With consumers out-of-pocket and regulators, consumer groups and the media exercised, the payment industry is coming under increasing scrutiny for its stance on deceptive marketing practices.
At the end of last month (June 2019), Visa announced worldwide harmonisation of requirements for free trial merchants. We examine these requirements and highlight the similarities and differences with the Mastercard requirements that came into effect on 12 April 2019.
How goods are sold is as important as what goods are sold. If a merchant’s sales and marketing practices violate applicable laws, such as consumer protection laws or trading standards legislation, transactions for legal goods and services may become illegal, creating an acceptance risk for acquirers and payment services providers (PSPs).
State of the industry
US Federal Trade Commission (FTC) data shows that complaints about ‘free trials’ more than doubled between 2015 and 2017. In a recent case from earlier this year, the FTC announced that it was returning more than $6 million to consumers. This followed a successful action against a vendor of online health products, Tarr, Inc and the 19 companies it controlled.
This case had all the hallmarks typical of a deceptive marketing scam. The defendants used unsupported claims, fake ads, bogus celebrity endorsements and consumer testimonials to market weight loss, muscle building and wrinkle reduction products. They also used deceptive offers of ‘free’ and ‘risk-free’ trials.
The websites failed to disclose that consumers would be enrolled in recurring billing arrangements, unless they cancelled within a short period of time. The process for cancelling orders was not clear, and as a result many customers, who signed up for free trials, were charged hundreds of dollars for often unwanted products.
Deceptive marketing practices such as these have caused disgruntled customers, increased chargebacks, negative publicity and scrutiny from consumer groups and regulators. For card schemes in particular, this has become a brand and legal issue. Card scheme logos appear on these websites, giving them the appearance of respectability. The schemes have also been accused of processing millions of dollars annually that contribute to the viability of such websites.
High-risk negative option billing merchants
The changes to Visa's rules apply equally to merchants selling physical or digital goods and services, if they offer free trials or introductory offers that roll into an ongoing subscription/recurring agreement. Some requirements are already in place in particular Visa regions. Readers are advised to review the full text of the Visa Business News bulletin dated 20 June 2019 for details. The requirements cover:
- Express consent at the time of enrolment
- Enhanced and standardised notification requirements
- Explicit transaction receipts which include the length of the trial, transaction amount and date for initial and subsequent payments and a simple way to cancel payments
- Easy method for cancelling the subscription or payment method, similar to an email unsubscribe button
- An additional statement descriptor that explicitly calls out the trial status of the transaction
- Global expansion of European dispute rights around free trial merchants
- Additional cardholder disclosure and consent requirements to be included in Visa rules and harmonisation of GBPP (Visa Global Brand Protection Programme) requirements around negative option and up-selling merchants
- Updated complaint forms against free trial merchant for issuers and cardholders
The main points of difference to the Mastercard requirements for high-risk negative option billing merchants, which came into effect on 12 April 2019 are:
- Visa’s requirements apply to merchants selling physical and digital goods or services, whereas the Mastercard requirements apply to sellers of physical goods only
- Visa requires a descriptor indicating a trial period in the merchant name field for the first transaction at the end of the trial period. This descriptor (e.g., ‘trial’, ‘trial period’, ‘free trial’) will then appear on cardholder statements, online banking, mobile apps and SMS alerts. Additionally, the recurring payment indicator is required for the first transaction, even if the amount is not the same as the usual or ongoing obligation (this is currently optional).
- Mastercard requirements state that merchants must send details of how to cancel the subscription with every attempted authorisation. The Visa requirements do not explicitly state this although merchants must provide an easy way to cancel the subscription online, regardless of how the cardholder initially interacted with the merchant.
- Mastercard requires merchants to send written confirmation to the cardholder when the trial period and/or billing plan has been cancelled. There is no equivalent Visa requirement, although confirming a cancellation is good business practice.
With the fight against deceptive marketing practices intensifying, acquirers and PSPs are under increasing pressure to improve their merchant on-boarding and monitoring. After all, any merchant scamming their customers is also scamming their acquirer. It pays to underwrite wisely. Web Shield offers functionality in both InvestiGate and Monitor to assist customers in identifying high-risk free trial and negative option billing merchants:
- The Subscription/Membership Detection Indicator helps identify corresponding merchants. This is in addition to the Deceptive Marketing module. If you require an export of the merchants within your portfolio, please contact firstname.lastname@example.org
- As part of the merchant on-boarding process, an acquirer must identify all third-party entities that provide services directly to their merchants and involve access to cardholder data. The Load Balancing Indicator gives an early hint of such relationships, which can be followed up with the merchant.
- The Cancellation Link Indicator shows at a glance if an e-commerce merchant has made its cancellation procedure known to customers.
- The Deceptive Traffic Detection database identifies all types of ‘risk-free trials’, high pressure sales tactics, such as countdown timers, prize draws and other red flags.
Deceptive marketing practices will also be the subject of the fifth book in the Web Shield ‘Fundamentals of Card-Not-Present Merchant Acceptance’ series launched at the RiskConnect conference, 19-20 November 2019.