In-App Purchase Chargebacks: Protecting Your Business

In-app purchases, or IAPs, are commonly relied upon by developers looking to generate revenue from an otherwise free or freemium app or service.

But, like all other types of sales, in-app purchases can lead to chargebacks. These in-app purchase chargebacks can negatively impact your chargeback-to-transaction ratio — especially if you experience a high volume of disputes due to the microtransaction-based nature of IAPs.

This detailed guide will help you learn how in-app purchase chargebacks work, why they occur, and how to prevent and fight them to protect your revenue.

What is an In-App Purchase Chargeback?

An in-app purchase chargeback occurs when a customer buys a product or service from within an app, then disputes the transaction. After submitting an IAP chargeback, funds are returned to the cardholder’s payment card and deducted from your merchant account.

Goods and services that can lead to an in-app purchase chargeback include:

  • Virtual currency, such as coins or gems
  • Premium features, such as advertisement removal
  • Bonuses or special items, such as extra player health or options to bypass time-limited functionality

Why Do In-App Purchase Chargebacks Happen?

In-app purchase chargebacks are card-not-present transactions, which means they share the same risks as other CNP sales. And in most CNP situations, fraud is the leading cause of chargebacks. 

There are two types of fraud: criminal fraud and ‘friendly’ fraud. 

Criminal, or malicious, fraud happens when a criminal uses a cardholder’s information without authorization. 

In the world of in-app purchases, criminals typically use stolen information to stock up on coins, gems, extra lives, etc. and then sell app access to another user. Once the cardholder discovers the unauthorized purchases, chargebacks start rolling in. 

While criminal fraud is a danger to be mindful of, the real threat is friendly fraud. Friendly fraud happens when a cardholder uses the chargeback process incorrectly. In the context of in-app purchases, examples of friendly fraud include:

  • A child making purchases without a parent’s permission
  • Buyer’s remorse
  • Inability to recognize a charge on the bank or credit card statement
  • Lack of communication between both parties of a joint account (such as a husband and wife)

Can I Prevent In-App Purchase Chargebacks?

Chargeback prevention is a broad topic. There are dozens of different things that can help reduce risk. 

For many merchants, chargeback prevention involves the use of different tools, such as prevention alerts, Order Insight, and Rapid Dispute Resolution (RDR). While these solutions can help prevent in-app purchase chargebacks, they might not be the most cost-effective option since IAPs are such low-dollar amounts. However, the extra expense might be necessary if you are in danger of breaching thresholds

Usually, the best chargeback prevention strategy for in-app purchases is to focus on the user. The more user-friendly the experience, the fewer chargebacks you’ll have. 

Here are some specific suggestions to consider.

How to Prevent In-App Purchase Chargebacks From Friendly Fraud

Since friendly fraud is usually the biggest threat, the majority of your efforts should go into minimizing this type of risk.

 Send a purchase notification immediately after an in-app purchase.

Emails and similar communications can inform cardholders of transaction activity. This can alert a cardholder to an unauthorized transaction — such as a child making an in-app purchase — before too many back-to-back transactions take place, prompting numerous chargebacks.

Such communication can also serve as a digital paper trail for intentional transactions. Customers can compare communications from your company to charges on a statement to more easily identify and accept those purchases. This is especially important if the customer purchased a recurring subscription (for example, ongoing premium access to your app).

Sending purchase notifications also helps you solve potential issues before they evolve into chargebacks. When sending a notification, include information about your refund policy and how to contact your customer support team. Doing so maintains open lines of communication with your customers, allowing you to cut down on potential transaction disputes.

  Use clear billing descriptors.

A customer may not remember making an in-app purchase by the time a billing statement is issued. If the billing descriptor is unclear, a customer can misclassify an authentic transaction — which they authorized — as fraudulent and initiate a chargeback.

Avoid confusion by using a billing descriptor that includes the name and type of the app in the billing descriptor — not just the name of your company.

  Always provide genuine value.

The ability to purchase in-app currency (such as gems or gold) can help users unlock new features, functionality, and items. It can also create feelings of buyer’s remorse that may prompt an in-app purchase chargeback, particularly if the purchase has a low perceived value.

For example, assume a customer spends $5 to purchase in-app currency, then uses that currency to purchase a sword. However, the sword lacks any special benefits — it doesn’t do more damage than swords that are freely available in-game. The lack of perceived value gives the customer feelings of buyer’s remorse and an in-app purchase chargeback is filed.

Instead, ensure such items come with premium benefits. They may enhance the player’s statistics, help them more easily defeat a difficult enemy, or provide cosmetics that are otherwise unobtainable in-game.

  Avoid a “pay-to-win” model.

A pay-to-win model allows certain customers or players to bypass in-app difficulty or challenges in exchange for real-life money. Though this can be an effective model for non-competitive apps, it can sour the experience for players in apps where they compete with one another, either face-to-face or on leaderboards.

