That’s the crux of the problem with negative option billing.
Fairly or not, banks consider merchants offering negative option billing as higher-risk.
While the practice is perfectly legal, it is also complex and monitored closely by the Federal Trade Commission for potential fraud.
What is Negative Option Billing?
Negative option billing’s business model typically involves introductory offers and free trials by sellers sending merchandise such as books, magazines, supplements, software or another subscription service.
When the customer agrees to that initial free or low-cost offer, the merchant continually bills them unless they specifically contact the merchant to cancel.
The term “negative billing” refers to an agreement in which silence equals consent for billing.
The customer is liable for the charge unless they take positive action to cancel it within the allotted time.
It also means customer disputes are far more common than with standard transactions.
That’s why banks and Visa and Mastercard have strict policies in place for negative billing merchants.
Types of Negative Option Contracts
The FTC recognizes four types of negative option contracts:
- Prenotification negative option plans – Sellers must let customers know the plan’s terms prior to subscription, pre-notifying them. Under these plans, sellers automatically send merchandise such as books or compact discs to their subscribers. Sellers bill the customers if they do not expressly reject these items within a certain timeframe. FTC guidelines dictate that all promotional materials used for enrollment must provide clear and conspicuous information regarding negative option plans.
- Continuity plans – Consumers agree beforehand to receive periodic shipments of goods or provision of services, which they continue to receive until they cancel the agreement.
- Automatic renewals – Many merchants offer subscription services. Subscriptions renew automatically at the end of the term unless the customer cancels the auto-renewal prior to that date.
- Free-to-pay or nominal-fee-to-pay negative options – As noted, after the trial period, sellers automatically charge a fee or a higher fee unless the customer “affirmatively cancels” or returns the items shipped.
Negative Option Billing Benefits
For the merchant, negative option billing offers several advantages.
Because there is a predetermined schedule for shipping products, inventory stocking is more efficient.
Customers benefit by receiving uninterrupted service and ease of renewal.
Negative Option Billing Regulations
The Restore Online Shoppers Confidence Act, which was passed in 2010, prohibits post-transaction third-party sellers from charging financial accounts in online transactions without disclosing all terms of the transaction.
The third-party seller must get the consumer’s “express informed consent” to the charge.
Regarding prenotification negative option plans, the FTC requires companies to inform buyers about:
- Minimum purchase obligations
- Membership cancellation policies
- Procedures for merchandise rejection
- Deadlines for returning forms to avoid merchandise shipments
- Whether billing charges include shipping and handling
Businesses must also reveal the number of announcement and rejection forms subscribers receive annually. Rejection forms explain how the subscriber may reject the shipment/
The FTC views failing to disclose this information as a deceptive practice.
It’s in the Details
For negative option billing, it’s all in the details.
Few customers take the time to read the fine print to learn the detail of these transactions.
Many customers don’t understand what they’re agreeing to, and negative billing-related misunderstandings are common.
They can have a direct impact on your chargebacks and can even lead to your account closure.
Negative Option Billing Compliance
As a merchant offering negative option billing, compliance is critical. Make sure all of your company’s contact information is current.
The FTC considers faulty emails or phone numbers a deceptive practice. And there are other compliance issues to keep in mind too.
MasterCard and Visa have implemented negative option billing rules. These include, but are not limited to:
- A trial period that starts as of the date the customer receives the product.
- After the trial period ends but prior to additional payments, the merchant must get the customer’s consent to charge the account.
- Providing instructions on how to cancel the subscription.
- Transactions must include the merchant’s website URL or a contact phone number for telephone orders.
Every business wants to keep chargebacks to a minimum.
These payment disputes occur when customers question transactions and the bank issuing the credit card reverses the charges. The business must wait until an investigation takes place before the bank releases those funds.
Even when the business “wins,” it takes a lot of time and energy to document everything and file the paperwork.
There’s another potential risk factor too.
A company with a higher than average number of chargebacks is vulnerable to having its ability to process transactions penalized.
Businesses with an above-average amount of chargebacks are at higher risk of having their accounts closed.
Visa, MasterCard, and Discover monitor chargeback ratios closely. More chargebacks mean more than higher fees – they increase closure likelihood immensely.
Understandably, negative option plans create more than their share of chargebacks. Here are some ways a merchant can minimize chargeback issues:
- Remind customers that the first charge is imminent. Five days prior to the first charge, send a reminder email so that the customer may opt to cancel before the trial period ends.
- Offer trials without collecting credit cards. If that’s not possible, get aggressive about letting them know that a charge is coming. When the trial period ends, notify the customer via email that their free trial is over and allow them to continue receiving the service by providing their credit card information.
- Effective customer service is essential. With negative option billing, a certain number of subscribers will demand to have accounts refunded because they did not understand the subscription agreement. Even if they are ineligible for a refund, it is often best to issue it because a chargeback will probably follow. Your company may prevail in the chargeback, but you must determine whether it is worth the time and effort.
How Easy Pay Direct Can Help
Easy Pay Direct serves as both a merchant account provider and payment gateway.
We specialize in high-risk merchant accounts, such as those offering negative billing options. That’s why working with a company familiar with your industry is a necessity.
At Easy Pay Direct, we’re here to make things easier! Let us set up your merchant account the right way from the start!