Recurring Billing Risk Management

Recurring billing for subscription sales, online memberships, and web continuity programs can incur higher levels of chargebacks, disputes, returns, and online credit card fraud than typical card not present credit card transactions. Payment processing for recurring billing or re-bills, can require additional risk management strategies and practices to reduce and avoid losses from both chargebacks and credit card fraud. Internet or online merchants who process recurring payments can obtain cost savings in their processing expenses by using low cost and easy to implement strategies to reduce chargebacks and prevent fraud.

Get a new authorization for each and every billing.

Never process a recurring billing payment on an old authorization (like the original authorization from sign up) or a voice authorization or a forced authorization. These transactions can be charged back by the cardholder as being “unauthorized”. Which is exactly what they are: the cardholder’s issuing bank settled funds to the merchant’s acquiring bank without a valid authorization. When disputed, the merchant and acquirer cannot produce a valid authorization and will lose the chargeback (the original authorization from sign up is not valid for a monthly membership or subscription, each month must have their own authorization).

Do not process $1.00 or like size amount authorizations to test a card’s validity or availability of funds. Never authorize for one amount and settle for another.

When an issuing bank places an authorization on a cardholder’s credit card or debit card the merchant and the acquiring bank lose control of the transaction. An issuing bank can leave an authorization on a cardholder’s account for an extended period of time: sometimes up to 7 days and the merchant and acquiring bank have no say on when it comes off the cardholder’s account. Sometimes the authorization amount may be subtracted from the cardholder’s available balance and an online statement may show the held funds as an actual charge. In the case of a debit card can these authorization can be held against the available balance in the cardholder’s checking account. One dollar authorizations followed by the full amount of the sale can appear to a cardholder to be a double billing or extra charge and can generate disputes and chargebacks. If a merchant charges a low sign up fee and a higher monthly membership and authorizes the card for the membership amount and settles for the sign up fee amount it can appear to the cardholder as a double billing for twice the membership fee. With a debit card this can result in double the amount the cardholder expected being held against their available balance and their bank’s online statements can make it appear that the funds are already out of the account. This can cause anxiety among cardholders and result in chargebacks, disputes, and cancellations. Plus, in the case of a chargeback, the settlement will be unauthorized due to the different amounts. 

Send an email giving notice prior to charging a cardholder for a membership fee, subscription, recurring billing, or installment payment plan.

This allows the cardholder an opportunity to opt out of a membership or cancel a subscription before being charged. This can avoid escalating the issue to the level of a dispute. An email notice reminds the cardholder of the purchase, so they have a better chance of recognizing the descriptor in their billing statement, and provides the merchant with an opportunity to provide new information about additional or up coming products, services, or sales. If the email bounces or gets any other out of the ordinary response, such as the cardholder not recognizing the sender, the merchant should investigate this transaction further as possible fraud.

Make sure the billing descriptor is recognizable to the cardholder and provides quick and easy tools for providing more information about the membership, access to customer service and support and dispute resolution and membership cancellation.

Always use a dedicated a toll free customer service phone number with the descriptor. If the descriptor references a web address or URL make sure that it provides the cardholder with content and tools to speed resolutions, such as clearly stated contact information with dedicated customer service email addresses and toll free customer service phone numbers, product information, terms & conditions, refund policies, cancellation policies, and billing policies. Making these policies clear and easy to find will minimize cardholder confusion and the potential for disputes. Providing clear contact information will make it more likely that the cardholder will contact the merchant to resolve disputes. Along with being clear, policies should be accompanied by features that make it easy for cardholders to resolve problems. Provide feedback forms for terms & conditions and auto cancellation and refund request tools.

Use BIN verification and BIN blocking to identify account numbers from non-US issuing banks and prepaid credit and debit card accounts.

The first six digits of a credit card account number are called the Bank Identification Number (BIN) or Issuer ID. The BIN identifies the issuing bank of the credit card. BIN verification tools allow the merchant to identify the issuing bank of the credit card, the country where the bank is located, and the bank’s telephone number. If the cardholder billing address or shipping address are in a different country than the bank, it could indicate card not present fraud using a stolen card or account number. The BIN can also identify the account number as a prepaid debit card. Prepaid debit cards are harder to track and identify the cardholder, and could indicate fraud. Prepaid debit cards are also often used in affiliate fraud and they will hold enough funds to pay for the smaller initial set up fee or trial offer of a product, but not enough to pay for the membership or subscription, resulting in a decline on the first recurring billing charge.

Use Visa Account Updater (VAU) and MasterCard Automatic Billing Updater.

Visa Account Updater (VAU) and MasterCard Automatic Billing Updater are programs developed by the card associations that enable the exchange of updated account information electronically among participating issuers, acquirers, and merchants that process recurring billing for subscription sales, online memberships, web continuity programs, health club memberships, utility payments and account-on-file transactions such as preferred customer travel and entertainment programs. Participating issuers, acquirers, and merchants are able to obtain seamless updates of “card on file” account information.

Visa Account Updater and MasterCard Automatic Billing Updater simplify and secure recurring billing and account-on-file transactions and ensure uninterrupted service for cardholders and uninterrupted payments for merchants. Authorization approvals are increased while decreasing declines and the customer service costs associated with contacting cardholders to obtain updated information due to an interruption of the payment relationship. Uninterrupted payment results in increased sales and revenue flows and higher customer retention rates.