CNP Losses – A Digital Subscription Perspective

Sydney VaccaroDigital GoodsLeave a Comment

CNP Losses - A Digital Subscription Perspective

When it comes to disputes, digital subscription merchants are faced with more challenges than most. Merchants that sell subscription digital goods have three factors that increase the chance of receiving disputes. We will break down the three main reasons why digital subscription merchants are receiving disputes and what can be done to prevent them.

Reason #1 - Digital Goods

Fraudsters are drawn to digital goods. True fraud is when a fraudster uses a stolen credit card number to make a purchase, then the true cardholder disputes the charge. True fraudsters target digital goods because:

Digital Goods are Easy to Sell

There are a lot of legitimate peer-to-peer sites that support the sale of digital goods. Meaning fraudsters have a large customer base that will buy their stolen merchandise. So this makes digital products attractive because they are easy to turn around and sell. Not to mention that digital products are delivered instantly so the fraudster could steal the goods and resell them in a matter of minutes.

No Physical Goods

A fraudster could get their hands on millions of dollars worth of digital goods which can all be stored on a laptop or smartphone. Unlike physical goods where they would need a physical location to store all the product. The fraudster can also be anywhere in the world to access the goods or sell them to any geographical location.

Reason #2 - CNP Environment

Ecommerce transactions are naturally less secure than in-store transactions. Without the ability to make sure the physical card is at the point of sale it is just not possible to be as secure as in-store purhcases. This opens the door for malicious fraudsters to commit true fraud or chargeback fraud. It also can create simple misunderstandings to happen such as a card being saved on that family computer for a child to easily make a purchase without permission.

Reason #3 - Subscription Billing

On the digital subscription side, there is also some risk for customer disputes. The seamless subscription model is great for the merchant because there is absolutely no friction at checkout once the customer is signed up. But the same thing that makes this billing model wonderful also creates customer disputes.

Your customers are human and sometimes they forget to cancel a subscription that they were meaning to. When they get the charge for another month, they just dispute the transaction instead of accepting their mistake. With digital products, customers are not being shipped a physical good every month. Instead, they are receiving access to digital goods such as an app, a game, a digital service or receiving digital credits. This means there is no physical reminder of their purchases and if they are not using the app, platform, or system regularly they may just forget they are signed up for a subscription and be caught off guard when they are charged.

How to Prevent Digital Subscription Disputes

We have gone over why digital subscription goods are more susceptible to dispute than other kinds of goods or billing types. So here is what digital subscription merchants can do to prevent disputes:

Clearly disclose terms and conditions. When a customer signs up for your subscription billing make sure you clearly tell them everything they need to know about when you will bill them, how often, the amount each month, etc. Make everything as clear as possible and easy to find if they have any questions at a later date.

Send a transaction reminder email. A day or two before the transaction will happen, give the cardholder a heads up. Just a simple email telling them when the transaction will take place and for what amount will prevent the “shoot! I totally forget to cancel that” disputes and any other panic a cardholder may feel when they see an unexpected dip in their account.

Make sure your merchant descriptors are clear. Merchant descriptors are what appears on the cardholder's statement. If a merchant descriptor has the company’s legal name or something that is not obvious to the cardholder they may dispute the transaction thinking it is a fraudulent charge.

Good and well trained customer service. If a customer reaches out to a merchant with a question or problem with the transaction and is met with unhelpful or unresponsive customer service, they have even more incentive to find an alternative way to get their money back. To prevent customers from turning to the dispute process to solve their problems make sure your customer service is easy to get a hold of and well trained.

The Digital Subscription Dispute Dilemma

For digital subscription merchants that transactions average transaction is $25 or less, there is a dilemma when it comes to disputes. When a customer disputes a charge the transaction amount gets taken from the merchant account and the merchant receives a dispute fee. These fees can vary from a few dollars to over $30 depending on the processor. A dispute fee has to be paid whether the merchant wins the dispute or not. This means if the merchant receives a customer dispute on a transaction that is only a $5, a fee could easily double the losses for merchants.

Let’s say on a $15 transaction there is a $7 dispute fee. That brings the possible ROI of creating a chargeback response to be $8. If it cost more than $8 in employee wages to create a dispute response than it is not worth responding. If it takes $10 in employee wages to respond to the dispute and the merchant gains the revenue back there would be a negative $2 return. But not responding to chargeback is not a great choice either because it means the merchant will automatically lose the dispute resulting in a $22 loss from a $15 transaction. But there is a solution to this.

The key to solving this dilemma is being able to stop the dispute before it is ever filed and with Real-time Resolution it is possible to do so. Real-time Resolution allows merchants to send the issuing bank and cardholder information about the transaction and product. For merchants that have a low-cost product, it is more cost effective to offer a refund to avoid the dispute fee. RTR can communicate that the merchant is willing to refund the transaction to the cardholder before the dispute is filed. Therefore preventing a dispute and the dispute fee from ever happening. Although this still is a loss of the transaction amount via a return, if the example above was able to intercept the dispute and refund the cardholder before the dispute was filed would result in only a $15 return instead of a $22 fraud lost.

