Recurring Transactions: How to Manage the Risk of Recurring Transactions

Sydney VaccaroSubscriptionLeave a Comment

Recurring Transactions- How to Manage the Risk of Recurring Transactions

Subscription billing models mean continuous, predictable payments after just one customer sign-up. On the customer's side, they get access to continuous products or services without having to go through a check out process. That may sound like a dream come true for both parties, but the continuous billing model has some downsides — one of those being a susceptibility to disputes.

In this post, we’ll dive into why the subscription model is susceptible to disputes and what merchants can do to protect themselves from revenue loss.

What Causes Recurring Transaction Disputes?

There are many aspects of recurring billing that can make merchants vulnerable to disputes.

Chargeback Fraud

Chargeback fraud is when a cardholder maliciously disputes a charge in an attempt to get their money back, while still retaining the goods or services. For subscription goods, a common scenario is when a cardholder has been meaning to cancel their subscription but doesn’t before their card is charged. Unlike a regular purchase that needs the customer to authorize every transaction, a cardholder can simply forget about a subscription and still be charged. Instead of owning up to their mistake or trying to contact the merchant, a chargeback fraudster just disputes the charge. The cardholder doesn't really have a fear of being blacklisted, because they were going to cancel the subscription anyway. They also may feel like they deserve the money back because they had the intention of canceling the subscription, even though the merchant did nothing wrong.

Another (and more malicious) motivation behind chargeback fraud is when the customer purchases the subscription with the intention of disputing the charge and selling the product.

Friendly Fraud

Friendly fraud is when a customer mistakenly disputes a transaction they actually authorized. A customer may be looking over their statement when they see a purchase they don't recognize. They panic, thinking the charge is fraudulent, and dispute the transaction. Subscription merchants are at risk for friendly fraud disputes because of the frictionless transaction process. There was no checkout process after the initial sign up. An unexpected charge will make any cardholder panic.

Issuing banks usually make it easy for the cardholder to dispute a charge. It can be as simple as a phone call or pressing a few buttons on their mobile banking app. The cardholder may have disputed the charge way before realizing what the transaction actually was.

True Fraud

True fraud is when a fraudster gets ahold of credit card credentials and successfully uses them at a merchant's store or site. A fraudulent transaction will result in a dispute from the actual cardholder. True fraud disputes are not winnable for the merchant. Therefore, merchants should put protection in place, such as fraud scoring or front end fraud filters. Subscription merchants selling digital or easily sellable goods should take extra precaution against true fraud.

How to Prevent Recurring Transaction Disputes

Now that we have covered some of the ways subscription merchants experience payment fraud, let's dive into how merchants can prevent disputes.

Communication is Key

Communication throughout the whole transaction process is vital for subscription merchants to avoid disputes. When a cardholder initially signs up for the subscription, make sure you clearly walk them through the exact terms and conditions they are agreeing to. This can include how often they will be charged, if that price ever varies, and how they can cancel their subscription if needed. A clear explanation of this is not only is important for the customer experience, but it helps build a strong dispute response if needed.

The next step is to send reminder emails before the card is charged. A simple email reminder can help prevent both chargeback and friendly fraud. The chargeback fraudster that was meant to cancel the transaction is now reminded to do so. The friendly fraudster has their memory jogged before the transaction hits their account.

Lastly, make sure your merchant descriptor is easy to recognize for the cardholder. If your merchant descriptor is your legal name instead of your recognizable public name, it could trigger friendly fraud.

Make it Easy to Cancel

It costs more to receive a dispute than it does to have a customer churn. When a merchant receives a dispute, they have the revenue from that sale taken and receive a dispute fee. This means that if the dispute is lost, merchants will lose more than the initial transaction amount. If the dispute is won, merchants will still receive a dispute fee. To prevent disputes and promote a pleasant customer experience, merchants should make it easy for customers to contact your customer service or cancel their subscription.

Collect Compelling Evidence

Taking preventive measures can drastically decrease your dispute rate, but there will still be some disputes that slip through. That is why merchants must collect compelling evidence throughout the transaction process, along with following the card networks guidelines and regulations.

Each card network has different reason codes that require specific compelling evidence. Here is a basic overview of what the card networks can require from recurring billing merchants:


  • A legally binding contract between you and the customer
  • Proof that the cardholder is using the merchandise or services
  • A previous, undisputed transaction that contradicts the disputed transaction


  • A description of the goods or services being provided
  • Proof that the merchant was not notified of the cancellation before the disputed transaction occurred
  • The terms and conditions for recurring transactions are separate from the general conditions of sale
  • The start date of the recurring transactions
  • There have been previous transactions that were not disputed


  • Transaction documentation signed by the cardholder, indicating that the cardholder authorized each of the card sales charged to the account
  • Proof that the cardholder did not cancel the recurring payments plan in accordance with the merchant's policy
  • Proof that the cardholder did not cancel the recurring payments at least 15 calendar days prior to the posting of the card sale subject to dispute
  • The cancellation number provided by the cardholder or issuer in support of the dispute is invalid, and the disputed card sale was processed correctly
  • Details of the recurring payments plan that requires the cardholder to pay the amount subject to dispute notwithstanding the termination or cancellation of said plan

American Express

  • A copy of your cancellation policy with an explanation of your procedures for disclosing it to the cardholder
  • Details that explain how the cardholder did not follow the cancellation policy
  • Proof that the cardholder had not canceled the recurring payment, and he or she continues to use the service or receive the goods

If you notice your company is not implementing or collecting the required evidence, it is important to start so you are protected when disputes happen.

Remember, not every piece of evidence will be required by every card network or for every reason code. If you need help drafting responses or knowing what you should put into each response, you can check out our customizable response templates for help.

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