How to Avoid Chargebacks in SaaS

I have dealt with many chagebacks. They can be a good thing for consumer rights, but many folks will abuse the system.

Thus, we need to focus on prevention. That’s what I’ll mainly discuss. Afterward, I’ll give you the 101 for chargebacks so you’ll know what you’re dealing with.

Let’s stop some chargebacks.

Key Takeaways

• Use AVS, fraud scoring tools, CVV codes, 3D Secure, and automated fraud detection software.
• Offer multiple support channels, notifications, feedback systems, and easy cancellation processes.
• Set clear terms, automate billing notifications, and use secure payment methods.
• Offer clear invoices, encourage payment updates, and offer flexible billing options.
• Stripe offers dispute protection for SaaS merchants; other payment gateways have limitations.
• Invest in fraud prevention tools, accept Apple Pay, and use dispute alerts.

Here’s How to Avoid Chargebacks in SaaS

The following are ways to help you avoid chargebacks in SaaS:

1. Fraud prevention
2. Better customer service
3. Optimizing the subscription experience
4. Address potential billing issues

Software supposedly has the highest chargeback-to-transaction ratio, 0.66% [1].

The industry average is 0.60%.

This is usually because customers like to abuse the subscription model.

These methods of reducing chargebacks sound “cookie-cutter.” However. There’s more depth that other folks don’t talk about.

But I will.

Let’s dive in.

1. Implementing Fraud Prevention Tools

Your goal here is to collect as much information as possible. You need to verify that the customer is who they say they are.

This information includes:

• IP address
• Name
• Address
• Previous orders
• Phone number
• Device type
• Email address
• Payment method

In some cases, like with Visa, you could use Compelling Evidence 3.0 to see details from previous transactions.

If the payment details match the one used for the disputed order, the dispute doesn’t go through.

Fraud scoring tools (like what Stripe’s) helps automate this process. Pair that with their chargeback protection and you’ll be able to protect yourself.

From there, you’ll integrate automated fraud detection software. These tools analyze transactions and flag suspicious activities.

Set up filters to identify risky behaviors. Examples include multiple failed payment attempts or unusual purchasing patterns.

This helps block fraudulent transactions before they complete.

Next, use address verification systems (AVS).

AVS compares the billing address with the cardholder's address. Mismatches can mean potential fraud. 

Requiring CVV codes during payment also works. These confirm the buyer has the physical card.

From there, use 3D Secure authentication. This adds an extra layer of security by requiring customers to verify their identity during the purchase.

Some software like Signifyd offers all-in-one solutions. Such software blocks orders if they’re suspicious.

Part of how you’ll prevent disputes is by talking.

Summary: Use fraud prevention tools like AVS and fraud scoring tools. Also, you collect CVV codes.

2. Enhancing Customer Communication

Does your customer service representative speak to a customer about pricing? Yes? They must mention ALL costs and other fine-text information that could lead to issues.

Yes, you might lose sales because potential users are deterred by what they hear.

But you prevent a potential chargeback. One that could tank your business.

Otherwise:

Improve customer service by offering multiple support channels.

Provide email, phone, live chat, and self-service portals. Respond quickly, as customers need prompt solutions.

This reduces frustration and the chance of chargebacks.

Send proactive notifications about billing changes, renewals, or service interruptions.

Customers should not encounter surprises. And make sure all communication is clear and timely.

Implement a feedback system to gather customer insights. This allows you to address issues before they escalate. Understanding their needs helps prevent dissatisfaction. Continuously improve your service based on this feedback.

Finally, offer easy cancellation processes.

Complicated cancellations lead to disputes. As 81% of customers find it easier dealing with chargebacks.

Streamlining this process increases customer trust.

Now that your customer service is better, it’s time to optimize the subscription experience.

Summary: Offer multiple channels that sub-businesses can contact you through. Also, make cancellation easier.

3. Optimizing the Subscription Experience

Start by setting clear terms. Ensure customers know the subscription details.

Use simple language. Make the pricing, billing frequency, and cancellation policy clear.

Do all this in your terms of service.

From there, ensure that users read and agree to these terms before subscribing.

The goal is to set expectations and ensure customers know what they’re getting into.

From there, automate billing notifications. Send reminders before billing. This reduces surprise charges. 

For the payment process, do the following:

• Ensure secure payment methods.
• Use tokenization to protect data.
• Make the payment process smooth.
• Prevent technical issues.
• Keep the system reliable.
• Offer multiple payment options.

Doing these will increase customer satisfaction.

Regarding sub-merchants.

Educate them.

They should know the best practices. Provide training on managing subscriptions. Share tips on reducing chargebacks.

Lastly, stay compliant with industry regulations.

