The Federal Trade Commission has been receiving numerous complaints from consumers billed without consent or facing difficulties in canceling subscriptions. In response, the FTC recently proposed a “click-to-cancel” amendment to their 1973 Negative Option Rule.

The new rules address a growing market demand to ensure sales terms disclosure before subscription and provide clear cancellation information. Acquiring banks should advise merchants to simplify their subscription cancellation process and enhance customer experience with self-service account management tools.

In this article, we’ll break down these updates, and explain what you should know about them.

What’s Changing?

Starting from the top, the new FTC negative option billing rules will:

• Require Simple Cancellation Mechanisms: Sellers should be advised to ensure the cancellation process is as easy as initiating service. “If you can sign up online, you must be able to cancel on the same website, in the same number of steps,” reads an FTC press release excerpt.
• Implement New Requirement for Offers: Sellers must obtain clear, affirmative consumer consent before pitching additional offers or modifications during cancellation attempts. Without consent, merchants must proceed with the requested cancellation.
• Require Annual Reminders: Sellers must send annual reminders before automatically renewing service subscriptions. Failure to do so prohibits automatic renewal.

The FTC started soliciting public comments in March, which will be considered before finalizing any changes.

A Step in the Right Direction

Acquirers are in a unique position to help their retail clients build trust and strengthen relationships with their customers, ultimately safeguarding all parties involved against fraud and potential losses.

From an acquirer’s perspective, innovative technologies have irrevocably changed consumer behavior and expectations, requiring digital experiences to be secure, fast, and transparent. Acquirers should guide retailers to provide comprehensive self-service experiences that cater to these demands, including flexible payment scheduling options and seamless convenience.

A satisfying customer experience is essential not only for maintaining a competitive edge but also for mitigating potential communication gaps between customers and retailers. Therefore, addressing consumer concerns is vital to reduce the risk of first-party fraud, which often arises when customers feel underserved or misinformed.

More is Needed

Subscription retailers frequently encounter first-party chargeback misuse. This is a significant issue that accounts for 75% of digital eCommerce chargebacks, according to Visa. First-party fraud has increasingly become a challenge for subscription retailers, as it not only impacts their bottom line but also tarnishes their reputation.

The LexisNexis True Cost of Fraud Report highlights the financial burden of such fraud, with every $1 in chargebacks costing merchants approximately $3.75. Additionally, these chargebacks leave an indelible negative mark on their records, which can harm their credibility and relationships with payment processors.

Despite calls from the industry for increased feedback and education on chargebacks, addressing and preventing this type of fraud remains a complicated and resource-intensive process for merchants. This emphasizes the need for improved communication, enhanced customer experiences, and better self-service options. All of these are necessary to mitigate the risks associated with friendly fraud and first-party misuse in the subscription retail sector.

Looking Ahead

Tedious cancellation processes can also contribute to an increase in chargebacks or customer complaints, regardless of whether retailers adhere to payment processing guidelines. The rise in chargebacks, largely stemming from subscription-related disputes, is outpacing the growth of U.S. e-commerce transactions by 20%. This phenomenon adversely affects both retailers and consumers.

Retailers may face financial penalties, damaged reputations, and, in severe cases, revoked merchant accounts due to chargebacks. Consumers, on the other hand, may experience the consequences of inflation, reduced profit margins, and unfavorable market pressures, which can ultimately lead to higher prices and limited service offerings.

To mitigate these issues, companies should be advised to incorporate essential information, such as recurring billing details and terms and conditions, within the checkout process. This ensures customers have easy access to relevant information before committing to a subscription. Additionally, companies should send frequent reminders and billing confirmations ahead of renewal dates to maintain transparent communication and minimize the likelihood of disputes and chargebacks.