Pay-to-win models can encourage players to purchase boosts and other items to get a competitive edge. Then, when they’ve defeated their competition or improved their leaderboard positions, they may feel guilty and regret the money spent.

Instead, focus on adding in-app purchases that your customer base celebrates. These items can be cosmetic — helping a player improve a character’s look or the design of a player profile — but don’t have a negative effect on other players.

  Analyze data and metrics.

Sales data and other analytics can provide valuable insights into which pages, buttons, and other features lead to higher rates of friendly fraud.

Once you know what’s triggering chargebacks, you can make necessary updates to reduce risk. For example, perhaps button text could be clearer so the user understands real money is being exchanged. Or maybe you should require a password or account authentication before allowing a purchase.

How to Prevent In-App Purchase Chargebacks From Malicious Fraud

Criminal fraud might be a lesser risk than friendly fraud, but that doesn’t mean you can ignore it. Take a look at these suggestions.

  Limit purchases from new users.

Fraudsters often take advantage of stolen payment cards or billing information to load up a new app account with in-app purchases. They then sell access to that account to other buyers, likely prompting chargebacks from the legitimate account holder and depriving you of sales revenue.

You can mitigate this risk by restricting purchases from new users. Forbid a new account from making an in-app purchase for a period of days to discourage fraudsters from using your app for criminal activity.

  Require linked accounts.

Another suggestion is to require a new user to sign up for an account before access is granted to its functionality. Many marketplaces and services allow you to require customers to link the app account to the account associated with the marketplace.

This can “lock” the user into a single account that’s unable to be disassociated from your app. In other words, it would prevent criminals from reselling access to your app to another user.

Can I Fight In-App Purchase Chargebacks?

Preventing an in-app purchase chargeback is usually more effective than fighting one. Because in-app purchases are often for low-dollar amounts, the cost of fighting a chargeback can negatively impact your ROI.

However, that doesn’t mean you can’t or shouldn’t fight back. When you receive a chargeback, you’ll want to consider these things.

The Amount

Check the chargeback amount. How much could you recover? Next, think about your workflows and labor costs. How long does it take to fight a chargeback? 

If you’ll spend more than you’ll recover, you might not want to fight. 

In these situations, it would be more cost-effective to accept liability and direct the money you would have spent fighting toward increased prevention instead.

The Reason

Fighting in-app purchase chargebacks is possible if the chargeback is invalid — a cardholder or bank error. However, you aren’t able to fight back against chargebacks that result from true criminal fraud.

Unfortunately, the cardholder’s bank has no way of knowing if the cardholder’s claims are legitimate or not. So it’s your job to prove that chargebacks marked as unauthorized transactions really were authorized. To do that, you’ll need to provide documents that support your argument. 

Check the reason code on the chargeback. Then look it up in our database. The most common fraud-related reason codes are: 

If you have any of the types of required evidence, you can fight the friendly fraud. Examples of information that might be convincing are: 

  • A description of the product or service sold
  • The date and time of the download
  • The buyer’s IP address and geographical location at the time of purchase
  • Any information about the device used to make the purchase (such as an identification number or device name)
  • The shopper’s name and email address
  • Information from any identity verification tools you use throughout the purchase process (such as AVS) or evidence that you required customer authentication (in the form of a password or similar) before processing the purchase

There are non-fraud related reason codes too. And those can also be fought if the chargeback is invalid. Look up the reason code, check if you have the right evidence, and fight back if it’s going to be cost-effective.

The Deadline

You never want to fight an expired chargeback — whether it’s for an in-app purchase or not.

If you fight a chargeback after the submission deadline, your case won’t even be considered. Don’t waste valuable resources on a chargeback that can’t be won!

Manage In-App Purchase Chargebacks With Midigator

Managing in-app purchase chargebacks is a delicate process. 

Low-dollar chargebacks don’t leave much room for return on investment (ROI) for any strategy, whether you are preventing or fighting. But letting the losses pile up will severely damage your bottom line. 

The key to your success lies in efficiency: you need better results with fewer costs and less effort. And the only way to achieve that outcome is to embrace technology. 

Midigator® is intelligent chargeback technology, perfectly designed to provide the efficiency needed to handle in-app purchase chargebacks: 

  • All your chargeback management strategies are consolidated into a single portal. Everything you need — preventing, fighting, and analyzing — is all in one place. No jumping from platform to platform. 
  • Real-time reporting and analytics shows you exactly what is happening at any given moment. Identify hidden issues and solve them at the source without inefficient, time-consuming methods of collecting and building the data yourself.
  • Automate as much or as little as you want — retain control or outsource your responsibilities completely. Whatever you pick, our flexible solutions will fit with your existing processes, resources, and abilities. 

By embracing technology, our clients spend 85% less time on chargeback management and reduce costs by 45%. Plus, technology is a scalable framework that can keep pace as your business grows.

Sign up for a demo today to learn how Midigator can help you manage in-app purchase chargebacks and protect your revenue.

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