For those who attended the PaymentsEd webinar last week and heard John Trivelas from Mastercard speak about the new rules for free trial/intro offers and recurring billing programs, you can stop reading now and instead fire up today’s Wordle (fwiw, I got 4/6 on 222. Sad). For everyone else, I provide below a summary of his prepared comments and his answers to various questions posed by attendees on Mastercard’s new requirements for merchants.
As I have previously reported, new Mastercard rules go into effect this March and September for free trial/low cost introductory period offers and card-not-present recurring charge subscription programs.
New and noteworthy, merchants must send a notice to customers 3-7 days prior to being charged (1) at the end of a low cost/free trial period, and (2) for any subscription program with a renewal term greater than 6 months (e.g., annual). In addition, all merchants that charge customers on a recurring basis must send a transaction receipt following each charge, regardless of billing frequency (including monthly), with . . . wait for it . . information on how to cancel.
All of these notices must be sent by email or other electronic method, based on an (an incorrect) assumption by Mastercard that all merchants collect consumer e-mail addresses. The new rules also require clear and conspicuous disclosure of the offer terms, an order confirmation, and an online method to cancel, which Mastercard described as an online page with information on how to cancel.
The Full Story
John opened last Tuesday’s program by explaining the reasoning for the new rules – to provide increased transparency to cardholders for recurring charge offers. From a Mastercard brand protection and merchant business perspective, the new rules are intended to reduce disputes and chargebacks by ensuring consumers know they are signing up for these programs and have the information and tools they need to cancel.
As a basis for Mastercard’s concerns, he noted that, in 2020, 60% of Mastercard’s chargebacks related to recurring transactions and that 76% of chargebacks “involving a recurring transaction were disputed because the cardholder stated they did not authorize the transaction.” He also noted that recurring charge programs were coming under greater scrutiny by regulators, and Mastercard had been contacted by these parties, particularly in Europe, to help address abuses to protect the payments ecosystem.
He briefly discussed other rules that were implemented by Mastercard in 2019 to address abuses by companies in the nutraceutical category that offered free trials and introductory periods to try these products, which resulted in complaints and high chargebacks. In response, Mastercard established rules at that time for the sale of all physical products delivered on a continuity basis following a free trial or introductory period, which required, among other things, the seller to obtain a consumer’s affirmative opt-in to continue the program following the initial period, regardless of the initial sign up. Because of this more stringent requirement, the new rules do not apply to those merchants.
With the exception of the separate opt-in following a trial period, John said the new rules extend many of the 2019 rules to all merchant categories, including digital, audio and visual streaming companies, such as making offer disclosures clear to consumers, requiring certain notices, and providing an easy way to cancel.
The New Rules
I will not repeat the new rule requirements here, as they were covered in detail in my prior article, but will only cover new information from John that was not clear in the notice (AN 4934) announcing the changes that Mastercard (purportedly) published/distributed to acquirers and merchants in September 2021 (more on this later). But as a reminder, the new rules have two effective dates: (1) September 21, 2022, for clear disclosure of offer terms, and (2) March 21, 2022, for all remaining requirements, such as the order confirmation, pre-bill (for renewal terms greater than 6 months), end of free trial, and post-transaction receipt notice requirements, and allowing an easy method to cancel.
His prepared remarks, which were brief, tracked closely to AN 4934, so there wasn’t much new there. The only area where he, in my view, added more color, was in regard to the new cancellation requirements, where he noted the new rules require an online method that is similar to unsubscribing from an email, but may also include instructions on how to cancel, such as a link to a web form on the merchant’s site or refer to a phone number to call, but not a link that sends the cardholder to a general website home page or customer support page.
A large portion of the program consisted of questions posed by attendees. I cover these by topic rather than as they were asked, and have condensed similar questions together for brevity.
General Background and Scope
Q. When/where were the new rules published?
A. The new rules have not yet been published in Mastercard’s Rules or Transaction Processing Rules, and were only announced in the above referenced announcement. He said the new rules will likely be included in the next release of their general rules, which could be this September.
Q. What is the distinction between a “Negative Option” marketer and a “Subscription” marketer?
A. A “Negative Option” marketer offers a free trial or low cost intro period that then rolls to a full paid program. A “Subscription” marketer bills consumers on a recurring basis regardless of whether a trial or intro period is offered. Negative Option is a subset of Subscription marketing.
Q. What is a low-cost offer for purposes of determining whether an offer is a Negative Option under the new rules?
A. Mastercard does not have a specific definition for what low-cost means, but a slight discount would not likely qualify, such as offering a $30 service for an initial term at $25. He noted that while each offer would have to be reviewed individually, as a general rule, any discount greater than 50% off the regular price would likely be considered a low-cost intro price, and thus qualify as a Negative Option offer.
Q. Do the new rules apply to retail installment payments, where the consumer pays for a product or service over several payments?
A. He had not thought about that and will get back to us.
Q. Are the 2019 rules applicable to only nutraceuticals or all physical goods?
A. While the impetus for the 2019 rules were abuses in the nutraceutical category, the rules apply generally to the sale of all physical goods that are sold on a free trial or introductory period basis.
