Growth of the subscription economy shows no sign of slowing down.
Subscription, continuity, rebilling, memberships and other recurring payment models are big online revenue generators. In fact, this e-commerce market is continuously growing year over year.
Studies show increases by more than 100% a year over the past five years. Revenues from online companies using recurring transaction models are set to top $3 billion in 2019, compared to just $57 million in 2011.
But compliance guidelines issued by major card companies such as Visa and MasterCard threaten to derail this current billing practice. In this article, you’ll learn how to stay on the right side of the rules while maintaining those enormous profits!
The differences between recurring orders, rebilling and subscription services
Some merchants still don’t know the difference between different recurring payment models. So, we’re going to spell it out for you.
Rebilling happens when customers get charged for goods or services on a pre-arranged schedule. Merchants must get the client’s initial permission on the first sale. Also, they must tell customers about future charges. Then recurring charges to the cardholder occur without further permission. Rebilling is the most common method of collecting payments for subscription businesses.
Subscription payments or continuity continue until a customer cancels. Some merchants use this strategy, because they have big upfront costs to land customers. Often, the investment is only recouped after the first few months of rebilling.
Many customers use auto-ship or auto-refill to take advantage of special offers or free trials. This common technique allows for low barriers of entry in purchasing their product. Amazon has popularized this with their “subscribe and save” strategy.
Recurring payments are getting riskier for payment providers
Merchants who rely on rebills for making a profit are presenting a risk for their acquiring banks. The benefits of regular payments are clear for merchants. But, subscription-based companies suffer higher-than-normal chargeback rates.
For subscriptions, there are a few risks for all parties involved.
The merchant’s side
For merchants, it may be offering free or discounted product in hopes of getting the consumers buy in and getting a regular paying customer. Also, merchants use rebills to break up large payments. This makes a high-ticket price more affordable for customers. This can be a big loss in a few ways. For example, the customer may not convert. They may also take free stuff, but then cancel before paying full price an item.
The bank’s side
For the bank, subscriptions mean a higher risk of chargeback. This means a profit and loss increase on their end.
For example, a motivational speaker charges clients $10,000 to attend a 4-day boot camp. Attendees might pay the first installment, before issuing a chargeback after attending the event. The acquiring bank is on the hook for the initial cost, plus extra fees. The bank may collect these fees from the merchant. But, if a merchant is unable to pony up the funds or goes out of business, the bank is liable for that chargeback.
This is why certain merchants get labelled high-risk. Furthermore, the banks reserves to process credit card payments.
The customer’s side
Another big issue arising from free trials is that often customers forget to cancel before the end of the free period. Resulting in yet more chargebacks. It’s also a loss to you, especially if your chargeback fee is higher than your ticket price. This is common for merchants selling digital content on a subscription. It could mean a free trial with a monthly $19.99 subscription results in a $25 chargeback fee (or higher). That is if the customer calls his bank and disputes the transaction.
The problem has become so prevalent that both Visa and Mastercard have taken action. Each has issued new compliance guidelines on rebilling and subscriptions.
MasterCard rules are already enforced and are only for merchants with physical products. But, Visa’s rules are coming in April 2020. They will affect all subscription businesses offering free or discounted trials. Now, merchants have no choice and must abide by these rules.
Does your business rely on free trials to attract customers? Do you need expert advice on how to pivot your product offerings to meet compliance guidelines?
Get in contact with our team today to protect your business before it’s too late!
Visa and MasterCard issue new guidelines on recurring
To improve high chargeback rates, Visa and MasterCard have issued new compliance requirements. Mastercard regulations have already affected physical product merchants. For example, those selling nutraceutical or subscription boxes.
Some merchants in these niches adapted to the new regulations through larger packages instead of subscriptions. One example is a six-month supply of a product at a large discount to avoid the monthly subscription. Revenue increases immediately and covers the cost of acquiring the customer.
Another option some merchants selected was to offer the same monthly price for the subscription. The regulations would not be applicable, as the new rules only affect merchants with free or discounted trials. So, the price has to change from the first to the second month for this to affect you.
Here’s a quick summary of the new regulations.
The rules surrounding free trials (also known as negative option billing) have changed for physical products such as supplements vis-à-vis MasterCard transactions.
Customers must be contacted for approval before continuing with a paid-for subscription or rebill. Merchants must send the cardholder an email or text message with the following information:
- Merchant name;
- Transaction amount;
- Payment date;
- Clear instructions for cancelling the subscription; and
- Clearly stated merchant contact information.
They must also issue receipts for each payment collected thereafter. That means every time you rebill the customer, you must send a transaction receipt with the information as stated above.
Free trial merchant get a merchant category code (MCC) marking them as a subscription-based business. A customer’s credit card bill descriptor must match their website. Banks no longer accept unrecognizable descriptors. A company in this category is instantly rendered high risk.
With regard to Visa, acceptable chargeback ratios are now lower. Chargeback ratios were reduced to 0.9% from the previous 1% threshold. And now, new rules for communicating with your customers will take effect April 2020.
