“Click To Cancel” RulesHere’s the 411 on the FTC’s New Rule Proposal

The FTC is Proposing Changes to How Merchants Handle Negative Option Billing. What Will This Mean?

Just last month, the Federal Trade Commission (FTC) proposed a “click-to-cancel” provision to their 1973 Negative Option Rule.

Under the legacy system, retailers were required to make it just as easy for customers to cancel a recurring subscription as it was to initiate the subscription in question. Merchants should take action now to streamline their subscription cancellation process in response. This may call for investment in tools that provide more self-service options for reactivating subscriptions and managing automated billing schedules.

This ruleset is still only a proposed change, as of this writing. However, merchants should begin making strategic moves now to comply with this new standard. Regardless whether the proposed regulation becomes a reality, improving the customer experience in a way that allows customers to self-manage their account is not only forward-thinking, but a growing market demand.

The FTC’s Legacy Approach to Negative Option Regulation

The rule proposal is part of the FTC’s review of their Negative Option Rule. This legal framework, which dates back to the 1970s, requires sellers to disclose the terms of sale before consumers subscribe. It also requires merchants to provide information about how consumers can go about canceling their service.

According to the FTC, the present Negative Option Rule does not go far enough. The regulatory agency receives thousands of complaints from consumers each year who have either been billed without their consent for recurring or subscriptions services. Thousands more complainants claim to have dealt with a retailer who makes it incredibly difficult — or sometimes impossible — to cancel a subscription.

“Some businesses too often trick consumers into paying for subscriptions they no longer want or didn’t sign up for in the first place,” says FTC Chair Lina Khan, regarding the agency’s rationale for the proposed regulation. “The proposed rule would require that companies make it as easy to cancel a subscription as it is to sign up for one. The proposal would save consumers time and money, and businesses that continued to use subscription tricks and traps would be subject to stiff penalties.”

What’s Changing?

Merchants engaged in negative option marketing are already required to abide by special requirements. They must make specific disclosures of terms, provide notice at predetermined intervals before automatic payments or renewals are initiated, and give prior notice of any changes to the terms of service, along with an opportunity to cancel service. They must also make the cancellation process easy, without providing roadblocks to consumers, and compliant cancellation requests must be honored in a timely manner.

However, the FTC has indicated that the current patchwork of federal laws and regulations does not provide a consistent legal framework for brands to follow. The result has been a lot of confusion, opening the door for potential noncompliance by accident. The commission suggests that the proposed rule change would close these gaps.

The new FTC rule would:

• Require Simple Cancellation Mechanisms: Sellers must make the cancellation process for subscriptions at least as easy as the process to initiate service. “For example, if you can sign up online, you must be able to cancel on the same website, in the same number of steps,” read an excerpt from an FTC press release.
• Implement New Requirement for Offers: Sellers must obtain a consumer’s affirmative, clear consent before pitching additional offers or modifications when the customer attempts to cancel service. If the consumer doesn’t consent, the merchant must immediately proceed with cancellation as requested.
• Require Annual Reminders: Sellers must provide an annual reminder before automatically renewing a service subscription. If no reminder is sent, then the seller may not automatically renew the service.

The FTC began soliciting comments from the public back in March. These comments will be taken into consideration before any proposed changes are made.

New Rules are In-Line With Best Practices

Consumer behavior trends are aligned with reduced friction when it comes to canceling subscriptions. Whether or not this proposed rule change is adopted by the FTC, it has been suggested for decades that merchants should have clearly-stated terms and conditions when it comes to recurring billing. Ultimately, the proposed rule changes are much in line with what we at Chargebacks911® have long advocated regarding subscriptions and negative-option billing.

Innovative technologies have forever shifted the behavior and expectations of consumers. The drive to digitization requires experiences to be safe and secure, but also faster, better, and more transparent. Providing customers with a tool that allows them to cancel a subscription is only part of the challenge.

To remain competitive and address growing demands, users require a more comprehensive, self-service experience. Today’s consumer wants intuitive flexibility, payment scheduling options, and frictionless convenience. Otherwise, retailers face steep competition with their customers’ banks and credit card companies, many of which supply a “concierge-like” service to efficiently address their customers’ needs and wants. 

This isn’t just a matter of serving shifting consumer preferences. Unfortunately, any perceived breakdown of communication between customer and retailer is an open door for first-party fraud. Left unaddressed, this door may be wedged open permanently.

First-Party Misuse of Chargebacks Causing Major Problems

No retailer wants to see their customers cancel services. However, having a tedious, complex cancellation process could push customers to file a chargeback, or file a complaint with entities like the FTC or Better Business Bureau. This may happen even if the retailer is fully compliant, and following all payment processing guidelines as laid out under FTC requirements.

Year over year, the growth of chargebacks is largely attributed to disputes filed on subscription products and services. The vast majority of these disputes are considered to be first-party fraud.

Compared to the growth of eCommerce transactions in the US, the growth of chargebacks has surged ahead by nearly 20 percent, according to a study conducted by Chargebacks911. This is a worrying statistic; retailers can easily be penalized with “guilty-before-innocent” fines and fees. Plus, depending on volume, it may even lead to a merchant’s account being revoked or terminated, where the company loses the ability to process card payments altogether.

Another indication of the growing consumer demand for convenience and efficiency is the heightened growth rate of friendly fraud, or first-party misuse. First-party fraud is cited by Visa as representing up to 75% of digital eCommerce chargebacks. First-party fraud is a growing industry concern, with subscription retailers shouldering a significant share of this burden. According to LexisNexis True Cost of Fraud Report, every $1 in chargebacks costs the merchant approximately $3.75 and evokes a negative reputational statistic that even if contested, is never removed from their record.

Friendly fraud commonly happens to subscription retailers when consumers contact their bank, rather than the merchant, to cancel a subscription. These retailers are often unaware that an irreversible, negative chargeback will be raised against them in effort to cancel a recurring subscription on the consumer’s behalf.

Merchants on the Front Line

The industry has advocated for retailers to exchange more feedback on these types of chargebacks, and educate consumers of the harmful effects of their often accidental or unintentional actions. However, the process is laden with complexities and can require significant resources to address. In many cases, this goes far beyond the purview of merchants.

Although merchants and financial institutions bear the initial “brunt” of the matter, consumers are ultimately the worst hit by this problem. Consumers suffer losses and policy restrictions as a result of inflation, low margins, and unfair market pressures.

Although it may not be fair, merchants are on the “front line” regarding first-party misuse of the chargeback process. Thus, the burden falls to them to take proactive steps regarding the issue.

We at Chargebacks911 advise that companies should include recurring billing information, as well as terms and conditions, within the checkout process. They should also make sure the information is easily accessible for customers. Finally, we suggest that companies increase the frequency of reminders and billing confirmations ahead of renewal dates.