Continuity Subscription Merchant Accounts: Why Approval Is Harder

As a continuity merchant, you face unique chargeback risks. Because of this, merchant account providers are more hesitant to approve new accounts. Often, continuity merchants will apply for an account and never know why their application was declined or terminated.

Ultimately, the reason for a declined account application is your classification, not your creditworthiness. A continuity subscription merchant account is considered high risk, so underwriters are stricter about their requirements. By learning how to build a stronger application, you can increase the odds that your account will be approved.

TL;DR

• Continuity subscription merchant services are considered high risk because this field has more chargebacks, cancellations, and refunds.
• Underwriters will evaluate account applications based on their chargeback history, account history, average volume, billing transparency, and website compliance.
• By preparing your underwriting documentation, updating your billing descriptors, and clarifying your cancellation process, you can increase the likelihood that your account will be approved. 
• Rolling, upfront, and capped reserves are charged to offset the provider’s risks. A portion of the merchant’s money is taken and held for an agreed-upon amount of time so that the provider can easily cover any chargebacks or refunds that occur.
• You can negotiate lower reserve requirements by reducing your chargeback rates, creating transparent cancellation workflows, and improving your financial stability.

PayCompass can help subscription merchants navigate the underwriting process and reduce chargeback rates.

Why Continuity Merchants Are Classified as High Risk

Because of the added risks involved, subscription payment processors are less likely to approve merchant accounts. Even if the account is approved, there is a higher likelihood that it will face merchant account holds or an account termination. In general, continuity subscription account providers are concerned about three main sources of risk.

• Chargebacks: One of the biggest issues is that continuity subscriptions have a higher chargeback rate than one-time sale businesses. Often, customers will forget they agreed to an additional charge and file a chargeback after their statement arrives.
• Refund and Cancellation Disputes: For similar reasons, continuity subscription merchants are also known for having higher rates of refunds and cancellations.
• Regulatory Attention: The Federal Trade Commission (FTC) and card networks scrutinize subscription merchants closely, which leads to increased compliance risks.

Common Chargeback Triggers for Continuity Subscription Merchants

There are a few different chargeback causes that occur with subscription businesses.

• Difficulty Canceling: When the cancellation process is confusing, a customer may be charged for a subscription they no longer want. If they can’t figure out how to cancel or refund their subscription, they may file a chargeback instead.
• Customers Forgot About Their Subscription: By the time the subscription is charged again, some customers forget that they agreed to it. This is a common source of friendly fraud, which is where customers dispute legitimate charges.
• Billing After Cancellation: Sometimes, the customer cancels too late to stop the charge. In other instances, the company may accidentally charge a customer who has already canceled.
• Free Trials That Converted To Paid Subscriptions: Often, subscriptions start with a free trial that eventually converts into a paid subscription. If the merchant doesn’t send a reminder, customers may be charged for a subscription they don’t want. 

Chargeback Causes for Different Business Models

High-risk industries are more likely to have chargebacks and disputes, which increases costs for payment processors. Even within industries, chargeback rates can vary based on the type of business model used. By understanding common chargeback causes for each business model, merchants can figure out ways to prevent disputes from occurring.

Business Model	Typical Chargeback Rate Range	Leading Reasons for Chargebacks
Standard E-commerce	0.3% to 0.9%	Fraudulent transactions, disputes over product quality, or item not received
Subscription/SaaS	0.5% to 1.2%	Cancellation problems, customers forget that the recurring billing will occur, or unauthorized charges
Continuity/Free Trial	1.0% to 2.5%	Unclear billing disclosures, customers forgot to cancel before the free trial converted to paid services, or customers didn’t read the enrollment terms
Negative Option Billing	1.5% to 3.0%	Unauthorized charges, misleading offers, or challenging cancellation processes.

What Underwriters Look for in a Continuity Merchant Application

When underwriters consider a business for a continuity subscription merchant account, they look at a range of factors. They want evidence that the merchant is running a stable business and does not use a deceptive business model. By showing that you give customers clear terms and have a low chargeback history, you can increase the odds that your high-risk account is approved.

The Features Underwriters Consider

When underwriters review applications for a high-risk subscription merchant account, they review a few specific features by requesting documentation about each topic.

• Business Model Clarity: During your merchant account setup, the underwriter will want to understand your business type and whether you use a continuity subscription model.
• Refund Rate: Your refund rate shows how many customers want their money back after subscribing. 
• Website Compliance: The underwriter will review your website to make sure there is a visible cancellation path provided and clear terms.
• Time in Business: Old, well-established businesses are generally viewed as a lower risk.
• Processing Volume: Your average monthly processing volume, ticketing size, and other aspects of your sales history help payment processors understand your company’s risk level.

A Checklist of Documents You Should Prepare for the Underwriters

To make your onboarding process as simple as possible, it helps to prepare the following documentation types.

• Business Formation: Gather your articles of incorporation, business license, EIN documentation, and operating agreement. These documents demonstrate that you are legally registered and allowed to operate.
• Processing History: Show your chargeback history, three to six months of your merchant statements, and your volume history. This data illustrates your financial stability and risk level to underwriters.
• Banking Documentation: Your reserve balance, three to six months of bank statements, and a voided check can be used to confirm cash flow for reserves and chargebacks.
• Proof of Ownership: Bring along proof of your ownership percentages, owner identification, and proof of address to satisfy the provider’s know-your-customer (KYC) requirements.
• Website Compliance: Show that your refund policy, terms and conditions, cancellation policy, and privacy policy are clearly disclosed on your website.
• Marketing Materials: Ads, posts, and other marketing items must be reviewed by underwriters for deceptive claims and false advertising.
• Chargeback Reduction Plan: Your dispute response workflow and fraud tools can demonstrate that you are proactively managing your chargeback risks.
• Fulfillment Documentation: Use your tracking process, customer support, and shipping timelines to show that you’re able to reliably fulfill orders.
• Financial Health: To demonstrate your financial stability and ability to meet reserve requirements, provide the underwriters with your profit and loss statements, tax returns, and balance sheet.
• Customer Service: Good customer support reduces chargebacks and complaints. To show your service quality, provide your customer support number, email, cancellation approach, and ticketing system.
• Billing Transparency: Show screenshots of consent screens, checkout, and recurring billing disclosures. Better billing transparency lowers the likelihood of chargebacks from customers who say they didn’t agree to recurring charges.

