fraud and chargeback management

How your merchant service provider can help find the easiest path to revenue recognition for subscription commerce

Revenue growth circulates around strategies and abilities to grow subscribers. The number of subscribers has a direct correlation to consumer interest, brand perception and the success of what one is offering.  We have become a click to subscribe society, but this trend we are seeing on social media platforms like TikTok, YouTube, Instagram and Twitter of seeking more followers, and more subscribers is only one kind of monetization.  In this example, consumers are subscribing to content creators, but it is not just content creators that are moving towards the push to provide something exclusive in exchange for more subscribers. Businesses offering products and services for sale are moving toward a subscription model to increase revenue recognition.

A subscription economy is the shift away from the traditional per-product purchase model in exchange for a subscription business model. Gone is the way of ad-hoc purchases. Today companies that can succeed in enhancing their customer experience, offer flexible and personalized pricing and products, establish long term relationship with their customers; and have the systems to manage subscriptions are the ones that will make it as every business takes on the subscription market. Venture capitalists and investors want to know the lifetime value of your products/services and the revenue generated over the lifespan of a customer, the longer a customer subscribes, the greater the value, and revenue opportunity.

Subscription Insights

Subscriptions provide and replenish curated products and/or services at set and consistent intervals. This model of providing a recurring service or product can be seen across many businesses and brands: beauty products, nutritional supplements, marketplaces, food and beverage, utilities, memberships, mobile apps, and SaaS are some of those examples. Subscriptions are viewed positively by consumers for removing constraints and providing convenient access to quality services and products, at the same time benefiting subscription businesses with improved forecasting, cash flow and predictable recurring revenue.

Analysts, are predicting the subscription market will grow to a $1.5 trillion opportunity by 2025. With nearly 80% of adults subscribing to products and services today, over 50% of business revenue stems from subscriptions and recurring billing revenue.

As a business owner, consider every SaaS subscription you use in the workplace (Adobe, Salesforce, Microsoft Office…), as a consumer consider every paid mobile app you have on your smartphone, and every service you subscribe to fulfill every one of your needs. From streaming (Netflix, Spotify), finance (Motley Fool), lifestyle (gym memberships), food (Costco, HelloFresh), digital products (eBooks), and subscription boxes for every durable and non-durable good right down to funky socks.  Even with subscription rates seeing a slight downward trend as consumers are trying to be more budget conscious and experiencing subscription fatigue; with the average consumer still holding at least 5 subscriptions and millennials doubling that, subscription commerce will continue to gain momentum as it evolves into the preferred means of access to products and services.

As for the businesses offering subscriptions, especially eCommerce subscriptions that are driven by the need for automation and convenience, it is important to have the right systems and platforms in place to help you pay attention to consumer values and patterns, especially where payments and checkout have a critical role in consumer acquisition and retention.

The role of recurring payments for subscriptions

When a customer signs up for subscription products or to use a subscription service, there has to be a method to authorize and capture this transaction on a recurring basis in order to get money from the cardholder account into the business’s merchant account and funded into the business’s deposit bank account. This is known as a recurring payment.  Subscription billing and recurring billing or payments are terms often used interchangeably to identify the difference between a one-time purchase and on-going automatic billing. Once a customer provides their payment details and agrees to the price and frequency, they will continue to be charged on a set schedule until the subscription expires or is cancelled, and the business will continue to receive automatic payments.

For eCommerce subscription businesses, the likelihood of customer acquisition and retaining an ongoing relationship with customers is dependant on providing customers with a checkout experience that offers both convenience and value.  Inputting 100s of transactions manually will not accomplish this.  However, through the implementation of recurring payments and a subscription platform to manage them, businesses are able to collect recurring fees with minimal manual effort for both the business and their customers. And customers are able to access products and services without having to go through a lengthy checkout with each purchase, benefit from subscription discounts, and avoid late payments and payment errors.

Solutions for Subscription Management

In today’s competitive market, it is difficult enough to be the best at your business and provide products and services that stand out amongst the rest. To succeed in enabling subscriptions, businesses should focus on their core offerings and leave subscription management and billing to platforms built to handle subscription payments.  Setting up a subscription program begins with having a merchant account, a payment gateway, and a platform or software to handle recurring subscription billing.

With the increasing momentum the subscription business model is seeing, comes demands on businesses to effectively manage subscription billing and the necessity for subscription platforms to handle all aspects of subscriptions. Subscription and billing management software and solutions are a market of its own, with a projected value of $10.5 billion by 2025 that is expected to rise to $14.5 billion by 2027.

For continuity subscription merchants this comes as welcomed news, as it means that across different business sizes, stages and business needs there are multiple subscription management solutions that can be tailored to them.

At the basic level, with the right merchant service provider, subscriptions can be supported by a standalone merchant account that has support for recurring payments through their payment gateway offering. Whether using Elavon’s Converge gateway, or third-party payment gateways that support recurring transactions and connect to Elavon’s host, businesses can benefit from functionality like converting a stand-alone transaction into a recurring transaction, recurring batch imports, sending payment links or placing payment buttons on a product website with the ability to then add those transactions to run as recurring on an ongoing basis.

