Che Sampat
Co-Founder & CEO at ChargebackStop
Dec 23, 2024
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4
min
Chargebacks can pose challenges for businesses across the board, but SaaS companies often feel the impact more acutely. With consumers frequently subscribing to multiple SaaS tools—sometimes offering similar functionalities—it’s all too easy for them to lose track of what they’re paying for. As a result, many end up filing chargebacks simply because they can’t identify the source of a particular charge.
Fortunately, Merchant of Record services like Dodo Payments provide a different approach. By taking on the financial risk of payment processing, they help prevent chargebacks and secure better authorisation rates for your business. In this post, we’ll explore how they achieve this, and how partnering with a Merchant of Record can ultimately benefit your SaaS operations.
Understanding Chargebacks and its impact on saas companies
What is a Chargeback?
A chargeback occurs when a customer disputes a transaction and requests that their bank or credit card provider reverse the payment. Chargebacks, unlike standard refunds, go directly to financial institutions rather than the company.
Chargebacks are particularly challenging for SaaS businesses due to recurring payments, digital delivery (no tangible goods), and poor customer awareness of subscription prices.
How does a Chargeback work?
When a customer identifies a charge they don't recognize, they dispute it with their bank. The bank then initiates a chargeback by reversing the transaction. The business can either accept the chargeback or contest it with evidence.
While chargebacks were originally designed to protect consumers, misuse has made them a recurring pain point for SaaS businesses.
Top Causes of Chargebacks in SaaS Businesses
Chargebacks in SaaS often stem from a mix of unintentional issues, customer dissatisfaction, and deliberate fraud. Addressing the root causes can significantly reduce chargeback rates.
1. First-Party Fraud (Friendly Fraud)
First-party or “friendly” fraud occurs when customers file a chargeback despite having legitimately authorized the payment. For SaaS companies, this often happens when:
Customers forget about an active subscription.
They don’t recognize the transaction on their bank statement.
They use chargebacks as a way to avoid proper cancellation.
60%-70% of all chargebacks in digital businesses stem from friendly fraud. For SaaS, where recurring charges are common, unclear payment descriptors and auto-renewals exacerbate the issue.
2. Subscription Billing Issues
Recurring billing models are the backbone of SaaS businesses, but they can easily lead to chargebacks if not managed carefully. Common billing-related triggers include:
Unexpected Charges: Customers often forget they signed up for a subscription, especially if the renewal happens months later.
Poor Communication: Lack of billing reminders before renewals frustrates customers.
Failed Cancellations: Customers believe they canceled, but due to a system glitch or unclear cancellation flow, they continue to be charged.
StaxBill highlights that 41% of chargebacks are related to unclear subscription policies and billing errors, making transparency critical for SaaS businesses.
3. Lack of Clear Refund Policies
Without a clear and accessible refund policy, frustrated customers are more likely to bypass the business and file a chargeback. SaaS companies often fail to:
Provide hassle-free refund options.
Communicate clear refund policies on their website or within the subscription terms.
Respond quickly to refund requests, prompting customers to escalate disputes through their bank.
4. Poor Payment Descriptions
A surprising number of chargebacks occur simply because customers don’t recognize the charge on their statement. This happens when SaaS businesses:
Use vague or generic descriptors for billing (e.g., “XYZ Services” instead of “XYZ SaaS Tool - Monthly Subscription”).
Fail to match the billing name to the business name customers recognize.
Have inconsistent descriptions across payment providers.
Unclear descriptors can cause avoidable chargebacks, particularly for subscription services where recurring payments appear monthly.
Key Ways Merchant of Record Services Reduce Chargebacks
Aggregated Payment Volume for Better Authorisation Rates
When you’re on your own, you’re stuck with the ups and downs of just your own transactions. But MoR services blend your payment volume with that of other merchants.
Since the MoR is processing payments for multiple businesses, your transactions are just part of a much bigger, more diverse pool. This broader mix often leads to better authorisation rates and a healthier overall processing environment—so your SaaS business benefits from smoother payment flows right from the start.
Shared Risk Means Lower Chargeback Ratios
If you alone process 100 payments and get one dispute, that’s a 1% chargeback rate. But if your 100 payments are part of a larger pool—say, combined with another merchant’s 100 payments—then one disputed transaction affects a total of 200 payments. Suddenly, the effective chargeback rate is just 0.5%. By spreading the load across multiple accounts, MoR services help keep chargeback ratios in check, reducing the chance that you’ll face penalties or account issues.
Better Protection with Chargeback Alerts
Merchant of Record providers often use chargeback prevention alert providers like ChargebackStop. These alerts give you advance warning of a chargeback and enable you to refund the transaction before turning into an actual chargeback. With that early warning, the MoR can offer a refund if needed, and prevent the dispute from escalating. This avoids extra fees, protects your reputation, and keeps everything running more smoothly.
Data Driven Payment Decisions from a Bigger Picture
Because an MoR handles so many transactions across different merchants, they have access to a wide range of payment data. With more information on hand, they can make better decisions about which transactions to approve and which ones to scrutinise. This upfront screening helps filter out high-risk transactions, cutting down on the chance of chargebacks before they even happen. It’s a win for everyone in the network—your SaaS business included.
Extra Redundancy and Flexibility
Setting up multiple merchant accounts and juggling different payment providers can be complicated and expensive. But MoRs specialise in that kind of infrastructure. They can set up more accounts and spread out the risk even further, so if one account faces issues, others keep things moving without interruption. This level of redundancy would be challenging for an individual SaaS company to manage, but for an MoR, it’s all part of the service.
The Bottom Line
Working with a Merchant of Record service makes it easier to keep chargebacks under control. By blending payment volumes, spreading out risk, using alerts to stop disputes before they happen, and offering stronger policies and better data insights, MoR solutions help you maintain a stable, low-risk foundation for your SaaS business. Instead of worrying about chargebacks, you can focus on growth, innovation, and giving your customers the best experience possible.
