The Final Days of The Wild West for E-Commerce – Negative Option Billing
Negative Option billing refers to a business practice where a merchant provides a free trial or sample of goods/services, requires a credit card upon sign up and then bills the customer in the future unless they proactively cancel with the merchant.
For many years now we have been moving more and more to a cashless society. Merchants of all types have found that in order to stay in business they must be able to process credit cards. However since late last year, E-Commerce merchants have found themselves under increasing scrutiny and perceived attack from the processors who now with the stoke of a pen (or key) can literally put them out of business completely. Misunderstanding, confusion and fear abound as the dark clouds of change approach from all directions.
As we see company’s shut down and massive reserves being implemented on many others the questions of “Why is this happening?” and “What are we going to do?” are being heard from all corners.
To better understand what is happening we need look no further than the closest US history book.
These books tell stories of the old west. Of marauding bands of bandits and thieves on horseback, destroying lives and communities as they moved from town to town looting residents and robbing merchants of their ability to do business.
Of a broken south where carpet baggers and scallywags moved in to towns and set rules that sucked the life from merchants and consumers while filling their own coffers.
Get rich quick schemes hatched by disreputable types where common place. Otherwise good people, tired of being kept down, thinking there no solution, got caught up in these schemes becoming part of the problem instead of the solution.
We read how the law would go out and capture or kill these scurrilous characters only to find them soon replaced with even worse types.
In most communities law and order were resorted only when rules and regulations were implemented and strictly enforced without exception. The active participation of the entire community, merchants and townspeople alike, while gratefully accepted was not an essential requirement.
This analogy is many times used to describe the internet experience and e-commerce today. Since the inception of internet based companies and the practice of receiving payments on-line, the issues of fraud, mis-representation, get rich quick schemes and outright theft from consumers has been growing almost unabated. The issue of “Chargebacks”, their causes, and how they are to be dealt with, something almost unheard of 15 years ago, has become an ever-present albatross placed around the neck of good e-commerce merchants everywhere.
The idea of rules and good stewardship of the internet have been mostly ignored or explained away by the scalawags and promoters that would have you believe that they have the “keys” to your success or the “secrets” to the internet that will protect you and allow you to do what ever you like without harm or repercussion.
Beware. “The Law” is coming. Is your Business ready?
Several years ago (okay, a LONG time ago in the internet world ) the FTC published recommendations and guidelines for merchants. Anyone remember these? Known as “The Dot Com Disclosures”, They were a blueprint of how commerce should be conducted on the internet. Laughed at and discounted by the big Promoters, these recommendations passed into seeming oblivion and were all but forgotten.
However, in response to tremendous increases in consumer disputes related to card-not-present and direct response products and services, both Visa and MasterCard are now actively taking direct action.
MasterCard has recently warned the Acquiring community that “Negative Option” enrollment or “continuity programs” will be considered a “Brand Damaging” business practice and are issuing heavy fines on merchants found to be engaging is such practices. In some cases MasterCard will require immediate termination of merchants identified as using this business practice, along with any other practices considered “Brand Damaging”.
This follows recent policy changes from Visa regarding descriptor formats and disclosure of corporate entities related to Direct Response offers, with the intent to enforce all chargeback and transaction monitoring programs as defined by the associations.
Under the new guidelines, processors cannot accept merchant applications for products and/or services employing “Negative Option” enrollment, in addition to the following practices:
- Marketing models that employ “Free-Trial”, “Deferred Billing” and/or “Shipping Only”. Customers must be receiving a tangible good or contracted service in exchange for charging of payment cards. Incentivized discount offers are acceptable when the cardholder is receiving something in exchange for payment, however we will be unable to support accounts engaging in hidden or delayed charges and ‘free’ offers that are not truly free.
- “Cross-Selling” and “Up-selling” business practices. All sales should be directly between the business entities (merchant) processing the transaction and the cardholder, with cardholder authorization for all purchases.
- Per Payment Brand guidelines, the use of multiple merchant accounts, billing descriptors and merchant processors may be viewed as an attempt to avoid chargeback monitoring programs and is prohibited. Perceived non-compliance has led to termination of processing relationships. e-onlinedata will review the business consideration for opening multiple merchant accounts to ensure compliance with Payment Brand guidelines.
- Transactions generated from internet traffic and all other lead sources must be managed and monitored for potential fraud using an approved system. Third Party service engagement may be a requirement for account approval.
All of this is in line with the afore-mentioned FTC published guidelines. Processors being directed to take a very aggressive position against merchants utilizing/employing these business practices.
Recommendations taken in part from the FTC’s website, include but are not limited to:
- Material terms should be disclosed in a clear, concise manner. Unnecessarily long or inconsistent terms are viewed as an attempt to mislead the consumer.
- Terms should be disclosed in a conspicuous manner, clearly placed and labeled on websites in a location that indicates the importance and relevance to the transaction. Fonts and colors must be easy to view.
- Material terms must be disclosed prior to completion of the transaction and before a financial obligation is incurred by the consumer.
- Customers must provide affirmative consent to any offer, examples include a mandatory “I Agree…” statement checkbox, where the customer is acknowledging the Terms and Conditions of the offer and consents to be entered into continuity program as a result of completing the transaction. Pre-checked boxes do not qualify as affirmative consent.
- Merchants must not discourage or make difficult in any way the disclosed cancellation procedures and all cancellation requests must be honored in accordance with the stated terms of the transaction.
For some, the implementation of these guidelines will be viewed simply as further governmental interference in free commerce. For others it will mean the end the complete loss of their business. But for most it will herald a new beginning free of those who would drag us all down a road so restricted that none could survive.
As an e-commerce merchant, where do you stand?
Has your Service provider reviewed your account in the past 6 months?
Are you properly prepared for the changes and regulations, those here now and those still to come?
Are you ready to be a part of the solution?
If your current provider is doing nothing, consider talking to a different provider.By Joseph Stang Senior Account Executive Payline Data [email protected]
Portions of this article were taken directly from The FTC Website, the publication “Dot Com Disclosures” and Visa merchant Chargeback monitoring Program (MCMP).