How subscription brands are battling record credit card debt and chargebacks

Consumers disputed an estimated $11 billion worth of transactions with U.S. card issuers in 2023, the Wall Street Journal reported in June. The figure is a jump from $7.2 billion in 2019, according to finance industry research firm Datos Insights. Moreover, recent data from the Federal Reserve of New York showed Americans’ credit card debt hit a record $1.14 trillion in August.

Some subscription-based businesses say they have seen an increase in charge reversals and payment cancellations over the last year, seemingly in line with the latest payment industry data. Other services, like ButcherBox, say they haven’t seen an increase because of the category they’re in — but they’ve also taken steps to limit chargebacks. 

Chargebacks, in particular, have increased in popularity due to cardholders becoming savvy about their federal rights to dispute billing errors on unrecognized or unauthorized transactions or even purchases that are misrepresented, defective or not delivered. But now, some fickle customers are using chargebacks to dispute any purchase they are unsatisfied with — and, in some cases, abusing the system. The Wall Street Journal spoke with one customer, for example, who filed a chargeback after a chair he ordered “turned out to be not as antique as advertised.”

Michael Mallon, director of global product management at fraud prevention firm Accertify, explained that as more online businesses try to generate incremental revenue through subscriptions, more recurring payments are being made. This growth has naturally led to an uptick in chargebacks, Mallon said.

Still, Mallon said, “The numbers you’re seeing are unprecedented.” Research by Accertify and Javelin shows 51% of merchants say their chargeback volumes are increasing, with the industry volume set to hit $904 billion by 2026. That’s largely because of how large e-commerce subscription businesses have become in the last few years. At the same time, banks and credit card providers have made it easier than ever to dispute a charge. Oftentimes, he said, a click can help cancel an unwanted subscription transaction much quicker than contacting the brand.  

The growing cost of living is contributing to shoppers attempting to get out of subscription orders. “Anytime there is high inflation, there is an impact on discretionary spending,” Mallon said. Whether it be a streaming service, meal kit or a wine club, he said, “most subscriptions out there, in reality, are discretionary.”

The problem is that not only do companies miss out on sales, but they’re also forced to cover the losses from these payment cancellations. According to Accertify data, the initial cost of a chargeback for a merchant ranges between $25 and $50 per claim to cover. 

There’s also the issue of sky-high credit card debt. Per the Federal Reserve Bank of New York data, U.S. cardholders’ credit card balances rose by a collective $27 billion in the second quarter of 2024, a 5.8% spike from the previous year. But that hasn’t stopped Americans from charging discretionary purchases. According to Bankrate’s Discretionary Spending Survey, 38% of U.S. adults say they are willing to go into debt for discretionary purchases this year. 

Some subscription services companies are trying to get ahead of the issue.  

Reba Hatcher, chief commercial officer at meat delivery service ButcherBox, said that generally, the company is not seeing an uptick in credit card declines or chargebacks. 

“Thinking about this today, our theory is that our customers consider ButcherBox part of their grocery budget and are prioritizing that as essential spend and using a payment method they wouldn’t let default,” Hatcher said. 

One thing ButcherBox is proactively doing to combat potential card failures is building out a new feature with a partner vendor to combat card failures using SMS interactions. “That would help trigger a notification for an upcoming expiring credit card to guide the customer to update,” Hatcher said.

As far as chargebacks go, Hatcher said ButcherBox has a robust series of reminders that goes out several days before an order is placed to give customers ample time to adjust the products or the date of their next order. “We also have a generous refund policy if the customer didn’t intend to have the charge made, which combats chargebacks too,” she said.

An executive at another subscription box company, who asked to speak anonymously, told Modern Retail that declined or canceled credit card transactions can make customer retention more difficult.  

There are retention vendors, like Churn Buster and Chargebee, that help with the issue by reaching out to the customer on behalf of the company when this happens. “But I think it [chargebacks are] definitely picking up for us, especially as credit card limits are reached, and people have a hard time paying them down,” the executive added.

Accertify’s Mallon said he expects the practice of payment disputes to only continue to grow in the coming years. “Once consumers are used to getting things for free, it’s really difficult to get them to go back,” he said.