Subscription Merchants – Know What You’re Signing Up For

The subscription-based billing model is enjoying a renaissance. But with it has come an increase in deceptively marketed free trials, auto renewals and recurring payments. We explain how acquirers and payment service providers can fight back.

The subscription economy is booming. Everything from music to meal kits, file storage to fitness is available on subscription nowadays. And it’s easy to see why.

Subscriptions are convenient for consumers. One order gives uninterrupted service or delivery. Payment is fuss-free as it happens in the background via a regular card or direct debit payment.

At the same time, subscriptions are great for businesses wanting to secure repeat revenues from existing customers. They help strengthen customer relationships, reduce operational costs and attrition.

Brands such as Netflix and Spotify have built whole business models around subscriptions. Others, such as Amazon Prime, offer subscriptions as an additional sales channel. Small wonder that the subscription economy for physical goods is set to be worth around $265 billion by 2025, according to Juniper Research.

Meanwhile, the e-commerce subscription market has grown by more than 100% a year over the past five years. And the largest such retailers had more than $2.6 billion in sales in 2016, up from $57 million in 2011, says McKinsey.

The dangers of deceptive marketing

However, the subscription economy has a dark side. That’s the deceptive marketing of free trials, auto renewals and negative option sales. Unscrupulous merchants sign up customers for recurring payments, sometimes buried in the small print. Customers find it difficult to cancel, which causes customer disgruntlement, increases chargebacks and negative publicity from consumer groups and regulators.

Speaking at RiskConnect Virtual 2020, Bonnie Patten, Executive Director & Co-Founder of Truth in Advertising, a US-based non-profit consumer advocacy group, gave an idea of the size of the problem.

Consumer complaints to the Federal Trade Commission (FTC) about free trials and auto renewals more than doubled between 2015 and 2017, according to Patten. The Better Business Bureau received nearly 37,000 complaints and the FBI’s Internet Crime Complaint Center also rose during the same time.

The problem is not confined to North America. In fact, both major card schemes have introduced rules for acquirers around deceptive marketing practices. These are applicable worldwide and are particularly relevant to merchants active in the subscription economy.

In October 2018, Mastercard announced revised standards for negative option billing merchants, effective 12 April 2019. These can be found in ‘AN2202 – Revised Standards – High-Risk Negative Option Billing Merchant Requirements’, 19 October 2018.

In June 2019, Visa announced new rules for subscription merchants offering free trials or introductory promotions, effective 18 April 2020. These can be found in Visa Business News, Updated Policy for Subscription Merchants Offering Free Trials or Introductory Promotions’, 20 June 2019.

In summary, the requirements reiterate and enhance existing card scheme provisions. For example, cardholders must give express consent to a recurring transaction at the time of enrolment. There are requirements for transaction receipts, cancellation methods, coding and merchant registration.

How to mitigate deceptive marketing risks

Acquirers guarantee their merchants’ card sales at the time of purchase and into the future. They could be left covering the costs of chargebacks, resulting from the behavior and practices of their subscription merchants.

Deceptive sales and marketing can render any card transaction illegal, even if the goods and services sold are perfectly legal. It’s not what the merchant sells, it’s how they sell it. That is what creates the acceptance risk for acquirers and payment service providers.

Patten explained the types of checks her organization makes on companies. This overlaps almost exactly with the types of checks underwriters should make to mitigate the risks of deceptive marketing. “When investigating a company, we always start with the basics under US Truth in Advertising law,” says Patten.

“A company's advertising and marketing materials must be truthful, must have evidence to back up any claims made, and must be fair. Or, put the other way, advertising will be deceptive and in violation of section five of the FTC Act if a false, misleading or unsubstantiated claim is made, that is material to prospective consumers. And that's the broad brush under which we examine all companies advertising.”

Merchant underwriters should check these things when looking at potential deceptive marketing by a specific company:

• Review consumer complaints filed with state and federal agencies
• Analyse complaints posted online
• Search the company and CEO’s litigation history
• Read everything on the company's website, especially the fine print
• Watch all the company’s videos
• Check out what the company and its agents are saying, doing and writing on all social media platforms
• Examine a company's charity and financial documents
• Investigate the influencers and agents associated with the company
• Order the company's products and return them
• Request and or buy marketing material from the company
• Set up alerts to monitor changes to the company's website

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How Web Shield can help

The fight against deceptive marketing is complicated by the fact that the internet is a quasi-anonymous platform. Low start-up costs mean that unscrupulous merchants can change their locations and website quickly. Online shops are open for business 24 hours a day for a global customer base.

The problem is now too big to ignore, address piecemeal or as a by-product of tackling other risks in a merchant portfolio. Risk professionals must be cognizant of deceptive marketing risk and manage them in a coordinated manner, not only at the underwriting stages but throughout the merchant relationship to protect their business, reputation and bottom line.

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Deceptive marketing is the subject of the fifth book in Web Shield’s well-received Fundamentals of Card-Not-Present Merchant Acceptance series. A new Web Shield Academy online course dedicated to deceptive marketing is also available. It is packed full of information and case studies to help risk professionals recognize various deceptive marketing practices, plus advice on how to manage and monitor their risk exposure.