When it comes to disputes, digital subscription merchants are faced with more challenges than most. Merchants that sell subscription digital goods have three factors that increase the chance of receiving disputes. We will break down the three main reasons why digital subscription merchants are receiving disputes and what can be done to prevent them.

Reason #1 - Digital Goods

Fraudsters are drawn to digital goods. True fraud is when a fraudster uses a stolen credit card number to make a purchase, then the true cardholder disputes the charge. True fraudsters target digital goods because:

Digital Goods are Easy to Sell

There are a lot of legitimate peer-to-peer sites that support the sale of digital goods. Meaning fraudsters have a large customer base that will buy their stolen merchandise. So this makes digital products attractive because they are easy to turn around and sell. Not to mention that digital products are delivered instantly so the fraudster could steal the goods and resell them in a matter of minutes.

No Physical Goods

A fraudster could get their hands on millions of dollars worth of digital goods which can all be stored on a laptop or smartphone. Unlike physical goods where they would need a physical location to store all the product. The fraudster can also be anywhere in the world to access the goods or sell them to any geographical location.

Reason #2 - CNP Environment

Ecommerce transactions are naturally less secure than in-store transactions. Without the ability to make sure the physical card is at the point of sale it is just not possible to be as secure as in-store purhcases. This opens the door for malicious fraudsters to commit true fraud or chargeback fraud. It also can create simple misunderstandings to happen such as a card being saved on that family computer for a child to easily make a purchase without permission.

Reason #3 - Subscription Billing

On the digital subscription side, there is also some risk for customer disputes. The seamless subscription model is great for the merchant because there is absolutely no friction at checkout once the customer is signed up. But the same thing that makes this billing model wonderful also creates customer disputes.

Your customers are human and sometimes they forget to cancel a subscription that they were meaning to. When they get the charge for another month, they just dispute the transaction instead of accepting their mistake. With digital products, customers are not being shipped a physical good every month. Instead, they are receiving access to digital goods such as an app, a game, a digital service or receiving digital credits. This means there is no physical reminder of their purchases and if they are not using the app, platform, or system regularly they may just forget they are signed up for a subscription and be caught off guard when they are charged.

How to Prevent Digital Subscription Disputes

We have gone over why digital subscription goods are more susceptible to dispute than other kinds of goods or billing types. So here is what digital subscription merchants can do to prevent disputes:

Clearly disclose terms and conditions. When a customer signs up for your subscription billing make sure you clearly tell them everything they need to know about when you will bill them, how often, the amount each month, etc. Make everything as clear as possible and easy to find if they have any questions at a later date.

Send a transaction reminder email. A day or two before the transaction will happen, give the cardholder a heads up. Just a simple email telling them when the transaction will take place and for what amount will prevent the “shoot! I totally forget to cancel that” disputes and any other panic a cardholder may feel when they see an unexpected dip in their account.

Make sure your merchant descriptors are clear. Merchant descriptors are what appears on the cardholder's statement. If a merchant descriptor has the company’s legal name or something that is not obvious to the cardholder they may dispute the transaction thinking it is a fraudulent charge.

Good and well trained customer service. If a customer reaches out to a merchant with a question or problem with the transaction and is met with unhelpful or unresponsive customer service, they have even more incentive to find an alternative way to get their money back. To prevent customers from turning to the dispute process to solve their problems make sure your customer service is easy to get a hold of and well trained.

The Digital Subscription Dispute Dilemma

For digital subscription merchants that transactions average transaction is $25 or less, there is a dilemma when it comes to disputes. When a customer disputes a charge the transaction amount gets taken from the merchant account and the merchant receives a dispute fee. These fees can vary from a few dollars to over $30 depending on the processor. A dispute fee has to be paid whether the merchant wins the dispute or not. This means if the merchant receives a customer dispute on a transaction that is only a $5, a fee could easily double the losses for merchants.

Let’s say on a $15 transaction there is a $7 dispute fee. That brings the possible ROI of creating a chargeback response to be $8. If it cost more than $8 in employee wages to create a dispute response than it is not worth responding. If it takes $10 in employee wages to respond to the dispute and the merchant gains the revenue back there would be a negative $2 return. But not responding to chargeback is not a great choice either because it means the merchant will automatically lose the dispute resulting in a $22 loss from a $15 transaction. But there is a solution to this.

The key to solving this dilemma is being able to stop the dispute before it is ever filed and with Real-time Resolution it is possible to do so. Real-time Resolution allows merchants to send the issuing bank and cardholder information about the transaction and product. For merchants that have a low-cost product, it is more cost effective to offer a refund to avoid the dispute fee. RTR can communicate that the merchant is willing to refund the transaction to the cardholder before the dispute is filed. Therefore preventing a dispute and the dispute fee from ever happening. Although this still is a loss of the transaction amount via a return, if the example above was able to intercept the dispute and refund the cardholder before the dispute was filed would result in only a $15 return instead of a $22 fraud lost.