Negative Option Billing

Table of Contents

1. What Is Negative Option Billing?
2. Is Negative Option Billing Legal?
3. How Does Negative Option Billing Lead to Chargebacks?
4. Visa Negative Option Billing Rules
5. Mastercard Negative Option Billing Rules
6. How Can Negative Option Billing Merchants Prevent Chargebacks?

In November 2021, Mastercard revealed several changes to their rules for subscription billing that will go into effect in 2022. Many of these changes are targeted at merchants who use negative option billing.

Made famous by companies like Columbia House, negative option billing is an often controversial business practice that can lead to customers feeling tricked or taken advantage of. What do merchants need to know about the rules for negative option billing, including the upcoming changes from Mastercard, and the potential consequences of using it?

The history of negative option billing predates the era of e-commerce, and it has never enjoyed a particularly good reputation among customers, despite the fact that the book-of-the-month and mail-order record clubs that relied on negative option billing offers used to be fairly popular.

These days, subscriptions are a popular way for customers to get everything from movies to skin care products, and many e-commerce merchants are making the leap into the world of recurring billing for the first time. Many of these merchants might look at negative option billing as an effective way to get new customers on board.

Unlike a traditional subscription offer, the customer doesn't have to acknowledge and agree to the later charges in a negative option billing model. Instead, the customer is subscribed by default, with the option to opt-out.

This can be a tempting opportunity for merchants. After all, according to Forrester Research, only 18% of people respond to requests to either opt-in or opt-out. That means that negative option billing might lead to around 82% of customers subscribing where a traditional opt-in subscription might only be successful 18% of the time.

The fact that negative option billing relies so heavily on the fine print of the agreements that most customers don't bother to read is why it has been repeatedly examined and regulated by both the FTC and the major card networks.

In the past, some merchants have deliberately obscured the existence of these recurring charges, trusting that many customers won't notice a recurring charge they don't remember signing up for. However, the increase in conversion rate negative option billing offers can be desirable for honest merchants as well.

Subscriptions that include a free trial period before the customer is charged may sometimes be included in the category of negative option billing. However, these offers typically avoid the legal and regulatory issues associated with traditional negative option billing by making the cost of the subscription clear throughout the signup process.

For the United States, the FTC's rules about negative option billing can be found here, but a brief summary is that merchants must:

1. clearly and obviously disclose the terms of the agreement before obtaining billing information from the customer;
2. obtain express informed consent from the customer prior to charging their account; and
3. allow the customer to cancel any recurring charges easily.

The issue of what qualifies as customer consent has historically been interpreted liberally, with a simple acknowledgment of the terms and conditions often deemed sufficient. However, government regulators aren't the only ones merchants using negative option billing have to worry about. The card networks have their own rules for recurring billing.

While most merchants do make the required effort to explain the subscription terms, many customers still resort to chargebacks to deal with any problem they have with a subscription service, especially when it comes to negative option billing. Because of the unfavorable view many customers have of negative option billing, they may feel like there’s nothing wrong with disputing a charge that they forgot to cancel in time.

It doesn’t help that some merchants deliberately make it difficult for customers to cancel their services. In some cases, the cancellation process might involve logging in to the website, requesting a cancellation page, and being given a phone number to call.

This has led many customers to believe that easy online cancellations are rarely offered, and it’s faster to just call your bank and dispute the charge. Recent card network mandates have addressed this aspect of subscription services, but it can take cardholders a while to become aware of changing trends.

Visa Negative Option Billing Rules

In 2020, Visa issued a trial and subscription mandate featuring new rules and requirements for subscription merchants. As part of this mandate, merchants who accept Visa cards must now require the customer to take an action, such as clicking a box, explicitly agreeing to future recurring charges.

Merchants must also remind customers of upcoming payments before processing any charges, and must include a link that allows customers to easily cancel the subscription online.

Whenever a merchant charges customers in a way that goes against a card network mandate, any chargebacks that result will likely be decided against the merchant by default.

In practice, this means true negative option billing is no longer an option for most merchants, at least under the strictest definition. Visa enforces its rules according to its own discretion, but the network has said it will be monitoring compliance with this new mandate.

Some merchants may disobey the new rules and avoid any punishment beyond having chargebacks decided against them, but others may face consequences even up to being banned from the card network for repeated violations.

Mastercard Negative Option Billing Rules

In November 2021, Mastercard announced upcoming changes to their rules for subscription merchants. These changes are most significant for merchants using some form of free trial or negative option billing.

Some of these new rules are in line with Visa's recent changes, including allowing customers to cancel online, disclosing the terms of the subscription during enrollment, and obtaining affirmative consent from the customer. Merchants must also email customers a confirmation of enrollment a receipt for each payment.

Like Visa, Mastercard will require merchants to remind customers of upcoming payments, but Mastercard will only impose this requirement for plans that use any form of negative option billing (including free trials) as well as those where recurring payments are spaced at least six months apart.

The most significant new requirements Mastercard is imposing are those surrounding disclosures at point of payment.

The term "point of payment" here refers to the checkout page, including any page where customers can review the details of their order and any page where payment information is entered.

These pages must contain the terms of the trial or subscription and the amount and frequency of any future payments. This information must be clearly visible without any action from the customer. That means the traditional "terms and conditions" link isn't an option, nor is hiding the information in a drop-down menu or placing it at the bottom of the page where customers would have to scroll down to see it.

Due to the greater difficulty of implementing the point of payment requirements, merchants will have until September 22, 2022 to get in compliance. The other rule changes will go into effect on March 22, 2022.

This doesn’t mean that you won’t still see chargebacks related to these subscriptions, but if you’ve followed the card network rules and can provide documented proof that you did so, you should be able to fight these chargebacks and win.

The following guidelines should keep you in compliance with both Visa and Mastercard’s current rules:

• Make sure the cancellation process is easy and can be done online, even if the customer initially signed up over the phone or in person.
• Always obtain express consent at the time of enrollment for future recurring charges and include a detailed description of those charges on the checkout page.
• Send a copy of your terms and conditions via text or email immediately upon enrollment, and send a billing reminder at least seven days before processing a recurring transaction. The billing reminder should include the date and amount of the upcoming transaction, the name and description that will be shown on the cardholder’s bank statement, and a link to cancel the service if the customer wishes.
• Follow all card network rules for keeping and processing stored payment credentials.

Merchants who use negative option billing subscriptions are often automatically categorized as “high risk” and may be subject to additional rules or requirements from their payment processors and acquiring banks, so be sure to check with them as well.

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