Before founding Chargeblast, my co-founders and I founded a B2C platform that charged users $9.99 per month to access different software tools. We rode the software wave in late 2022 and focused all our efforts on growth sales and expanding margins in early 2023. Little did we know, we would be spending 80% of our time trying to resolve our high chargeback rate so that Stripe would not shut down our processing account.
Through this experience, we gained an in-depth understanding of chargebacks and how they affect B2C subscription SaaS businesses in particular. We have the privilege of working with Geoff to highlight some of our key learnings and solutions so you can avoid the risk of the Stripe algorithm shutting down your processing account when scaling your business. We hope this will allow you to focus your attention on scaling your business rather than becoming a chargeback analyst.
Subscription SaaS is at higher risk of chargebacks because customers will dispute multiple months of charges in one go.
The subscription model is both a blessing and a curse. While businesses benefit from consistent and predictable sales from customers, when a customer decides to chargeback, they will often chargeback multiple months. This is because most credit card companies allow customers ~120 days from the date of purchase to file a chargeback. A payment dispute belongs to the month in which it’s raised, not the month when the original payment was captured, so when a customer charges back 3 months of subscriptions, that counts as 3 chargebacks in go.
When Stripe evaluates merchant risk, they look at trailing 3-month chargeback rate and wants merchants to be below 0.65%, which is the Early Warning threshold for the Visa Dispute Monitoring Program (VDMP). When merchants reach 0.9% or higher for too many months, they start to receive severe penalties, including processor account shutdown or an additional Visa fine of $50 per chargeback (on top of the Stripe $15 dispute fee). As you can see, there is a very low bar for chargeback risk in the eyes of Stripe, Visa, and Mastercard.
Friendly fraud is on the rise, and new tools are available that make it easier than ever for a consumer to chargeback.
Friendly fraud has been on the rise ever since consumers leaned into online shopping during the pandemic. Supply chain issues resulted in many delayed orders and upset consumers looking for ways to get their money back. However, consumers quickly realized that they could get their money back with a click of a button in their credit card portal but still receive the product weeks later (effectively free). Because credit card companies typically favor consumers in the event of a chargeback, more and more consumers have grown confident in their ability to get away with friendly fraud.
In addition, companies like Chargeback, Billshark, and Rocket Money have made it easier than ever for consumers to look through their active subscriptions and effectively get their money back with a click of a button. Merchants are in more need than ever to manage friendly fraud risk, which has grown to become an existential risk for many.
Even when consumers forget to cancel a subscription, they would rather click into their app to chargeback rather than reach out to merchant’s customer support line to request for their money back. Some of the most common reasons for charging back are, “I forgot to cancel,” “I accidentally put in my credit card information twice,” “I meant to only use it for the free trial period,” and “I didn’t mean to make the purchase.” While most merchants would instantly refund a customer for those reasons, customers would rather not have to admit their mistakes and just ask for their money back on an app in the form of a chargeback.
Real fraud is also a real concern. Subscription SaaS companies are prime targets for credit card testing due to low monthly price points.
Credit card testing is when a fraudster purchases hundreds of credit card details and tests to see if there is any cash or credit available in the cards. Subscription SaaS companies are the perfect targets for credit card testing because of their low monthly price points. The fraudsters want to know whether there is a bit of cash or credit on the card (even as low as $9.99) because they make their money on volume rather than hitting it big on one card. By skimming hundreds or thousands of cards, these fraudsters can get away with hundreds of thousands of dollars. These schemes can become quite complex, so it's important to understand the nuances of card testing so you can protect your business.
Luckily, solutions are available to reduce your chargeback rate to ~0% and increase your payment authorization rate by 5 - 9%
The most commonly used tool to keep chargeback rates at bay are pre-dispute alerts. We founded Chargeblast to send merchants pre-dispute alerts at the moment of a customer chargeback so the merchant can address the issue before Stripe finds out and an official chargeback case is opened. If the merchant refunds the customer or reaches out to the customer to withdraw the dispute within 48 hours, Chargeblast will notify the credit card company that the issue has been resolved. Chargeback avoided.
Many merchants will ask - what if I want to fight against chargebacks? Well, beyond putting your processing account at risk (a chargeback is recorded by the processor regardless of the outcome), the average win rate for a merchant is ~20%. With subscription SaaS monthly price points at $9.99 per month or $19.99 per month, the value of fighting a chargeback is $2 or $4 per chargeback. When you net this against the $15 dispute fee from Stripe, the true value of fighting a chargeback is negative $11 or negative $13 per chargeback. It makes much more sense to pay for pre-dispute alerts to keep chargeback rates near 0% and avoid the $15 Stripe dispute fee. Pre-dispute alerts are priced per chargeback and can often drive a significant return on investment. You can look into how this Gen AI company and telehealth company saved their Stripe account from closure.
In terms of fraud, Stripe Radar for Fraud Teams allows merchants to write custom rules to fight against fraud. These rules may include card velocity limits, which prevent merchants from testing back-to-back purchases using purchased card information. Rules can also include IP rules when a customer tries to make purchases from various IP addresses (indicative of VPN usage) and/or when the customer's IP address is located too far from the address associated with the billing address of the card.
While I could go on and on about chargebacks, I believe this post captured the key aspects of what a chargeback is and how to protect against it. We believe that merchants should be solely focused on their companies' growth and not on fighting chargebacks. Over $1 billion of annual transactions are protected from chargebacks by Chargeblast, and nearly 1,000 clients have entrusted their chargeback and fraud management to us. Don’t hesitate to reach out to me at [email protected]. As a founder myself, I am always free to help other founders scale their businesses with the ease of mind we wish we had on our first startup. I look forward to seeing your businesses scale with the help of Chargeblast! Make sure to book a call with me.
