If your business deals with recurring payments for prescriptions, memberships and subscriptions, you may be tempted to practice annual billing. This is when you charge your customer up front for a year’s worth of services or goods.
It’s easy to be persuaded by the apparent benefits. For one, by charging your customer up front, you get paid faster. For another, the process of collecting payment once can be more efficient, especially if you have no automated way to collect on recurring payments. The monthly process of printing, mailing and waiting on invoices to be paid — and then chasing down customers when they aren’t — isn’t effective.
But, it’s important to be aware of some annual billing pitfalls. When it comes to chargebacks, this billing method can turn sour fast.
The Chargeback Timeline
A chargeback is a disputed credit card transaction. The process is quite in depth, but it can be the result of a customer not recognizing a transaction, never authorizing the transaction or simply not wanting to pay for the goods and services rendered. The last scenario is an example of chargeback fraud. There are safeguards during the chargeback process to catch this behavior, but they aren’t ironclad.
A signature is the best defense against a chargeback, which is why businesses hold onto their paper receipts for up to seven years. But managing paper receipts can get hectic fast. The more time that passes between the credit card authorization and the dispute, the harder it’ll be to track down the signed receipt.
When you charge your customers annually, they have up to six months after the billing period to file a dispute. This means up to 18 months between the card swipe and the chargeback claim.
You might be wondering why your customers would initiate a chargeback. While you may offer incredible service, the problem with annual billing is that the customer could have a change of heart midway through. Take a customer who signs up for a gym membership, for instance. She may have signed up for a year to get a discount, but lost her motivation six months in. She doesn’t want to pay for a service she won’t use, so she files a chargeback to get her money back.
If you have a high chargeback percentage, you could face merchant account termination. This could force you to turn to high-risk Merchant Account Providers or render your business unable to accept credit card payments.
Held Annual Billing Funds
When a customer initiates a chargeback, the disputed funds are immediately returned to the customer while the review process takes place. During this time, the funds are removed from the business’s bank account and frozen until resolution. Because these transactions are for annual subscriptions and memberships, they tend to be larger and hurt businesses more as they sit in a frozen state — sometimes for 30 days or more.
As a business owner, you may think you’ll get guaranteed payment by practicing annual billing. It sounds like a win if — worst case — the customer only uses part of the service but pays for the whole year. But the reality is that the likelihood of getting paid for unprovided services is small compared to the probability that the whole annual payment is lost due to a chargeback.
If you’ve turned to annual billing to resolve the issue of recurring billing being unmanageable, look for solutions that streamline that process and prevent a large chargeback dispute from affecting your ability to do business going forward.
Do you process annual payments for your customers? Have you encountered these chargeback-related issues? We’d love it if you shared your experiences in the comments section below.