The online subscription business model is spreading rapidly. Bank card fraud does not target subscription purchases, but it nonetheless leads indirectly to the loss of nearly 7% of subscription sales per year. What new options are available to merchants?
Subscription commerce already accounts for 22% of the e-commerce economy in Europe. From digital content to shared material goods, such as servers or cars, the subscription model allows consumers to enjoy a service or product based on value of use rather than value of possession. Naturally, the sharing economy is thriving among younger Internet users.
Online subscription commerce models are primarily paid for with bank cards, which are often the lesser of two evils. In the United States, where checks are still used for 18% of transactions, bank cards are the only low-cost, interbank electronic payment option. In Europe, central banks discourage the use of bank cards for recurring payments. But until now, the lack of any alternative electronic payment method on a European level has led to the general acceptance of bank card payments for subscriptions.
Of course, bank cards are rarely used fraudulently for subscription purchases. What fraudster would risk being identified through prolonged use of a stolen card?
But the millions of people who have been the victims of bank card fraud have experienced the nightmare of having their means of payment invalidated. Suddenly all of their subscriptions come to a halt, from their VOD, to the kids’ school cafeteria accounts, to their antivirus software. When the card is finally replaced, it must have a different number for security reasons. Cardholders who wish to reactivate all of their subscriptions must then update their bank card information with every different merchant. It’s a laborious task during which some subscriptions are not renewed by the consumer. It is essentially the same as a new sale; the customer may challenge your price benefits, which the merchant cannot anticipate. The transformation can only be less than the original sale. It is estimated that at least 35% of subscriptions are not renewed. This is commonly referred to as “churn.”
Cancellation of compromised cards and the resulting non-renewal of subscriptions lead to annual losses of about €4 billion. Indeed, there are 9.3 million compromised cards per year in Europe. If you estimate an average of three subscriptions per cardholder, a 35% non-renewal rate, and an average shopping cart of €66 per month, the average annual loss is €3.9 billion, or nearly 7% of the subscription market.
The international figures are even more alarming. In December 2013, Target revealed that more than 40 million card numbers had been compromised. The future does not look too bright either; direct fraud in distance selling in Europe grew by 21% in 2012. Indirect losses to subscription merchants are rising at the same rate.
With the introduction of SEPA payments and e-SEPA, the version created for online purchases, Europe now has fast, economical and innovative payment methods. SEPA direct debit, which was specifically designed for recurring or subscription payments, is protected from the domino effect that can result from bank card fraud. Payment cancellations are handled one merchant at a time. It is no longer a question of the customer having to invalidate his entire payment method, but rather its use in specific cases or by specific merchants.
Only by testing this method will you be able to determine if using e-SEPA will increase your customer retention without negatively affecting your customer experience or your transformation rate. So… To churn, or not to churn?
SlimPay – see previous article
Cap-Gemini-RBS – World Payments Report 2013
ECB – 3rd report on card fraud – Feb 2014
CSA-SlimPay – Direct Debit Survey – Feb 2012
SlimPay – Average amount of transactions carried out by SlimPay – Jan 2014
SlimPay – see previous article
Finextra – 19 Dec 2013
ECB -3rd report on card fraud – Feb 2014 – Card Not Present fraud growth