Mastercard Subscription Rules

Subscriptions are a budget-friendly option for purchasing ongoing services that provide merchants with reliable revenue streams. Free trial offers give customers an enticing way to try out a product without a major commitment. In theory, these billing practices are a win-win for everyone involved.

In reality, however, they can attract chargebacks like moths to a flame when customers get confused about their charges or want to cancel a subscription mid-cycle. What do merchants need to know about the changes Mastercard is making to its subscription rules this year?

Subscription services are everywhere, and their popularity only seems to be increasing. Subscriptions are how most of us pay for our streaming platforms, data storage, fitness plans, meal deliveries, video games, and a host of other goods and services. Hand-in-hand with subscriptions go the no-obligation free trial offers that entice many of us to sign up for them in the first place.

Regularly scheduled billing makes logical sense for things that consumers receive and use over extended periods of time, and merchants benefit from billing arrangements that allow users to become customers without a significant initial outlay of funds.

And yet, despite its ubiquity, recurring billing causes a lot of problems for merchants and consumers alike. Cardholders frequently dispute recurring billing charges simply because they don’t recognize them, or because they didn’t closely read the terms they were signing up for and want to get out of paying the charges after the fact.

Mastercard has estimated that 60% of their chargebacks were related to recurring billing in 2020, and of those, more than three quarters of cardholders claimed that they did not authorize the charges.

Those are troubling figures, and to combat recurring billing disputes Mastercard is following Visa in enacting new rules for subscriptions and free trials. Merchants who make use of these billing practices must familiarize themselves with the new rules and ensure that their policies and procedures are in compliance before the final deadline arrives.

Why Is Mastercard Changing its Subscription Rules?

The chargeback process is designed to protect consumers from credit card fraud, fraudulent merchants, and billing errors. When cardholders are disputing recurring billing charges because they’re confused or dissatisfied with the terms of their purchase, this is a sign that the system isn’t working the way it’s supposed to.

Many of these chargebacks are invalid and can be contested by the merchant, but that takes time and labor. It also fails to address the fact that even if the cardholder was wrong to file the chargeback, they had a bad customer experience that may cause them to lose faith in the merchant and maybe even e-commerce in general.

Mastercard’s new rules are designed to create better customer experiences for the benefit of every participant in the payment system, including consumers, merchants, and banks.

By following Mastercard’s updated rules, consumers should find recurring billing practices to be better aligned with their expectations and merchants should experience fewer complaints and chargebacks. The rules also help to bring Mastercard payments into alignment with consumer protection regulations in various global regions.

How Are Mastercard’s Subscription Rules Changing?

Mastercard’s changes to its subscription rules are designed to provide greater clarity and transparency to consumers and discourage the use of billing practices perceived to be harmful or deceptive.

Here are the new requirements:

1. The full terms of any subscription, such as the total cost and frequency of charges, must be disclosed to the consumer at the time their payment information is being collected.
2. The full terms of any free trial offer or negative option billing agreement, including the length of the free trial period and the cost and frequency of charges once it ends, must be disclosed to the consumer at signup time.
3. Between 3 to 7 days before the end of a free trial period, the merchant must inform the cardholder that their card will be charged unless they cancel before the free trial ends. This message must include information about how they can cancel their subscription.
4. Merchants must send a receipt after each billing that includes clear instructions on how to cancel, unless the customer opts out.
5. Merchants must provide an online cancellation method or clear instructions for cancellation that are easily accessible on the merchant's website.
6. For recurring billings six months or more apart, merchants must notify the customer of the upcoming charge and provide cancellation information between 7 and 30 days before the billing.

Mastercard has been clear that cancellation information must include a link to a cancellation form or a direct phone number.

A link to a general customer service page is not acceptable. Mastercard will be monitoring payment activity in various marketplaces and communicating with acquiring banks to ensure compliance.

Email is the preferred medium for this communication. Mastercard has indicated that SMS messaging is acceptable if email is not available, but merchants must be sure they are not violating any other regulations pertaining to sending unsolicited commercial text messages.

When Is the Deadline for Compliance with the New Rules?

Mastercard recently changed the effective date for these rules to give merchants more time to comply. All rules will now go into effect on September 22, 2022.

Mastercard has not specified penalties for non-compliance, but they could run as high as $25,000 or even more in egregious cases.

Conclusion

Most merchants would rather focus on providing excellent products and service rather than studying the details of arcane payment regulations. That’s quite understandable, but the digital payments infrastructure that makes e-commerce possible only functions properly when it is kept up to date and accounts for the realities of consumer behavior.

To preserve strong customer relationships, prevent disputes, and avoid costly chargebacks, merchants have to be fully informed and up-to-date about the payment rules they’re required to follow.

If you’re feeling overwhelmed and hoping you can avoid penalties by flying under the radar, it might be time to reach out to experts who can walk you through your regulatory challenges as part of developing an overall fraud and chargeback prevention strategy.

Thanks for following the Chargeback Gurus blog. Feel free to submit topic suggestions, questions, or requests for advice to: win@chargebackgurus.com