How Mastercard’s Negative Option Crackdown Impacts High Risk Merchant Processing

How Mastercard’s Negative Option Crackdown Impacts High Risk Merchant Processing

It’s as if the General Data Protection Regulation (GDPR) has collided with high risk merchant processing: Mastercard is rewriting the rulebook for merchants who use negative option billing by requiring more transparency. A lot more transparency.

MasterCard has set new rules, effective 12 April 2019, that will force merchants to improve communication and transparency with customers, particularly in the models of subscription, continuity, recurring billing and free trials. The new rules specifically center around card-not-present transactions where consumers purchase subscription-related products – magazines, nutrition supplements, shaving kits, etc… — that are supplied and billed regularly (most commonly monthly).

Mastercard is aiming for more consumer protection by demanding more communication and transparency from merchants and even acquiring banks.

What is the issue with negative option billing?

When Visa announced its chargeback and fraud monitoring restructure in April 2016, not only did we feel it would make high risk merchant processing more difficult (it has to some degree), but we honestly felt it meant the end of negative option billing as a business model. Visa’s chargeback threshold was cut in half from 2 percent of sales or 200 chargebacks per month to 1 percent/100 per month. We wondered how high risk merchants, especially those in subscriptions, free trials and recurring payments, would survive.

Here’s the thing about negative option billing: it is a tactic that tends to be very consumer unfriendly, puts too much of the onus on the consumer while the merchant pleads a degree of ignorance. From a consumer’s standpoint, it doesn’t send a particularly good message from a merchant.

The best example of negative option billing is the former Columbia House Records and Tapes club that thrived from the 1970s well into the 1990s. For 1 penny, a consumer would receive 12 albums, 8-tracks, tapes or CDs from a huge selection as long as s/he agreed to purchase a minimum of eight albums at Columbia House prices within 2-3 years.

There wasn’t a teenager on the face of the Earth who didn’t think this was the deal of the century. There were several significant caveats, however:

  • Consumers had to purchase records at Columbia House prices, which were close to $20 each (record store prices were nearly half), and cover the shipping and handling fees, which usually amounted to more than $20.
  • Each month, the consumer was sent a quick form to either select a ‘featured’ album or indicate no selection to be mailed back by a certain date. If the consumer failed to send the form back – even opting for no selection – s/he was sent that month’s featured album and billed for it.

For teenagers with limited income, the Columbia House deal could become a financial burden. However, for music enthusiasts that could afford it, Columbia House (and later the more consumer-friendly BMG Music Club) was a terrific way to build a music catalog. It was the iTunes of its time.

Columbia House’s model presented hassles for consumers: Receiving an unwanted album and either sending it back or absorbing the charge; and the commitment of purchasing a minimum amount of albums in a certain window at high costs.

In retrospect, it was too close to the bait and switch technique for a large consumer base and presented a somewhat unsavory message: ‘You signed up for this. Make good on your obligation.’

Mastercard feels this is not the message that any business should send. We’re curious to wonder if Columbia House would survive under Mastercard’s new rules.

The new rules for subscription, free trial and recurring billing merchants and acquirers

While Mastercard will classify all negative option billing merchants as high risk, it is adding more responsibility on acquiring banks:

  • Acquirers must register their negative option billing merchants with Mastercard’s Registration Program (MRP) and monitor their merchants’ transactions in real time.
  • Ascertain their merchants maintain fraud and chargeback rates below Mastercard thresholds (a necessity in high risk merchant processing).
  • Make known any third party services (ISOs, agents and other payment service providers) that have access to consumer account information.

Negative option merchants have new challenges as well, particularly if they’re offering free trials:

  • After the trial has ended, the merchant must have express consent from the customer to continue with the product/service before charging their credit card.
  • Free trials begin the date when the consumer receives the product, not the date of signup.
  • Merchant must provide customers will electronic receipts after every transaction, with the business’s name as it appears on a billing descriptor, the date and amount of the transaction along with clear opt-out instructions (kind of like the ‘unsubscribe’ option in a blast email).
  • When consumers opt to cancel subscriptions, the merchant is required to provide written confirmation (by mail or e-mail) of the cancellation.

It just might break free trials

In May of 2018, we blogged, even denounced, the use of free trials and how that specific marketing tactic was prehistoric, whose time had come and gone due to its propensity in causing chargeback problems in high risk merchant processing. With Mastercard’s new rules, merchants who wish to continue offering free trials are going to have a massive challenge in getting express customer permission to begin charging their credit card at the end of a trial.

The key to high risk merchant processing and subscriptions: Communication

We preach about the value of one-on-one direct communication – telephone conversations and even live chats. We’ve always believed that communication was and will continue to be the catalyst in high risk merchant processing (hence, why we prefer a 10-minute conversation).

For merchants who will continue to offer free trials, subscription and recurring billing, communication will be a merchant’s best tool.

How will you prepare for Mastercard’s 12 April 2019 rule changes? Leave us a comment below.

To find out more about our high risk solutions, speak with a live merchant account manager today at 1-800-530-2444.

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