Follow PCI DSS guidelines.

Regularly audit your systems

Doing both reduces the risk of data breaches.

PCI DSS is a set of rules businesses must follow to keep credit card information safe. These rules help prevent hackers from stealing card details and making unauthorized purchases. 

Now that’s out of the way, let’s discuss dealing with sub-merchants.

Summary: Be transparent and make the payment process as smooth and secure as possible.

4. Address Potential Billing Issues

Offer clear, detailed invoices. Break down all charges so customers understand what they’re paying for.

This reduces confusion and disputes.

Customers should also have easy access to these.

Next:

Encourage users to update their payment details regularly. Offer simple ways to update this information within your platform.

Expired or incorrect payment information can lead to failed transactions and disputes.

Provide a trial period for new customers. This allows them to explore the service without commitment.

If they decide the service isn’t right for them, they can cancel before the first billing cycle. This approach lowers the chances of chargebacks from unhappy users.

Offer flexible billing options. Allow customers to choose billing frequencies that work for them. Examples include monthly, quarterly, or annually.

Doing this can help avoid unexpected charges.

Communicate any changes to your service or pricing in advance.

If customers are informed ahead of time, they are less likely to feel blindsided.

Track and analyze chargeback data.

Identify patterns and common issues that lead to disputes.

Use this data to adjust your processes and reduce future chargebacks.

For example, if you notice a spike in chargebacks after a specific update, investigate and address the root cause.

Lastly:

Build strong customer relationships. Check in with customers to ensure they’re satisfied. A strong relationship can lead to direct communication instead of chargebacks when issues happen.

Most prevention methods are universal across industries.

We have a separate guide that’ll provide more information on ways to prevent disputes.

Otherwise:

You should look into software that’ll reduce chargebacks.

Summary: Offer detailed invoices and billing descriptors.

Merchant Protection Against Chargebacks: Your Options

The only payment processor that offers chargeback protection for SaaS is Stripe. They’ll cover the costs of disputes on eligible transactions. Moreover. You’ll get Stripe Radar. A useful fraud-scoring tool.

Since you’re selling digital products, you won’t have much luck with many payment processors. As requirements typically include the sale of tangible products

Thus, you couldn’t use Shopify, Amazon, and PayPal’s protections.

Otherwise:

I recommend investing more in fraud and chargeback prevention software.

For fraud, accepting and encouraging the use of Apple Pay is a great place to start. They supposedly reduced chargeback rates by 25% for some businesses [2].

Since customers’ cards are tokenized and require strict verification. This means that there’s less of an opportunity for someone to steal their card.

As for chargebacks…

Dispute alerts are the best that you can do regarding software investments.

Most providers offer them, but bundle them with chargeback representment software, which you don’t need. Adding costs.

We offer alerts that have reduced chargeback rates for some SaaS companies by up to 91%.

Focus on account and data security.

Be transparent with customers.

And follow the prevention tips mentioned.

That’s the best you can do.

If you really want to tackle chargebacks, you’ll need to get into the meat and potatoes.

Summary: Stripe is the only payment processor with protections for SaaS merchants. Otherwise, use chargeback alerts and consider Apple Pay to reduce disputes.

What is a Chargeback, Anyway?

A chargeback is when a shopper complains about an issue with a transaction with their bank or card brand. In the chargeback process, these are known as issuers. Chargebacks often result in the forced reversal of funds for merchants.

So long as the customer wins the dispute.

The issuing bank is always the decider of the chargeback process. Your payment processor (AKA acquirer) represents you.

They’ll be your middleman and communicate with the issuer. They will also be the one pulling money from your account and applying a chargeback fee.

That means you’ll use them for the following:

• To send evidence to.
• Receive a chargeback notification.
• Know whether you won the dispute.

Oh yeah.

Banks, card brands, and processors often use the terms “dispute” and “chargeback” interchangeably.

The process will involve you receiving the notification, sending your evidence, and waiting for a decision.

This can take up to 120 or more days.

The actual process will vary by payment processor and card brand.

The time it takes will depend on the dispute’s complexity.

For instance, if there’s fraud involved, it’ll take longer. Because cases like these typically involve law enforcement.

If you win the dispute, the processor will reimburse the disputed amount. But not the chargeback fee. Only processors like Shopify Payments will reimburse the fee if you win.

Then there are credit versus debit card chargebacks.

The differences between them is with the liability the customers have.

You should know the basics of chargebacks by now. If not, click on any of the links in this section to learn more.

Or, check out our in-depth guide on disputes.

You might be able to see why these suck. But I want to emphasize. That way, you’ll know why prevention is critical.

Summary: Chargebacks are when a shopper brings up an issue about a purchase. This often results in a forced reversal of funds.