Reserves: What They Are and How To Negotiate Them

With continuity subscription payment processing, reserves are often required. The type of merchant account reserves required and the amount will depend on the account provider and your risk level. A reserve basically means that the provider holds some of your company’s earnings to counterbalance risks. You may be required to use rolling, capped, or upfront reserves.

• Rolling Reserves: A rolling reserve involves holding back around 5% to 15% of the merchant’s daily earnings for a set time period of 90 to 180 days. This directly impacts your cash flow by limiting the funds you can access. Because the funds are released over time, the ongoing impact is not as severe as it is with upfront reserves.
• Capped Reserves: Capped reserves are essentially rolling reserves, but there is an upper limit to how much can be accumulated. This reduces the impact on your ongoing cash flow while reducing the subscription payment processor’s exposure.
• Upfront Reserves: With upfront reserves, the merchant must deposit funds before they can receive continuity subscription merchant services. Since this amount can range from $5,000 to over $25,000, it can have a significant effect on a company’s startup costs.

Because of the impact reserves have on your cash flow, it’s important to negotiate lower reserve rates whenever possible. You can typically do this by demonstrating a strong track record, having a consistently low chargeback rate, and providing a clear cancellation policy.

Show a Strong Track Record

The best way to negotiate a better rate is through data. If you can show consistent operational performance over an extended time frame, you’ll have stronger negotiating leverage. Often, this involves 6 to 12 months of your processing history, sales volume, and cash flow.

Demonstrate a Low Chargeback History

If you’ve historically had a low chargeback rate, then your account is less risky for the merchant account provider. For the best negotiating power, try to get your chargeback rate under 1%. When chargeback rates are low, it indicates that customers understand the product and receive what they paid for. With a low chargeback rate, you can negotiate a reduction in your reserve percentage and the holding period.

Clarify Your Cancellation Policy 

An unclear cancellation policy makes it difficult for customers to cancel their purchases, which increases the likelihood of chargebacks. Because of this, the underwriter will likely review your recurring billing disclosures, cancellation visibility, refund policies, and self-service cancellation policies. 

Billing Descriptors and Cancellation Policies That Reduce Chargebacks

When you apply for continuity subscription payment processing, the payment processor’s main job is to evaluate your risk level. Anything that is unclear or confusing to customers can increase this level. If customers are confused about your cancellation policy or don’t recognize your billing descriptor, it can lead to disputes.

What a Compliant Cancellation Policy Looks Like 

To create a good cancellation policy, start with the billing disclosure. Customers should be aware of when the next billing date will be, as well as the last day they can cancel their subscription. The cancellation and refund policies should both be easy to find. You should also have customer support numbers and email addresses readily available so that customers have an easy alternative to chargebacks and refunds.

What Your Billing Descriptor Should Include

Your billing descriptor is the company name next to the purchase total on the customer’s account statement. If the customer doesn’t recognize the name on their statement, they may file a chargeback. 
A good billing descriptor should include the name of the company. It can also help to include the name of the product purchased or a customer support phone number.

Choosing a Processor for Your Continuity Business

To find the right continuity subscription merchant services, you should ask the payment processor about their high-risk experience, chargeback support, and knowledge of your business model. Otherwise, you may struggle to get your account approved or may face account termination later on.

• Explicit Support for Continuity and Subscription Billing: The best processor will have experience handling continuity subscription payment processing. They should understand subscription billing processes, trial-to-paid conversions, subscription retention tools, and customer lifecycle billing management.
• High-Risk Experience: Before picking a processor, ask if they have experience working with high-risk verticals. They should have a team of underwriters who understand how to evaluate continuity merchants.
• Transparent Reserve Policies: While reserve requirements are normal with a high-risk subscription merchant account, they must be clearly conveyed upfront. This ensures you know what to expect so that you can plan your cash flow accordingly.
• Chargeback Monitoring: Because of the higher rate of chargebacks involved, it’s essential to have a processor that offers real-time chargeback alerts, chargeback analytics, fraud prevention tools, and dispute management tools.
• Processors Who Know How To Handle Chargebacks: Besides chargeback monitoring and prevention, you need a processor that knows how to evaluate and respond to chargebacks that do occur. You don’t want a processor that may terminate your account when the first chargeback occurs.

How PayCompass Can Help Continuity Businesses 

From our understanding of high-risk industries to our customized merchant account solutions, PayCompass can help continuity subscription and high-volume recurring businesses access the processing tools they need. We can guide you through each step of the underwriting and onboarding process. Once your account is set up, our team can help with chargeback monitoring, billing descriptor optimization, and improving your compliance.

Final Thoughts

Setting up a continuity subscription merchant account is harder than applying for a standard account because of the added risks involved for the processor. Chargebacks and disputes are more common, so many processors do not work with continuity subscription merchants. Even the processors who are willing may expect extra reserve requirements.

By preparing the right documentation, improving your cancellation workflows, and updating your billing descriptors, you can increase the likelihood that a processor will approve your account. For more information about how you can get approved, reach out to PayCompass today.