What is Future Delivery?
High “Future Delivery” and Annual memberships/payments can often be considered high-risk. Scroll down to learn why.
What is Future Delivery?
You may be wondering, “why is an annual membership risky?” – great question! First, let’s define a term that we can use throughout this discussion. Whenever you (the merchant) sell a good/service that you haven’t delivered yet, then you are engaging in future delivery. Just like it sounds, future delivery means that you’ve taken a payment today for a good/service you’ll deliver in the future. This is normal in some circumstances – when you purchase an airline ticket, it almost always has “future delivery” since most consumers make that purchase weeks/months ahead of time. So why is that risky? Scroll on.
Why is Future Delivery Riskier?
According to the card association guidelines, virtually all credit card transactions offer customers a 6-month window to dispute their transactions if they’re dissatisfied for any reason. This is built in to all credit cards as a method of consumer protection. This means that for any given transaction, your customers have 6 months to dispute the transaction after the goods/services are delivered. So in a normal product-purchase scenario where a customer walks away with their goods/services in hand, a consumer has 6 months to call their bank and complain/dispute.
But as you can see – if you’re selling a good/service that isn’t being delivered for an extended period of time, then the window of “future delivery” just got extended! If you sell a service in January that you don’t deliver until June – the customer effectively has a full YEAR to dispute the sale, since the service won’t be delivered until June. Then, they could wait six MORE months to dispute the original purchase. So instead of having a potential chargeback on the books for six months, now it’s there for a year. Historically, the more time customers have to dispute things, the more likely they are to do so.
What Else is Risky about Future Delivery?
In addition to a customer having more time to dispute a sale, future delivery offers customers more time to change their mind. Whenever you charge a customer but don’t give them their product/service yet, you run the risk that your customer changes their mind, for whatever reason. And ultimately, it doesn’t matter what the reason is – they could have a change of heart, they could move to a new country, lose their job, whatever – if they choose to cancel their transaction, you’ll either have to honor that request, or fight the impending dispute that the customer will likely file if you don’t.
If your business has already started creating/customizing the product that the customer intended to purchase, you just lost out on a lot of time. If you had been counting on that customer’s money to purchase future inventory, you just lost those funds. As you can see – unexpected, lost sales can have a devastating impact on certain merchant types, if you sell highly customizable or expensive goods. That’s why future delivery can pose a BIG risk to certain merchant types, particularly those who sell high-ticket items, goods that can’t be sold last-minute, or custom goods that can’t be resold to a different customer. (Think: furniture, airline tickets, annual membership fees, etc).
Why are Annual Payments Risky?
We can take the concept of future delivery one step further. If you sell annual memberships/services, you as the merchant have 12 months of future delivery, plus 6 months for a customer dispute, or effectively 18 months of potential risk! A consumer who purchases an annual membership on January 1st of 2021 wouldn’t technically complete their annual membership until January 1st of 2022, and then would have six more months to dispute the original transaction.
So – for a transaction initiated in January of 2021, there’s still risk that the charge comes back all the way into June of 2022. That’s a long time! As your processor, Dharma is effectively managing this risk. What happens if your company goes out of business, and you still have 100 active annual subscriptions for products to be delivered on a monthly basis? If you aren’t making those deliveries anymore, those customers will dispute the sales, and they’ll win – leaving Dharma on the hook to repay your customers. That’s why Dharma does not allow for annual payments outside of very specific circumstances.
The one big “caveat” to annual memberships/subscriptions are for nonprofit memberships/dues. The card-associations recognize that nonprofits are much less likely to go out of business, and in addition, most consumers who purchase annual memberships/dues through a nonprofit are far less likely to be dissatisfied. So – annual dues/memberships are typically OK for nonprofits. If you have questions about any of this, just ask! We can be reached at firstname.lastname@example.org.