Considerations made at this level are crucial, specifically which payment service provider (PSP) one signs up with. Card brands provide incentives and interchange benefits on transactions that pass a recurring flag, so while an eCommerce site might go with the familiar since they may already be utilizing Stripe, they will be charged a fixed percentage and not benefit from recurring cost savings.

As a business scales and their subscription offerings expand with a greater volume of recurring payments to manage, a standalone payment gateway solution on its own won’t be sufficient. One option would be to code to a custom integration supported through the Converge recurring API, where payment tokens are submitted using the Hosted Payments, Checkout.js, and XML API integration methods, to be used in subsequent transactions without needing to collect cardholder information again.

Even custom payment integrations are easy to outgrow when operating within a subscription business model. Building out a system to manage end-to-end customer subscription lifecycle and upkeeping this system will distract a business from their focus on the products and services they are actually selling. This is when Cartis Payments suggests finding a subscription billing management software that focuses on one thing best – subscription management!

Subscription Management and Recurring Billing Software

There is a plethora of sophisticated out of the box subscription management software to manage recurring billing, accounting, reporting, revenue recovery and visibility into subscription churn. These subscription platforms have already done the heavy lifting to develop a specialized subscription and billing solution and have already integrated to multiple payment gateways and payment processors. Chargebee, Zuora, Recurly, Zoho Subscriptions are amongst some of the most common subscription CRMs available today, but there are constantly new niche subscription billing solutions for specific industries (i.e., telecommunications). Cartis Payments through its extensive software connections can support a subscription merchant account with the software your business already uses or chooses to implement.

Challenges of a subscription business

While a solid subscription management solution and strategy will help subscription-based businesses offload the complexity of managing recurring billing, subscription trials, and customer lifecycles, the unique infrastructure of a subscription model brings inherent payment processing risk. There are many payments related challenges that can disrupt revenue recovery and put a merchant out of compliance with card brands.

So, what are some of these subscription payment challenges and their solutions?

Cart abandonment – the right eCommerce platforms, and subscription management solution already does a lot to reduce checkout friction, but making sure to work with a merchant provider that offers multiple payment methods is just as important.

Declined payments – card brand decline responses are meant to help merchants improve their authorization rates.  Responses are grouped into categories of soft declines (i.e., NSF insufficient funds, temporary hold, restricted card) which can be reattempted for a successful authorization, hard declines (invalid card, expired card, non-activated card) which can be reattempted once the data quality is corrected, and fraud declines (stolen card) which should not be reattempted. While with a subscription management solution, a business is greatly positioned to manage subscriptions, their customers are not, with 42% of consumers forgetting they hold a subscription. Subscription churn occurs when a customer cancels their subscription and/or just stops paying without realizing their subscription is still active. In an attempt to increase accounts receivables and revenue recovery, businesses use their subscription platforms to strategically retry declined transaction and participate in dunning efforts for failed payments.  Dunning management involves email reminders and customer outreach in an effort to get updated payment details and engage customers regarding failed charges. Reattempting declined transactions can result in high decline percentages and authorization fees for a merchant account.  The right merchant provider will help you monitor when your decline % increases, and alleviate some of your efforts through account updater service, which monitors and automatically updates and records changes to account numbers and expiration dates.

Fraud and chargebacks – With increased subscription payments, eCommerce transactions, declines and dunning management comes an increase in disputes and friendly fraud. For subscription-based businesses, this is perhaps the biggest payment challenge with the greatest repercussions.   Some chargebacks may seem innocent, a cardholder deleted the mobile app thinking it would stop recurring charges, then initiated a chargeback for cancelled recurring billing or goods/services cancelled, while others are for fraudulent chargebacks, claiming to be card absent environment or no cardholder authorizations. Not only can fraud and chargebacks lower authorization rates, and increase fees, but they can flag a business that has exceeded card brand thresholds.  In the best case card brands can compel the merchant to enroll in dispute monitoring programs; and in the worst case the merchant is placed on the MATCH list having their merchant account closed. It is critical for subscription businesses to enable a chargeback and fraud management system, but it is just as important to work with a system provider to have the right system in place that doesn’t block out the legitimate sales. With Cartis Payments arsenal of chargeback prevention tools, merchants gain access to a robust AI system that screens, alerts, and prevents friendly fraud and chargebacks, incorporates Verifi by Visa and Ethoca by MasterCard and provides insurance for fraudulent chargebacks.

Looking ahead in your subscription strategy

In working with subscription-based merchants, there are recurring (no pun intended) discussions that come up.  Here are our bits of advice:

  • Make it easy for your customers to cancel or pause subscriptions
  • Maintain communication with customers
  • Analyze data to minimize churn rate, monitor for declines and chargebacks
  • Choose a payment gateway and merchant provider that supports recurring payments and offers integrations, flexible pricing options, and payment optimization for level 2 and 3 transactions
  • Look for value-add features like account updater
  • Supplement your subscription management platform with fraud and chargeback management solutions

At Cartis Payments, we take a collaborative approach with finance teams to analyze their subscription payments data and trends, provide solutions that work with their platforms, and advocate for the good standing of their merchant account.

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