If your business offers subscription services or has a subscription element, you’ll realise the complexities this adds to payment processing. There are various challenges to overcome before you can run a seamless recurring payment process, ensure risks are averted and remain compliant with the additional regulatory requirements. In this blog, we outline four key subscription-based payment model challenges that merchants must combat.
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Why is payment processing more complex for businesses with a subscription model?
Payment processing for businesses with a subscription-based payment model is more complex and nuanced than most forms of ecommerce and traditional payment models. There are so many other factors to consider, from managing customer accounts, securely storing user card details for recurring payments, rebilling and chasing customers whose monthly payments fail (such as when a credit/debit card expires), plus dealing with changes to subscription preferences.
In addition to these complexities, there are the regulatory differences and the perception of businesses with subscription models, that can impact reputation and stability.
Let’s dive into the specific challenges for businesses with a subscription-based payment model and what issues merchants face in each case.
Top subscription-based payment model challenges for merchants
1. Ensuring regulatory compliance
With managing recurring payments comes additional regulatory obligations, to ensure that customer data is protected and processed responsibly. Also, merchants need to ensure that consent is captured for ongoing payments for products and services, information is clearly displayed about short and long-term costs of subscribing and guidance is given about how to unsubscribe – with easy options to do so.
If you’re giving customers trials or offers that subsequently turn into paid options or increased costs after a certain time, again these details must be clearly communicated to customers at various times and across different channels.
Failure to comply can lead to significant repercussions, both financial and reputational, and the knock-on effects can be very damaging for your business. For example, businesses can incur fines of up to £80,000 ($100,000) per month for PCI DSS compliance breaches. And as most recurring payments are made by card, it’s vital to meet obligations outlined by PCI DSS (Payment Card Industry Data Security Standards).
2. Gaining a stable processing account
Having a stable processing account is crucial for companies with a subscription-based payment model, especially new businesses. Various factors can impact the stability of your processing account, such as an excessive volume of chargebacks and high chargeback-to-sales ratio, a high loss of revenue from failed payments or missed opportunities and the perception of a high-risk business and reputational damage.
A stable processing account is the lifeblood of your business, so we advise seeking risk management support from your payment service provider.
3. Retaining customers and increasing CLV
Although all businesses need new customers, it’s well known that retaining customers is far more cost-effective than acquiring new ones. For example, let this statistic sink in: the success rate of selling to an existing customer is 60-70%, compared with 5-20% when selling to a new one.
Customer retention is obviously very important within subscription-based businesses. Recurring payments mean ongoing revenue, so customer retention is a top priority. But this requires optimization, a sophisticated marketing strategy and a clear focus on building, nurturing and developing relationships. However, with brand loyalty not what it used to be, thanks to a competitive market, cost of living issues and changing consumer behaviours, there’s a high bar for customer experience.
So, the name of the game is increasing customer lifecycle value. Which is no simple task. How competitive are your prices? Do you have tiers for different users? Are you rewarding loyalty? Do you have cross-selling opportunities and regular offers to keep your customers engaged and incentivised? Bear these factors in mind.
4. Mitigating and managing chargebacks
We previously mentioned the impact of chargebacks on subscription businesses, so a key challenge for merchants with a subscription model is mitigating and managing chargebacks.
In May 2022, Justt conducted a survey with the UK eCommerce association IMRG of 1,000 British consumers regarding their attitudes to chargebacks. The survey revealed that 23% of respondents had filed or threatened to file a chargeback on a recurring billing subscription that continued longer than needed, while 16% that had filed a chargeback in the past 12 months did so to cancel a recurring transaction.
You’re not going to eliminate chargebacks – they are an unavoidable reality of today’s business world – but you can implement procedures to reduce and manage them and coordinate an efficient dispute process.
How can PSPs support businesses with a subscription-based payment model?
Although these challenges of operating an efficient subscription-based business may seem daunting, your payment service provider (PSP) will be able to support you with these issues and help you overcome them.
For example, a good PSP can give you expert advice and solutions to help you identify and manage payment risks, ensure robust security and meet compliance requirements, plus offer strategic guidance to retain more customers and deliver the best possible payments experience.
Despite the complexities involved in running a subscription-based payment model and the specific challenges merchants face, outlined in this blog, working closely with an experienced payment service provider to address and overcome these challenges will set you on the path to success. Learn more about how your PSP can help you overcome key subscription payment challenges in this blog. Or why not download Fibonatix’s handy guide to Mastering Subscription Payment Processing?