgotten about, or because of buyer remorse. Some streaming customers regularly switch between services as content changes. Genuine fraud can also lead to chargebacks as criminals’ game the system.
According to research carried out by Accertify and Javelin5, 51% of merchants say chargeback volumes are increasing. That’s a real problem for anyone who trades online.
The initial cost of a chargeback varies, but typically it ranges between $25 and $50 per claim6.
But that’s not the only cost. It’s been estimated that for every $30 in chargebacks, merchants lose $32 in wasted labour, $27 in chargeback fees, and $12 in dispute resolution fees7.
Then there’s reputational damage. Accounts with high chargeback numbers will be looked at more closely by payment providers, potentially making payment authorizations (and business) more difficult.
Online merchants can face a challenge with chargebacks, but the problem can be acute for those that collect small sums regularly. Therefore, subscription service providers often let chargebacks go, because taking a stand feels like a prohibitively expensive undertaking.
The proliferation of subscription services
When we consider online subscription services, we tend to think of Netflix, Spotify, or Amazon Prime. Increasingly, we consume media of all types via an online subscription, from games, newspapers, and music to films and TV.
But subscription services have spread beyond digital services and into the physical world. Younger people are now more than happy to replenish stocks of beauty and personal care products via subscription8.
Food and drink items like wine, specialty tea, organic produce, and cheese are all available as regular, recurring deliveries. Recipe services that send busy consumers the ingredients for complete meals every week have become wildly popular in the last few years. Meal kits in the US is forecast to exceed 25 million by 2027.9 In the UK alone, revenues from meal kit deliveries have grown from $0.39 billion in 2018 to an estimated $1.4 billion this year10.
That’s scratching the surface of a booming industry. The model is popular with merchants looking for the win-win of repeating revenues and sticky customers, but it’s also fraught with challenges.
Chargeback management and churn in subscriptions
Subscription services must be very good to keep customers, offering something that makes paying a recurring fee seem like a great deal. That might be a personalised or highly curated service, access to member-only benefits, or a sense of exclusivity. Ordering, payment, and delivery processes must be high quality.
Consumers are rarely tied to a contract, so churn is inevitable. But this can be especially costly if a customer leaves and forgets to cancel payment, seeking redress through a chargeback. As the use of subscription services grows, so does the likelihood of payments not being remembered and deliveries going missing. Both can lead to chargebacks that merchants must accept or challenge.
The chargeback headache is compounded by difficulties in distinguishing between honest mistakes and genuine fraud. For example, a recurring delivery service might be used fraudulently by a third party after a password breach, triggering a chargeback from the subscriber for unrecognised items ordered on his account. According to The Identity Theft Research Center (ITRC), 422 million individuals were impacted by a data breach in 2022 in the US alone10.
But merchants should tread a fine line when dealing with chargeback challenges, and even more so when consumers are paying recurring fees. Customer experience is king, and subscribers require smooth, seamless, and easily managed services. They will not take kindly to friction or implications of criminality when all they want to do is cancel a subscription.
It’s a balancing act for merchants. Finding a trusted chargeback management partner is essential.
In the next blog, we’ll take a deeper dive into the world of online subscription chargebacks and the types of friendly and unfriendly fraud providers typically face.
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- Ethoca and Aite Group Research Finds Cardholders Are Eager for Digital Solutions that Deliver Greater Purchase Transparency. 2020. https://www.ethoca.com/press-releases/ethoca-and-aite-group-research
- Shopify. 2022. https://www.shopify.com/uk/enterprise/global-ecommerce-statistics
- Business Research Company. 2022. https://www.prnewswire.com/news-releases/subscription-ecommerce-market-growth-rate-reaches-a-whopping-65-301534371.html#:~:text=The%20global%20subscription%20e%2Dcommerce,(CAGR)%20of%2064.64%25.
- Ethoca and Aite Group Research Finds Cardholders Are Eager for Digital Solutions that Deliver Greater Purchase Transparency. 2020. https://www.ethoca.com/press-releases/ethoca-and-aite-group-research
- Accertify. 2022. https://www.accertify.com/white-papers/merchant-chargebacks-fraud-survey-2021/
- Tokenex. 2022. https://www.tokenex.com/blog/what-is-a-chargeback-and-how-much-does-it-cost/
- Accertify. 2020. https://www.accertify.com/improve-win-rates-reduce-loss-chargeback-management/
- PYMNTS. 2023. https://www.pymnts.com/consumer-insights/2023/gen-z-consumers-are-subscription-boxes-biggest-fans/
- Statistica Meal kits in the U.S. – statistics & facts | Statista
- Statistica. 2024. https://www.statista.com/forecasts/1346159/united-kingdom-revenue-in-the-meal-kits-market
- Identity Theft Research Centre. 2022. https://www.idtheftcenter.org/publication/2022-data-breach-report/