Five years ago, we had internet credit card processing solutions for merchants – nutraceuticals, continuity and weight loss merchants, for example – who sold products by way of using free trials to entice consumers to sign on for longer periods. Now, we’re seeing our acquiring banking partners shun this kind of business model, and based on recent changes in the payments industry, we agree with them.
The offer of free trials may have been an effective marketing tactic at one time, but in the current climate, the free trial model is a fast lane to a chargeback – a lot of them.
The ‘free trial offer’ model had its time, but high risk merchants in search of payment processing should avoid it all costs.
Why free trials are a chargeback waiting to happen
Let’s say you have an online store that offers vitamins and supplements to consumers on a subscription or recurring billing basis. To attract more customers, you offer a free, no-commitment 30-day trial for whichever type of supplements a consumer wishes to purchase, in exchange for the customer’s credit card details which you will start billing once the trial is finished.
Herein lies the problem with internet credit card processing and free trials:
Many customers are only interested in the free trial and will take what they can get for free, but forget to decline the supplements when the trial has expired. More important, they also forget they gave their credit card information to the merchant. At the end of the free trial, the merchant continues to ship the supplements to the customer, and rightfully bills their credit card. After a month (often more), when the customer realizes s/he is still receiving the supplements and their credit card is being billed, they telephone their card issuer to file a chargeback, complaining that they were dissatisfied after the free trial.
In the vast majority of such cases, the vitamins/supplements merchant is on the hook for the chargeback.
“I don’t know of any acquiring bank at the moment that’s allowing free trials,” said Instabill Sales Manager Wendy Jacques. “We’re advising free trial merchants to switch to straight sales.”
What is going on with chargebacks?
Based on changes in the way credit card brands handle chargebacks over the last two-plus years, a merchant should think of his/her businesses as a new automobile, which is bound to decrease in value over time unless s/he is diligent with the necessary maintenance an automobile requires: oil changes every 5,000 miles; tune-ups every 15,000, fluids replenished and winterization.
Chargebacks happen when an internet credit card processing merchant fails to take the necessary precautions – clear return policy, billing descriptor and good customer service skills – to avoid such customer disputes.
The four major credit card brands are, frankly, fed up with dealing with chargebacks, Visa in particular:
- In November of 2015, Visa announced it was halving its chargeback rate from 2 percent of sales and 200 chargebacks per month to 1 percent and 100 per month.
- A year later, Visa announced it was applying a pre-monitoring program and a warning for merchants who were dangerously close to the 1 percent, 100 per month threshold (0.75 percent and 75 per month and upwards).
- As of April 15, 2018, Visa changed its chargeback protocol, implementing two dispute processes – the allocations model, which decides whether disputes are valid; and the collaboration model, which facilitates information sharing by all parties – to decide disputes.
Why we believe certain business models are falling by the wayside
A little over two years ago, we blogged about negative option marketing – when a merchant interprets a customer’s failure to accept or reject an offer as consent to charge for goods and services — and whether it is a dying model. The former Columbia House Records & Tapes club in the 1970s through the 1990s is an excellent example.
We assume negative option marketing is still practiced today, but certainly not as largely as it used to be. It is a marketing tactic which enables the merchant to plead ignorance and, frankly, it sends the wrong message to a consumer.
To a lesser degree, merchants plead ignorance in the use of free trial offers, particularly in internet credit card processing, in assuming they have permission to charge the credit card once the trial has expired. It is a very risky method.
Internet credit card processing with Instabill
The free trial model is simply an old, outdated marketing tactic which merchants should avoid. Fewer and fewer (if any) acquiring banks are offering internet credit card processing services for merchants who employ this tactic, simply because it elicits chargebacks.
There are far more effective (and safer) marketing strategies to help you draw customers. We’re always up for a conversation about high risk merchant account solutions at 1-800-530-2444.