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Main image for Hit Pause on Auto-Renewals: Changes Needed by April 2019 to Subscription Plan Operations
Publications|Alert

Hit Pause on Auto-Renewals: Changes Needed by April 2019 to Subscription Plan Operations

E-Commerce Alert

1.30.2019

Remember Columbia House Records? You signed up, got a dozen albums for a penny, and then maybe tried to cancel your subscription before paying the higher monthly price. This was a very successful business model for attracting new customers and by now has expanded to all manner of products and services. The basic plan provides a free or deeply discounted first shipment and a fixed monthly rate thereafter. Subscribers provide a credit card up front and can end the charges only if they take certain steps at specific times.

Subscription plans are great for merchants. However, some bad actors have abused them with hidden fees, large or unannounced price increases, and by making it nearly impossible to cancel. Out of this we have an increasing and evolving minefield of technical and legal requirements that apply to these “negative option” plans. The good news is that this is still a very manageable business model when merchants and their technical staff or outside developers work together to keep an eye on what is needed over time.

The Federal Trade Commission (“FTC”) has tried to curb abuse of negative option subscription plans by prosecuting under federal law those who are engaging in any “unfair or deceptive act or practice in or affecting commerce.” The FTC traditionally looks for the merchant to disclose all material terms, including how and when payments are charged and how and when the customer can cancel the subscription. California, Louisiana, and Washington, DC, among others, have also passed local laws in an attempt to discourage abuse of these programs. By and large, these laws also require merchants to provide detailed information about the program, provide a clear path to cancellation, and give pricing information.

As technology has changed, new laws and regulations have been enacted. For instance, a recent law specifically addressing online shopping requires the merchant to “clearly and conspicuously” disclose all material terms “before collecting billing information”; to obtain the consumer’s “express written consent before making the charge”; and to provide a “simple mechanism” that actually stops unwanted charges. This sounds easy enough. You make sure the web content associated with the subscription plan is clear and comprehensive, that your billing system is integrated so that the first charge won’t occur at some point before the user shows affirmative consent (usually a checkbox or submit button), and provide a cancellation link that is connected to the billing system. Are you done? 

No, not quite, because a major credit card company is now stepping into the fray with its own requirements. Mastercard recently released rules which will be effective April 12, 2019. These rules will require merchants to go through several more steps when selling physical goods by subscription. These rules will require technical upgrades to merchant websites. Among them:

  • At the end of the free trial, the merchant must contact the customer (by email or text) to obtain affirmative consent to begin subscription billing;
  • That communication must contain the following information: the amount of the transaction, the payment date, the merchant’s name, and explicit cancellation instructions; and
  • A separate receipt must be sent (by email or text) after each subscription payment with details of the amount paid; the email or text must also include explicit cancellation instructions.

Most merchants will make this a technical upgrade to their entire system rather than limit customer payments to avoid accepting payment through Mastercard. Furthermore, if Mastercard sees a benefit to this system, can VISA or American Express be far behind?

Merchants will undoubtedly grumble about the extra cost and added work, and perhaps worry about lower sales conversion rates. But despite the red tape, since the days of Columbia House Records, this has always been a profitable business model. The added checks may increase profits as customer retention rates should be higher, and there will be an improved customer experience and enhanced brand loyalty. Higher retention rates also mean lower chargeback rates and fees assessed by the credit card companies and issuing banks. It is entirely possible that over time, those lower fees will make up for the added technical development expenses borne by merchants. Finally, merchants will be able to worry less about the FTC bringing charges against them for engaging in misleading practices. Overall, it’s only a bit of pain now for the benefits that will be seen later.

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Media item: Susan Okin Goldsmith
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