Visa and Mastercard’s regulatory approach to direct selling explained
Understanding how the regulatory environment is changing to provide broader protection for consumers and what this means for specialized businesses.
Since 2018, Visa, Mastercard and regulatory bodies have issued on a number of mandates that create additional requirements for the direct selling market, specifically focusing on merchants that rely on subscription models including offering free trials that convert into subscriptions. With Mastercard’s final update scheduled to go into effect on June 8th, 2022, it’s important for merchants to be aware of these changes and to take action where necessary.
Here are some of the key changes that we expect to have the most significant impact on direct sellers this year.
A new method for calculating chargebacks may leave direct sellers without an acquirer partner
Direct sellers have traditionally had challenges managing chargebacks, and this is one of the main reasons they struggle to open merchant accounts. Acquirers consider direct sellers as high risk because they are often susceptible to fraudulent behavior, particularly non-genuine claims for non-delivery of goods or services. For this reason, historically there have only been a limited number of acquirers supporting these specialized merchants. And, with these changes, that list of prospective providers may be getting even smaller.
One significant reason for this is that VISA adjusted its VAMP (VISA Acquirer Monitoring Program) system for calculating overall chargeback rates in Q4 2021. Acquirers’ chargeback rates for card present and card not present payments are now calculated separately instead of being combined into a single figure; this means that acquirers cannot use low risk instore retail payments to offset the risk incurred by much higher risk eCommerce and mail order payments. This tactic of processing large volumes of low-risk card present payments to balance the risk profile of an acquirer’s entire portfolio and keep overall chargeback rates low has been a favorite tactic previously. This strategy is now only available for acquirers with large low-risk volumes of card not present sales, and we expect to see many acquirers that were previously reliant on their card present volumes to balance their portfolio to leave the sector as they do not have the risk appetite they will now have to take on.
The rules for subscriptions and negative option billing are becoming stricter
We have written articles in the past detailing why issuers have been determined for years to upgrade the consumer experience when it comes to subscriptions and negative option billing. Mastercard has recently taken this a step further when it announced AN 4934, its revised standards for merchants using subscriptions and negative option billing.
The main focus of these changes is to provide consumers with greater transparency over the payments they are signing up for. And this is needed; when we asked consumers about this, 46% told us that subscriptions are too difficult to cancel and tie them into long term financial commitments while 35% said that they had overpaid for a subscription service that they had stopped using but forgotten to cancel.
The new regulations require that merchants:
- Disclose the full terms of any subscription including the cost and frequency of payments at the point card details are taken
- Disclose the full terms of any free trial to the consumer at the point they sign up for the free trial, including the length of the trial and the cost and frequency of the subscription service once the trial ends
- Inform consumers that have signed up for a free trial again that they will be charged for the service if they do not cancel the subscription between three and seven days before the end of the trial period. This communication must include details of how to cancel the subscription
These new regulations came into effect December 8th, 2021, with the exception of disclosure of the subscription terms at the point card details are taken which comes into effect June 8th, 2022.
In parallel with these rule changes, Mastercard has also informed merchants that it is significantly ramping up its investigations into non-compliant merchant trial and subscription billing and are actively fining acquirers that fail to comply. Merchants can expect to find themselves under increased pressure from their acquirer and risk having their merchant accounts closed if they fail to adhere to the Mastercard guidelines.
And it isn’t only Mastercard that is putting bad actors on notice. In October 2021 the Federal Trade Commission issued a statement announcing that it would be significantly stepping up the enforcement of its guidance in the areas of consumer consent and ongoing billing that is impossible to cancel.
Merchants that fail to conform to these new guidelines face the threat of legal action. But one of the other consequences of this step has been to dissuade acquirers from working in this space any longer as the risk now falls outside their appetite. Merchants that do not react to the FTC warnings will be hit with a wave of chargebacks from consumers that will have had their rights breached.
So again, the threats of excessive chargebacks are forcing merchants to rethink their acquiring relationships. There may be a temporary solution; some merchants have partnered with lower risk acquirers that are less aware of the rules. However, this can only be a short-term solution and it will not take long before non-compliance fines and excessive chargebacks remove this option.
So how do we move forward?
There are sizable opportunities for growth in 2022, but this will be dependent on partnering with an acquirer that has expertise in the space.
Succeeding in this new environment starts with education about the regulations, and there are specialist acquirers that have expert knowledge in this area. Direct sellers must work with these acquirers to achieve long term growth in this challenging environment.
While it is expected that many acquirers will abandon their direct selling merchants this year, those that are best placed to manage risk appetite through detailed understanding of the regulations and a proven history of being experts supporting merchants in this space will continue to work tirelessly to benefit the industry.