Q. How will the new rules impact weekly billed programs?
A. While a pre-bill will not be required, a post transaction receipt must still be sent after every charge.
Q. Do the new rules apply to non-profits and donations?
Q. Do the new rules apply to B-B transactions?
Q. If a coupon is used for an initial order that provides the consumer with a discount off the merchant’s regular price only and is not a trial, would that require a pre-bill notice before the regular price is charged?
A. This would likely be out of scope as a Negative Option offer, but ultimately would be subject to the particular facts of the offer.
Q. Will other card brands follow Mastercard’s new rules?
A. He doesn’t know, though he did say that Visa implemented new rules for free trials in 2020. Those rules are available in the Visa Core Rules and Visa Product and Service Rules at Section 18.104.22.168.
Q. Do the new rules apply to a “hard offer,“ which is defined as an initial charge with no free trial or intro period, where the charges continue if not canceled?
A. Yes, while these offers may not be “Negative Option” offers (as defined by Mastercard), and as such no notice would be required prior to the first charge, but pre-bill notices and transaction receipts would be required for future charges.
Q. What is the logic/rationale behind the post-transaction receipt and why include cancel instructions?
A. John noted that some jurisdictions require transaction receipts, and while he made a passing reference to some state laws, he didn’t identify any in particular. He did mention foreign laws on this point and Mastercard’s desire to provide a consistent cardholder experience in all jurisdictions. Notably, he provided no justification for it or cite any proof or data that sending these notices would necessarily reduce disputes and chargebacks. But he did confirm that receipts must be sent for all recurring payment transactions, including monthly charges.
Q. What if a merchant does not have a consumer’s email address to send the notices?
A. His quick answer: send a text message.
My Note: This response is concerning as it demonstrates Mastercard’s lack of awareness of the risks associated with sending unsolicited text messages to consumers without appropriate consent as required by the Telephone Consumer Protection Act (which provides for a private right of action and steep statutory damages) and various similar state laws. I, for one, would advise not sending these notices via text without appropriate consent, which is a discussion for another day. But back to John, he did not offer any other solutions to email or texting such as sending the notice sent via postal mail, as he (and Mastercard) appear to assume that all merchants collect email addresses.
Q. Can a consumer opt out of receiving email and texts?
A. This question kind of caught John by surprise, but he did say that if a consumer opts out of receiving emails and/or texts, that would excuse the merchant from sending the notices, but the merchant would be responsible for documenting and maintaining the opt outs.
My Note: It wasn’t clear whether the question applied to pre-bill notices or post transaction receipts, but his answer did not make this distinction, so it presumably applies to both. Nevertheless, as various state laws do require a pre-bill notice, it is advisable to continue sending them to customers in states with those requirements, despite any opt-out for Mastercard purposes.
Q. Can the pre-bill notice include any other content, such as highlighting the benefits or attributes of the ordered product/service?
A. Yes, but the billing aspect of the notice must be made clear and not be obfuscated (my word, not his, but big points in Scrabble!) by the other content.
Q. Does a billing receipt have to disclose the seller’s refund policy or how to seek a refund, or is the disclosure requirement limited only to cancel instructions?
A. Only information regarding cancellation is required; Mastercard does not dictate the content or placement of merchants’ refund policies.
Q. For purposes of determining when notices must be sent, does “days” refer to “business days” or “calendar days”?
A. He was unsure and will get back to us.
Q. Visa requires merchants to send a notice “at least 7 days before a charge” following a trial, whereas Mastercard will now mandate 3-7 days prior notice. These timing requirements are not aligned and will provide merchants with significant operational challenges.
A. He said he can’t speak to Visa’s rules or point of view on this issue, but it is his understanding that despite Visa’s rules mandating “no less than 7 days,” they are nonetheless aligned on the 3-7 day window.
Q. Do prebill notice requirements apply even if there is no increase in price?
Q. As some state laws require a pre-bill notice to be sent 30-60 days prior to an annual billed renewal, and Mastercard requires this notice to be sent 3-7 days before the charge, which governs?
A. In general, laws govern. In the event of a conflict between a local law and the Mastercard rules, the applicable law will govern. But if they are not in conflict, both would apply, so two notices would be required prior to billing.
My Note: Yup, he said it.
Q. Would placing a “red” button in an app or sending a push notification satisfy the email or other electronic method of delivering the notice requirement?
A. No, it must be sent by email or other electronic method.
Q. What information about cancellation should be on the transaction receipt?
A. Instructions on how to cancel, such as “to cancel, click here.” Also note the phone option mentioned above.
Compliance and Penalties
Q: Given the late notice of the rules, can the effective dates be extended?
A. No, since the rules were published and distributed in September 2021 which should have given merchants ample time to plan compliance. He noted that merchants can discuss compliance challenges with their acquirers and seek a variance for compliance timing.
My Note: As many of you know, these rules were not distributed or made public at any time, and in fact, aren’t even published in the current version of Mastercard’s Transaction Processing Rules, dated October 5, 2021.
Q. How will Mastercard monitor compliance?
A. Mastercard will monitor the marketplace for merchant offers and practices and continue looking at consumer complaints. If they identify any issues, they will notify the merchant’s acquirer who will pass these concerns on to the merchant for remediation.
Q. Are there any penalties for non-compliance?
A. He seemed very vague when answering this question but did say that non-compliance could result in a $25k penalty, and if not rectified, can go up to $50k, and even up to $100k, though that is a worst case scenario.