Recurring Payment Solutions: How To Reduce Failed Renewals and Chargebacks

With a subscription model, companies generate consistent recurring revenue instead of relying on a single upfront purchase. Because of this, a failed renewal represents a major risk to your revenue stream. Each time a renewal fails or a chargeback occurs, you are losing an ongoing source of income.

By understanding chargebacks, failed renewals, and why customers dispute charges they don’t recognize, you can protect your company’s bottom line. For the best recurring payment solutions, read on.

TL;DR

• A recurring payment solution includes pre-dunning communication, smart retry logic, chargeback prevention tools, support for billing descriptors, and automatic updater tools.
• Failed renewals are often caused by expired cards, insufficient funds, and other types of soft declines. Because of this, retrying the transaction is often an effective way to recover lost revenue.
• When you handle merchant-initiated transactions (MITs), you must capture and store the customer’s authorization for compliance reasons and potential chargeback disputes.
• By sending out pre-dunning emails and text messages, you give customers a chance to update payment information and cancel the subscription if they need to. In turn, this can lower the rate of chargeback disputes.
• PayCompass can help recurring payment merchants optimize their payment systems through smart retry logic, account updater integration, billing descriptor support, and chargeback monitoring.

What Are the Risks Involved With Using Recurring Payments?

While recurring payment processing offers a predictable revenue stream, there are also risks involved in using this approach. Involuntary churn can happen if a customer files a chargeback for a transaction they don’t recognize or get buyer’s remorse. Even if the customer wants to make the purchase, an expired card and insufficient funds can stop the payment from going through.

Involuntary churn, chargebacks, compliance risks, and fraud are just some of the risks facing this industry. By understanding these risks, businesses can determine the best ways to mitigate them.

Risk	Cause	What You Can Do To Prevent or Mitigate It
Soft Declines	Temporary issuer limitations	Smart retry logic, alternative fallbacks, automatic account updaters, and issuer optimization
Hard Declines	Stolen, invalid, or closed cards	Payment method update
Failed Renewals	Expired cards or insufficient funds	Automatic card updaters and smart retry logic
Friendly Fraud	Customers dispute a legitimate transaction	Consent records, transaction records, and cancellation policies
Chargebacks	Unrecognized charges	Clear billing descriptors, transaction records, and renewal notifications
Poor Retry Strategy	Too many retries in a short time period	Adaptive retry logic

What a Recurring Payment Solution Actually Needs To Include

A recurring payment solution isn’t just a way to run pre-authorized payments. It also includes important features and tools that verify the authenticity of the transaction, retry failed payments, prevent chargebacks, and more. 

These individual components matter. If a business has a billing system set up but no retry logic, they can easily lose 10% to 15% of payments due to soft declines. In many cases, these declines would disappear following a second processing attempt.

Consent, Capture, and Storage

The recurring payment system is responsible for capturing and storing the customer’s consent. This is the document where the customer explicitly consents to future charges. Besides ensuring your compliance, consent records are necessary if a customer files a chargeback dispute for unrecognized charges. 

Authorization at Signup

With authorization at signup, the payment information is verified before the actual payment is run. If the account number is incorrect, the card is fraudulent, or there are insufficient funds, this step gives you a chance to fix the problem. In turn, you can avoid having failed first payments and fraudulent signups.

Retry Logic for Failed Payments

The leading cause of involuntary churn is failed payments. The subscription payment processor can prevent this issue with intelligent retry logic. 

Rather than immediately retry a failed transaction, the system can space retries apart. The retry can also be delayed until after common paydays have passed.

A smart retry system will analyze the decline reason code to determine if a retry is necessary and what timing makes the most sense. By doing so, these systems can help companies effectively recover soft declines.

Pre-Dunning Communication

Pre-dunning communication refers to the emails, texts, and phone calls that are sent out to remind customers about upcoming payments, expired cards, and payment retries. They are essential for getting payments updated before a payment failure occurs.

Sometimes, chargebacks take place because customers don’t recognize the transaction on their billing statement. By sending out pre-dunning emails, you can decrease the likelihood of this happening. If customers want to cancel the transaction, this also gives them the opportunity to do so in advance instead of filing a chargeback later on.

Billing Descriptor Management

Your merchant billing descriptor is the name that customers see on their billing statements. If your descriptor name is significantly different from your brand name, customers may not recognize the charge. By clarifying your descriptor, you can prevent chargebacks.

Chargeback Prevention Tools

One of the most important features in a recurring billing system is your chargeback prevention tools. Subscription-style billing is especially prone to chargebacks.

Some of the most effective tools include transaction monitoring, fraud detection systems, dispute management workflows, renewal emails, clear cancellation policies, and strong customer support. By giving customers advance warning about upcoming charges and alternatives to chargebacks, you can reduce the number of disputes filed.

Getting Consent and Authorization Right

Recurring payments are considered merchant-initiated transactions, so they carry specific obligations and risks. Basically, an MIT is any transaction that occurs after the initial cardholder-initiated authorization. Because of this, there are special authorization forms, disclosures, and cancellation requirements involved.

Provide Clear Disclosures

During the initial transaction, the merchant must provide specific disclosures. They must detail the amount of future transactions, when billing starts, the billing frequency, and whether the price will change following an initial free trial. Additionally, the merchant should detail the cancellation process so that the customer can cancel future payments instead of filing a chargeback.

Store a Record of the Payment Authorization and Confirmation

If a dispute or chargeback occurs in the future, you’ll need to provide a record of the payment authorization and confirmation in order to win your case. For your compliance and chargeback prevention, you’ll likely need to store the following types of records.