Why Are Chargebacks Challenging for SaaS Companies?

Chargebacks erode SaaS revenue, drain resources, and harm reputation. Disputes are costly and time-consuming. High chargeback rates risk payment processor penalties.

First off, there are chargeback fees.

These cost $25 – $100 per dispute. The fee will vary by payment processor.

Processors apply this fee to make up for the chargeback fee that the customer’s card brand or bank charged them.

There’s no way to reverse this fee.

However:

If the chargeback is done through Shopify Payments, and you win, they’ll reimburse it. Or if you’re a business that operates in Mexico and uses Stripe.

Then, there are dispute monitoring programs.

Card brands will place you in these if you exceed their chargeback thresholds.

They’ll often result in the following:

• Higher fee per chargeback.
• $20,000+ review fees to help you become compliant.
• Termination; you’re unable to process that specific card.

The rates to be considered “excessive” will vary by card processor.

Visa will place you in it if you have”

• Slap on the wrist: 0.65% dispute rate. 
• You passed the red line: 0.9%
• Immediate fines: 1.8%

Payment processors will deal with dispute rates differently.

For instance, Amazon has a 1% threshold but doesn’t have a dispute monitoring program. Instead, they’ll label you as a high-risk merchant and restrict your privileges.

And finally.

Chargebacks are a nightmare because there’s no guaranteed way to stop them.

For instance, 1 in 4 customers admitted to committing friendly fraud [3]. They’re the most common chargeback type.

And there’s not too much you can do to prevent friendly fraud. As it involves the customer trying to defraud you.

Worry not.

Businesses typically win 43.82% of friendly fraud disputes. Much higher than the 30% industry average.

Fraud win rates are around 9%. These make up less than 1% of disputes, though.

You might have read through all of this and wondered if chargebacks are refunds in disguise.

No. And I’ll explain why.

Summary: Chargebacks lead to higher fees, are hard to prevent, and can result in being placed in dispute monitoring programs.

Are Chargebacks the Same as Refunds?

Chargebacks and refunds are different processes:

• Refunds are given directly by merchants.
• Chargebacks are handled by customers' banks.

Merchants prefer refunds because chargebacks cost them more. Chargebacks can result in extra fees for merchants. They may also lead to restrictions on the merchant's account.

72% of shoppers don’t know the difference between the two.

Now you should, though.

We go into more depth in this area in a separate guide. Check it out.

Summary: Merchants initiate refunds. Customer’s banks start the chargeback process.

Common Causes of Chargebacks in SaaS

Here are the typical causes of chargebacks in the software as a service (SaaS) industry:

• Fraud
• Subscription and cancellation issues
• Billing errors
• General dissatisfaction

These sections will focus on explaining what each cause is, what kind of damage they can lead to, and potential ways to stop it.

Let’s dive in.

1. Fraudulent Transactions

Thieves use stolen payment info for unauthorized purchases. Cardholders notice these charges and complain.

This leads to chargebacks for SaaS companies.

These aren’t the same as chargeback fraud or friendly fraud. Since the account holder didn’t authorize the purchase.

These typically make up for 1% of disputes. However. For every dollar dealt with in fraud, you lose $3.36. Such costs often result in merchants losing 5% of their revenue in fraud.

That’s why many mid-sized businesses spend up to 11% of their annual revenue on fraud prevention.

And merchants often win 9.27% of these chargeback cases.

Thus, they’re not worth fighting most of the time.

Wait:

Wouldn’t I save more by considering it as the cost of doing business?

Yeah. So long as you want to lose access to your payment processor and your user’s trust.

Many card brands and payment processors will look at the amount of fraud you have. If you have too much, they’ll cancel your account or place you in fraud monitoring programs.

The programs are nasty because they can result in fines of tens of thousands of dollars or more.

If you don’t fix your rates, you’ll lose access to the card network.

And if you can’t process cards or other forms of payments, how will you get money? By having customers send you envelopes filled with cash each month?

I digress:

Here are ways to find fraud:

• Watch for unusual patterns in user behavior.
• Use AVS and CVV checks during purchases.
• Look for mismatches between billing and IP locations.
• Check for suspicious email addresses.

Most of these solutions fall under the preventative steps mentioned in this guide. 

But here are some possible additional steps you could take:

• Add extra security with multi-factor authentication.
• Set limits on transaction numbers or sizes.
• Check high-risk transactions before approving them.
• Keep your security system up to date.

The next issue is also serious, but not as severe.

Summary: Fraudulent transactions happen when someone uses stolen information to make a purchase.

2. Subscription & Cancellation Issues

Customers may feel trapped by auto-renewals they didn’t expect.

This happens when the renewal process isn’t clear.