Pressure is shifting from acquiring banks to merchants. The goal is to get you in line. Thus, adding stricter controls to your merchant account. And, merchants with European customers will also face strict rules. Tools like Strong Customer Authentication (SCA) or 3D-secure (3DS) are mandatory for Visa cards as of September 2020.
New requirements (like the above) from card providers will affect those in the recurring payments industry.
That said, what steps can merchants take to adapt?
5 Hacks to protect your recurring payments model
Do you operate a subscription-box service or sell supplements? Or, do you use rebilling to deliver a high-ticket product by breaking it down into monthly payments? In either case, changes will be needed to protect your company’s future. Here are 5 easy-to-implement hacks to safeguard your business:
Avoid Free Trials If Possible
Research has shown that consumers who churn from this business model do so quickly. Therefore, don’t invest large sums in free trials. More than one-third of consumers who sign up for a subscription service cancel in less than three months. Worse, over half cancel within six. Calculate all costs associated with your free trial model and ensure it is the best way to run your business. Costs can include additional customer service costs, losses from chargebacks and refunds, affiliate payments that get paid for customers who don’t convert, etc.
If the costs of these start adding up, having a set monthly cost might make more sense even if you make less sales, they may be more profitable. Comes back to the old adage of making $100 from one customer vs $1 from 100 customers, one carries a lot less maintenance cost than the other. Also, ensure you do everything you can to help to educate them about important information such as cancellation policies. And, this helps merchants to reduce chargebacks and remain compliant in the process.
Avoid industries where you can’t easily distinguish your offering
Some industries have alarming churn rates. The meal-kit category has high rates of cancellation within the first six months (up to 70%). This is due to the similar nature of the leading players.
Conversely, replenishment models are the highest-performing models (such as Dollar Shave Club). They have particularly high long-term subscription rates. Forty-five percent of members have subscribed for at least one year. Ten percentage points higher than the level for either personalized or par-for-access services. Find something your customers like and offer it to them monthly instead of trying to be creative.
Pay closer attention to your transactions to remain compliant
With Visa’s new rules coming into effect, stay on top of your merchant account transactions. Make use of real-time reporting to keep chargebacks at acceptable levels. Plus, enlist the services of a reputable fraud detection software to help prevent fraudulent orders to begin with.
Next, make sure to test 3DS/PSD2 protocol if you deal with European customers. This move will help to satisfy both Visa’s and the EU’s new SCA requirements and you will have time to test the impact on your conversions before this becomes enforced.
Lastly, improve the relationship with your acquiring bank. Remember the new laws affect them too. Make use of their reporting and anti-fraud tools. Also keep open lines of communication. Any issues surrounding transactions and compliance can then be ironed out quickly before they lead to more sinister scenarios.
Reward Customers for Paying More Up Front
Offering discounts to pay for three, six or twelve-month product bundles helps for two reasons.
- It lowers the chargeback rates.
- Customers aren’t likely to commit friendly fraud with higher pricing and longer periods to make use of the product or service than usual.
Also, by asking for more money up-front you can sell more products to your customers at a different time and they will not have multiple charges from your company during one month, thus reducing the chargeback threat.
Educate and Support Customers
The best route to success for subscription-model companies is through education. Being transparent with customers helps to increase retention rates and lower chargeback rates. First of all, make the recurring billing policy clear and easy to understand on your checkout page when customers order your product. Also, make sure to have an easy cancellation that is easily found on your website. Making customers jump hoops to get a refund should be avoided. Most banks don’t hesitate to file a chargeback when they see the transaction comes from a merchant in a high risk category code.
Send regular emails to update customers with all the details of their transaction and an easy way to get a hold of you if they want to cancel or get a refund. A refund request is always a better option than getting a chargeback. Educate them on billing details to avoid friendly fraud defenses like “I forgot I ordered this”.
Finally, excel in customer service. The margin for error is wafer thin for business selling supplements, subscription boxes or digital subscriptions. Thus, do everything to keep the customer. Offer them phone, email and chat support, the more means to reach out to you the better. Response time is also critical, try to get back to customers within a day.
Merchants need to adapt and overcome new laws governing recurring billing
Stricter compliance laws don’t spell the end of the subscription economy. Today 15% of all online shoppers have at least one form of subscription. Those numbers are only likely to increase.
Merchants need to understand how the tightened compliance regulations affect their business. Remember, the introduction of these compliance requirements will actually help merchants to tackle high chargeback rates. Merchants who don’t offer value to their customers will get wiped out and leave more money on the table for merchants offering subscriptions the right way.
These new rules present an opportunity for you to distinguish yourself as a reputable merchant. Redouble your efforts to educate customers on important items. They should be well versed in cancellation policies. And, ensure your customers know how the transaction will appear on their credit card statement each month. Aim to specialize in products and services that are easy to differentiate from your competitors.
As demonstrated, compliance laws and regulations are constantly shifting and getting stricter. Without an independent merchant account your businesses can suffer.
DirectPayNet has a decade of experience of securing merchant accounts. Particularly, for internet marketers, copywriters and online business owners just like you in high-risk verticals. Subscription, continuity, rebilling and other recurring payment models are more complex than it initially appears.