Merchants may be considered high risk by financial institutions for many reasons. For example, they could have a high chargeback rate, or they may have a bad credit history, or even no credit history at all. Or they could simply be in a specific industry or use a billing model that is considered high risk automatically.

Subscription-based payment models are automatically classified as high risk. This may seem surprising at first thought, as subscriptions generate revenue on a predictable basis and if there’s one thing businesses like when it comes to income it’s reliability. However, the reality is that subscription payment models come with several challenges that can cause problems for the merchant. 

The primary problem with subscription-based payments is the high chargeback rate. High chargeback rates mean high risk, and as such if you operate a subscription-based business you are automatically classified as high risk.

It does not matter if you offer a physical product for delivery such as newspapers or monthly boxes, or if you offer digital products such as cloud-based services or software –  recurring payments make you a high-risk merchant.  

So why do subscription services have such high chargeback rates? There are four main areas that can result in chargebacks:

  • Customer error
  • Merchant error
  • Fraud
  • Transaction error

Let’s look at these areas and see where the pain points are, and how to try and reduce them.

Customer error

There are several reasons why a customer might file a chargeback on a recurring payment.

One of the simplest is that they simply forget that they had subscribed in the first place. This frequently happens when customers sign up for a free trial and are then billed when the trial period comes to an end, or if the billing is not frequent, such as an annual charge.

To help combat this merchants should send customers reminder emails before each billing cycle, reminding them when and how much they will be billed for the particular service.

In other instances the customer does not recognise the name on the billing descriptor and thinks the charge is fraudulent. It is very important to inform customers of the billing name if it is not the same as the name of the product they purchased. 

Merchant error

Merchants can make several errors that can result in chargebacks from their customers.

One such mistake is not advising customers that there is a renewal or price increase on their subscription. Always give customers fair warning of increases, and if they need to manually renew the subscription make it clear and easy to do so.

Cancellation is another area where merchants frequently fall short. Make sure that if a customer cancels their subscription that the recurring debit on their card or account is canceled, either manually or automatically, depending on your processes. If they cancel too late for the next run to be canceled make sure to take proactive steps to advise the customer that they will still be debited but that they will receive a refund within a specified time frame. And make sure that you make the refund as promised. 

Merchants should also make use of systems that automatically flag expiring cards, and communicate with the customer that their card information needs to be updated.

Merchants must also ensure that the goods or services supplied with the subscription are as advertised and meet customer expectations. If the customer feels they have not received goods as promised they could file a chargeback. Excellent customer service to deal with unhappy customers is a merchant’s first line of defense against chargebacks of this type. 


Unfortunately, subscription services are susceptible to several different types of fraud.

Account takeover 

Fraudsters may take over an account to divert the shipping of the goods away from the intended recipient. Or perhaps the type of subscription entails the customer choosing specific goods each month, and if the customer forgets and does not select the goods in a time period they build up credit. Criminals taking over the account then use the credit to buy goods and have them shipped to themselves. Criminals will often use social media to falsely advertise promotions in order to trick customers into entering their login information in order to be registered for the fake promotion. Merchants need to take active steps to prevent takeover fraud by implementing measures such as alerts and authentication when customers change details on their accounts.

Password sharing

Although a common practice that seems harmless to the average user, password sharing seriously erodes revenue for merchants. Password sharing can also result in account takeover fraud, which can result in chargebacks. Merchants should carefully consider their password-sharing policies, communicate with their customers and implement the appropriate technical measures.

Friendly fraud

Friendly fraud also happens with subscription models, most commonly with physical goods. For example, the fraudster may claim their goods were never delivered or that they were damaged or incorrect. Merchants should have excellent record keeping and use shipping partners with tracking capabilities to help reduce this type of fraud.

Transaction error

There can be problems with recurring billing, such as double billing, or cancellations not being processed. Merchants need to keep a close eye on automated payments to make sure everything is in order. Technical problems do happen, and advising customers that there has been an error and what steps you are taking to correct it goes a long way to build trust, as well as avoid chargebacks.

At Baer’s Crest we offer payment solutions to businesses with subscription-based payment models. Talk to us about the right services for your business.