If you want the long and short of it: All the new Mastercard rules really do is ensure transparency in offerings like free trials.
For merchants whose business practices are one hundred percent transparent and up-front, the changes probably aren’t going to affect your business at all. But there is a tendency for merchants to offer “free trials” that are, in actuality, a full sign-up, with one free month.
Most of us have experienced this, right?
You sign up for a free month of a streaming service or some subscription-based platform, and when the free month is up… we get hit with a five, fifteen, thirty dollar charge on our credit card.
Maybe the fine print mentioned it in passing, but for all intents and purposes, we weren’t really made aware that we were going to be automatically billed. And by this point having the charges reversed is more trouble than it’s worth, so we just roll with the punches and take the charge.
So Mastercard’s new rules applying to negative option billing are really just an attempt to get these merchants in line with a more transparent sales policy.
Defining Negative Option Billing
For the intents and purposes of the new rule changes, negative option billing is not just “free trials.” And it does not apply to all subscription-based services.
The problem with negative option billing is that customers don’t always know they’ve been signed up. They see “free no-risk trial” and they click “sure, why not.” Maybe their payment info autofill, it’s a very easy, casual experience for the buyer. Then a month later they see a charge of ten, fifteen, thirty, forty dollars on their card and have no idea what it’s for.
They may have signed up for a dozen free trials that month and not even know what it is they’re trying to cancel.
The problem with negative option billing is that it winds up costing money to people who did not intend to spend any money, simply because they forgot to cancel their free trial, or because the cancelation process was difficult to understand or hard to find on the company’s website. Sometimes they decide to just forget about it, other times they hit the merchant with chargebacks. This approach is ill-advised for a number of reasons.
What Are The New Rules?
Most of the new rules pertaining to negative option billing come down to simple forthright transparency. Essentially it has to do with letting the customer know, as clearly as possible, and every step of the way, what the deal is:
- Merchants will be required to get in touch with the cardholder before the card is charged to let them know exactly when their card will be charged, and for how much.
- Merchants need to contact cardholders to let them know exactly when a second charge is going to go through if an account has insufficient funds on first try.
- Cancellation instructions need to be completely clear in all documentation. This means that they need to be clear on the website, they need to be accessible, and they need to be clarified in contact with the cardholder.
- Merchants need to let cardholders know what name will appear on the cardholder’s statement when charges go through. This is to prevent merchants from using ambiguous or confusing names, alternate to their business names, in order to throw customers off the scent in case they need to file for a chargeback.
- Written confirmation of cancellation must be delivered to the cardholder in some form or other to ensure that the cardholder knows their card will no longer be charged.
- The trial period will begin on the day the product is received by the customer, not the day that the payment goes through or the day they register an account. This ensures that the customer knows they have a full month before they have to decide whether or not to cancel.
If you’ve always dealt with your customers with transparency, then these rules might have absolutely no effect on how you do business beyond, perhaps, being required to send an extra follow-up email here and there.
Other rules apply largely to how companies that practice negative option billing are categorized.
- Companies engaging in negative option billing will be classified as high-risk merchants. This might not make for a huge difference for a lot of companies, as practicing negative option billing almost makes your business high-risk by default, because these merchants tend to get hit with a higher than average rate of chargebacks. Likewise, they tend to deal in goods and services that may already have them classified as high-risk by definition.
- Acquirers will be required to register negative option billing merchants through Mastercard’s registration program, the MRP, in order to make sure that they conform to new standards.
- Negative option billing merchants will be assigned a 5968: Direct Marketing – Continuity/Subscription Merchants MCC or business code.
Who Is Affected By These Changes?
Right now the rule changes will only apply to merchants who use negative option billing for physical goods. In particular, Mastercard is looking at the “nutraceutical” industry. These are things like protein powders and other supplements, the sort of products you can find at gyms and fitness stores. This industry in particular has a tendency to rope customers in with a negative option billing setup.
Part of the advantage to negative option billing for nutraceutical companies is the simple fact that returning physical goods is harder than canceling a subscription to something like a website or streaming service. Further, there are be rules against returning perishable and consumable items like protein bars and smoothie mix and so on.
This makes for a perfect storm of “seller’s market” advantages for companies in this field. Customers may not realize that they’re still signed up for something following the initial free trial run.
For many merchants, it might be easier to simply offer a free trial with no strings attached, and without collecting credit card information. This may be what Mastercard is aiming for.
The new regulations do not make it unnecessarily difficult to use the standard negative option billing setup, but for any merchant whose business plan revolves around customers forgetting to unsubscribe, there are now going to be a lot of safeguards in place ensuring that cardholders do not forget.
Note that these rules do not apply to any and all merchants who offer free trials. The rules apply to merchants who…
- Collect credit card information and sign customers up for a full subscription through a free trial offer, and…
- Are selling physical goods such as nutraceuticals.
If you use a negative option billing setup to sell digital services like streaming and other access-based websites, then you don’t have anything to worry about. Likewise, if all you ask for is a name and a shipping address when sending free samples, then your business won’t have to undergo any changes at all.
What Kind Of Impact Will This Have?
It shouldn’t surprise anyone if other credit card companies follow Mastercard’s lead on this one. The chargebacks, returns, canceled payments and general clutter of the negative option billing plan just isn’t really worth the headaches for credit card companies, for customers or, if you think about it, for merchants.
What good is it to squeeze a few extra dollars out of a few customers if most of the cardholders are going to be filing chargebacks and getting you put on the high-risk merchant list?
This is not to say that the nutraceutical industry and similar marketplaces are not, by and large, honest, fair and transparent, but if one percent of customers are charged for something that they didn’t know they were buying, then you can multiply that by thousands or millions of people depending on the size of an industry, and you can see why this would create some big stacks of paperwork for the people at Mastercard, and why they would want to rope some of this stuff in at a merchant level.
Again, ninety-nine percent of merchants have absolutely nothing to worry about. Many merchants who use negative option billing already go out of their way to make sure that customers know exactly what they’re signing up for every step of the way.
For these merchants, the only real change is going to be a few points added to the fine print here and there. Requirements towards letting a customer know that their free trial is almost up is hardly a game-changer for most merchants, just a few more i’s to dot and t’s to cross.