Subscription Fraud: What Is It and How to Protect Your Business

Shoppers love subscriptions, and for merchants, automated subscription payments are an eCommerce dream. Once a customer is acquired, they’re much more likely to buy repeatedly when subscribed. With customer acquisition costing up to five times more than retention plays, just a 5% boost in retention can yield a 25-95% increase in profits. In the United States, eCommerce subscription sales jumped 132% between 2019 and 2023. Subscriptions offer shoppers an ideal customer experience that provides set-it-and-forget-it convenience for essential goods, with the flexibility to cancel at any time or skip shipments as needed.

As subscription sales have grown, so has subscription fraud. Around 60% of subscription-based businesses have noticed a surge in online payment fraud over the past 12 months, with 56% of these merchants encountering new and emerging threats. 

Subscription fraud is a deceptive practice in which individuals or organized fraud rings exploit the subscription model — or the technologies that facilitate subscriptions and recurring payments — to gain unauthorized access to products or services without any intention of payment. A complex issue, subscription fraud schemes are often layered with numerous tactics, methods, and objectives, which we’ll explore in the next section.

Subscription fraudsters look for ways to take advantage of the subscription business model by using traditional fraud tactics or exploiting eCommerce platform integrations with subscription tools. Here are the ways subscription fraud happens:

• Account takeovers (ATO): Fraudsters will gain unauthorized access to a legitimate shopper’s subscription account. They may change account details, lock out the account owner, exploit the subscription for their benefit, or sell the account credentials. For example, a fraudster may resubscribe to a subscription and change the delivery address until the account owner (genuine shopper) notices and cancels. Account takeover is a way for criminals to leverage genuine or previously authenticated credentials and transaction history, as well as stored payment information from the genuine customer, to carry out fraudulent activities with the hopes of going undetected. 
• Payments fraud or credit card fraud: Fraudsters may use stolen or fake credit card information to sign up for recurring subscriptions without the intention or ability to pay. The goal here could be to gain access to services or goods for free or to resell access to these services to others. (See more on reseller fraud here.)
• Sign-up and cancel scams: Some fraudsters exploit promotional offers, i.e., commit promo abuse, by signing up for subscriptions using fake identities or stolen card details, only to cancel them after receiving the initial benefit. Fraudsters may manipulate trial periods without the intent to pay for a full subscription, often by using disposable emails or fake identities to repeatedly sign up for trials. This can also involve chargeback fraud, in which the fraudster disputes the charge after receiving the benefit, claiming it was unauthorized or that the delivered value wasn’t as promised. This can be a form of friendly fraud committed by ordinary shoppers who change their minds, despite understanding the nature of a subscription.
• Service abuse: This broader category includes using subscription services in ways not intended by the provider, such as sharing account details with a large number of users beyond what is allowed in the terms of service.

Subscription fraud is often a gateway symptom that other types of fraud are happening. Consider these findings by the Merchant Risk Council:

• Around 60% of subscription businesses have observed a rise in online payment fraud over the past 12 months, which is above the eCommerce average.
• Almost 60% of subscription merchants have seen an increase in account takeovers, with significant rises in high-level threat incidents.
  • Entertainment streaming subscriptions are particularly affected by account takeover fraud, exacerbated by widespread password sharing.
• Over 50% of subscription merchants selling physical goods have noticed an increase in friendly fraud, which is particularly risky due to the nature of recurring payments.
• Around 50% of subscription merchants consider policy abuse a top business risk, with a noticeable increase in such activities.

• Financial losses: Chargebacks and refund demands from fraudulent transactions can lead to significant revenue losses.
• Operational disruption: Dealing with fraud can consume substantial operational resources and disrupt business processes.
• Reputational damage: Fraud incidents can damage a brand’s reputation, leading to lost customer trust and potential customer churn.
• Compliance risks: Businesses that fail to comply with industry standards for preventing fraud might face penalties and fines.

To prevent subscription fraud, use advanced fraud detection tools that leverage the latest machine learning and AI to analyze transaction patterns and flag suspicious activities. These tools can identify and block potentially fraudulent transactions in real-time. Additionally, be sure to do the following:

Fortify Access to Accounts

• Create additional verification steps during the subscription sign-up process to deter fraudsters, such as SMS or email verification, requiring additional personal information, or CAPTCHA tests to prevent automated sign-ups.
• Ensure that your eCommerce platform and payment processes comply with security standards like PCI DSS to protect customer data and reduce the risk of data breaches.

Monitor Account Behavior & Setup Subscription Fraud Prevention Mechanisms

• Monitor accounts regularly for unusual behavior, such as multiple failed payment attempts, rapid changes to account information, or an excessive number of account creations from the same IP address.
• Screen reactivated subscriptions to make sure it’s authorized by the customer. Many merchants don’t have their fraud solution screening recurring orders so fraudsters exploit this by reactivating a canceled subscription unbeknownst to the customer.
• Review rebills! Some subscription companies offer a “get another one now” button where customers can make another quick purchase if they run low on a subscribed product — before their next month’s delivery. While an important and valid button to have for legitimate customers, fraudsters have realized that many companies don’t have rebills screened. They’ll put one order through and hit the “get another one now” button multiple times in a row.
• Offer transparent subscription management that enables customers to easily view, manage, and cancel their subscriptions. Transparency can reduce the likelihood of disputes and chargebacks.
• Set up velocity checks to monitor and control the rate at which certain actions or transactions can occur within a system or application. By limiting the frequency or speed of these actions, velocity checks help detect and prevent account takeovers, card-not-present (CNP) fraud, or Distributed Denial of Service (DDoS) attacks.
• Perform monthly audits on your fraud prevention processes to identify potential vulnerabilities and areas for improvement.

Educate Customers & Collaborate With Industry Experts

• Raise awareness among customers on the importance of securing their accounts with strong, unique passwords and watching for phishing attempts or unsolicited account changes. 
• Stay apprised of the latest fraud prevention technologies and trends. Make sure security measures and technologies are updated accordingly. An effective fraud prevention partner continues to learn and grow with your business, keeping you ahead of fraud threats to minimize damage to your business.
• Work closely with your payment processors to ensure that fraudulent transactions are swiftly identified and handled.

In the vibrant yet challenging world of eCommerce, the allure of subscription services for both consumers and businesses is undeniable. They promise convenience, value, and a steady customer relationship. However, the shadow of subscription fraud threatens to undermine these benefits, posing significant risks to revenue, operational integrity, and brand reputation. It is imperative for businesses to arm themselves with knowledge and deploy sophisticated fraud prevention strategies to safeguard their interests. 

By fortifying account access, monitoring account behavior, employing advanced fraud detection tools, and educating customers, businesses can create a robust defense against the diverse tactics of fraudsters. Collaboration with industry experts and continuous adaptation to evolving fraud trends are also crucial. In doing so, businesses not only protect their bottom line but also preserve the trust and loyalty of their customers. 

The journey to combat subscription fraud is ongoing, but with vigilance, innovation, and partnership, eCommerce businesses can navigate these challenges successfully, ensuring that the subscription model remains a cornerstone of digital commerce growth and customer satisfaction. Explore NoFraud to learn more about how it partners with eCommerce brands to help them stay ahead of rising fraud trends like subscription fraud.