• Timestamped consent
• Terms and conditions acceptance
• The IP address and device data used to sign up
• Email and SMS messages confirming the purchase
• Checkout confirmation records

Verify Cancellation Flow Compliance 

Under the Federal Trade Commission’s (FTC) proposed Click-to-Cancel rule, the government sought to make canceling recurring billing as easy as possible. While the implementation of this rule is still held up in the courts, businesses should review their compliance in the interim.

Even if you are operating in an area that doesn’t require simple cancellation processes, it’s a good idea to update your current cancellation flow. Transparent, well-communicated cancellation policies provide customers with an alternative to filing chargeback disputes.

Reducing Failed Renewals With Smart Retry Logic

When it comes to payment authorization, one of the most important tools you can use is smart retry logic. Often, recurring payment processing fails because of insufficient funds, expired cards, changed card numbers, and hard declines. While you can’t fix hard declines, these other causes may be remedied by retrying at the appropriate time, using pre-dunning emails, and adopting an automatic updater.

How Smart Retry Logic Works

Smart retry logic involves retrying transactions at different times or on different days. It also incorporates an account updater service that automatically captures new card numbers when the customer gets a new card.

For example, let’s assume the customer set up their subscription on the 14th of the month. Their subsequent payment fails because of insufficient funds. Because some companies pay on the 1st and the 15th, the smart retry logic may attempt the transaction again the next day and successfully process the payment. 

Use Pre-Dunning To Improve Your Approval Rates

To improve your approval and acceptance rates, you need pre-dunning emails and SMS. Your recurring payment system should automatically send out a message before the billing date as a reminder. Additionally, the system will send reminder messages with self-service options whenever a card expires and needs to be updated.

Optimize Your Failed Payment Recovery: A Quick Checklist

To help you optimize your recurring payment solutions, we’ve compiled a list of the most effective failed payment recovery steps.

• Use intelligent retry schedules that are based on the user’s behavior.
• Automatically retry soft declines that occur.
• Don’t retry hard declines.
• Avoid retrying cards rapidly at once. Instead, space the card retries over multiple days.
• Use card updater services to automatically nudge customers to update their cards.
• Send update reminders before the card’s expiration date.
• Prevent payment failure from expired cards through tokenization.
• Send pre-renewal reminders.
• Let customers know immediately if their payment has failed.
• Clarify your billing descriptors so that customers will easily recognize them.
• Make it as simple as possible for customers to manage their subscriptions.
• Ensure your descriptor matches your brand name.
• Store customer consent records.
• Monitor your subscription metrics for any concerning changes.

Billing Descriptors and Chargeback Prevention

A major portion of subscription chargebacks stems from customers who do not recognize the charge on their accounts. By clarifying your billing descriptor, you can prevent one source of chargebacks.

What You Should Include in a Good Billing Descriptor

To make an effective billing descriptor, you should always use a business name that the customer would recognize. Whenever possible, you should also include the product or service. You can reduce chargebacks by adding a customer service phone number, so customers can easily call for help instead of filing a chargeback.

Chargeback Triggers That Are Unique to Subscriptions

When you handle pre-authorized payments, there are a few specific chargeback risks you are more likely to deal with.

Trigger	Cause	Prevention Step
Unrecognized Charge	The customer didn’t recognize the billing descriptor or the recurring transaction.	Clarify your billing descriptor and send reminder emails in advance.
Friendly Fraud	After the purchase was complete, the customer decided to dispute the transaction to recover the funds they paid.	Store transaction records and receipts. Update your cancellation policy. Send renewal notices.
Duplicate Charges	There are multiple charges for the same purchase.	Use billing validation checks and monitor transactions.
Challenging Cancellation Processes	The client can’t figure out a different way to cancel future transactions.	Make canceling subscriptions easier.
Billing After Cancellation	The customer already canceled their subscription, but they were still billed.	Clarify cancellation timelines. Simplify the cancellation process through click-to-cancel measures.
Forgotten Transactions	The customer didn’t realize the transaction was going to happen.	Send reminder emails.
Fraudulent Subscription Signups	Someone stole the cardholder’s card or account number and paid for the subscription.	Use AVS and CVV verification to reduce the likelihood of fraud. Implement fraud screening tools and velocity checks.
Free Trials That Converted to Paid Subscriptions	The customer signed up for the free trial and forgot to cancel before the subscription ended.	Send pre-dunning emails and SMS before the end of the trial so that customers have a chance to cancel.
Poor Customer Support	The customer filed a chargeback because they couldn’t get help from customer support.	Clarify your return and cancellation policy. Train workers on how to help dissatisfied customers.
Delayed Refund Processing	Because the refund was taking too long, the customer filed a chargeback instead.	Quickly provide refunds for eligible transactions. Communicate the expected timeline as clearly as possible.

How PayCompass Can Optimize Your Recurring Payments

Managing recurring billing processes isn’t just storing consent and running payments. For your business to achieve a high acceptance rate and low chargeback rate, you need account updater integration, native support for MITs and subscriptions, customizable retry logic, chargeback monitoring support, and billing description control.

Whether you use a free-trial model or are a continuity merchant, you need a subscription payment processor that specializes in dealing with high-risk transactions. At PayCompass, we offer support for recurring payment processing and continuity subscription pages. By helping you manage the operational and risk challenges that come with this business model, our team can support lower rates of failed renewals, better approval rates, improved billing compliance, and reduced chargeback risks.

Final Thoughts

While recurring billing practices bring in a consistent flow of income, this model also carries unique risks. Through intelligent retry logic, clear billing descriptors, chargeback prevention measures, and other tools, you can avoid chargeback disputes and failed renewals. 

PayCompass can help through failed renewal recovery, advanced fraud detection, and subscription payment authorization. To learn more about recurring payment solutions, reach out to our team today.