Auto-renewals also become problematic when customers forget about them.

They might not remember signing up or expect the subscription to renew. When unexpected charges appear, they often feel deceived.

This leads to frustration. And frustration leads to chargebacks.

Unclear cancellation processes add to the problem.

If canceling a subscription is difficult, customers may think the company is making it hard on purpose. 

Complicated steps or hidden cancellation options can lead to anger and mistrust. When they can’t easily cancel, they may choose a dispute as the quickest solution.

While auto-renewals help maintain steady revenue, you must clearly communicate them.

Let’s move onto billing errors.

Summary: Users often feel trapped by unexpected auto-renewals.

3. Billing Errors

Mistakes like incorrect charges or unauthorized payments frustrate customers.

If you read the previous section, you likely remember what frustration leads to…

Administrative mistakes also lead to chargebacks. These include incorrect data entry, wrong billing amounts, or failing to update payment details.

Such errors cause customers to lose trust.

System glitches can have a similar impact.

For example, technical issues might double-charge a customer or fail to apply discounts.

Administrative mistakes and system glitches damage the customer relationship. They lead to disputes, which are costly and hurt your business's reputation.

Okay, now you have a chargeback. What do you do?

Summary: Entering the wrong billing information can lead to disputes.

How to Respond to SaaS Chargebacks

Here’s how you would respond to chargebacks:

1. Act quickly: Time is critical in chargeback disputes.
2. Gather evidence: Collect transaction details and proof of delivery.
3. Understand the reason: Review the chargeback code provided.
4. Craft a clear response: Include relevant facts and documentation.
5. Submit promptly: Adhere to the given deadline for your response.

Let’s break down each of these points:

1. Act quickly.

Respond to inquiries from your payment processor ASAP and within their required timelines.

Here are some of these time frames for reference:

• Discover: 5 days
  • Retrieval requests: 20 days
• American Express: 20 days for inquiries and chargebacks
• Mastercard: 45 days
  • Second chargeback: 30 days
• Visa: 20 days

Your payment processor will tell you how much time you have to reply.

Failure to do this will result in an automatic dispute loss. There’s no way you can convince the acquiring bank otherwise.

2. Gather evidence.

You’ll build a representment package that includes your evidence and a rebuttal letter.

Payment gateways will typically have online platforms where you’ll submit your evidence. For the most part, they’ll explain what you need.

Most of this includes information like:

• Transaction details
• Fraud scoring tool results
• Communication logs between you and the user
• Screenshots of relevant sections from your chargeback

This isn’t a comprehensive list.

The actual evidence you’ll submit will vary by chargeback reason code.

3. Review the reason code.

You should see a reason code if your chargeback was done through a payment gateway and for cards like Visa.

Use the reason code to interpret why the dispute happened. Also, use it as a guide to determine the evidence you should gather.

Here are lists of all reason codes to help you get started:

• Visa
• Mastercard
• Discover/JCB
• American Express

If the transaction was made through a Visa card and flagged as fraud, Visa Compelling Evidence 3.0 will be used.

This allows you to share 2 previous transactions the cardholder did to prove that the transaction wasn’t fraudulent.

The more evidence you can gather, the better.

4. Write a rebuttal letter.

A rebuttal letter is a written response to counter a claim or decision.

Here are the components it’ll usually have:

• Introduction: Purpose of the letter and the issue being addressed.
• Acknowledgment: Recognize the original claim or decision.
• Counterpoints: Provide evidence or arguments against the original claim.
• Supporting Details: Relevant facts or documentation to support your rebuttal.
• Conclusion: Summarize your main points and state your desired outcome.
• Professional Tone: Maintain a formal tone throughout.

5. Submit your evidence.

Use your payment processor’s dispute management gateway to submit evidence. From there, they’ll pass it onto the customer’s bank or card network.

From there, you wait for a decision.

Your payment processor may request more information. If they do, submit it immediately.

The way you’ll deal with chargebacks is universal across all industries. The main differences are the reasons for the dispute and the evidence you’ll submit.

That’s all I have to teach you.

Now, go. Prevent disputes. Win chargebacks.

Summary: Deal with disputes by responding quickly with evidence relevant to your case.

Wrapping Up

Most of the ways to prevent chargebacks are the same as in other industries. The main difference is that you won’t have as much chargeback protection as those selling physical items.

One of the better ways to go is to use chargeback alerts. These allow you to refund customers before they escalate to a dispute automatically.

We offer such alerts. Learn how we can help.

Sources

• [1] Avoid chargebacks. Stax.
• [2] Lenders fight against chargebacks. PayNearMe. 3/25/2021.
• [3] Not so friendly fraud. Enigma. 4/23/2024.