A Guide To the FTC’s New Subscription Provision

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Opinions expressed by Entrepreneur contributors are their own.

The Federal Trade Commission (FTC) proposed a “click-to-cancel” provision to their Negative Option Rule, requiring retailers to make it just as easy for their customers to cancel a recurring subscription as it was when they initially subscribed. Merchants should take action now to streamline their subscription cancellation process and invest in tools that provide more self-service options for reactivating subscriptions and managing automated billing schedules.

So-called “negative option” services are nothing new. These businesses provide products on a trial basis, then later initiate a subscription unless the customer specifically declines service before billing. However, the US Federal Trade Commission announced changes to their negative option rules with a factsheet published back in March.

These proposed changes would seek to avoid misrepresentation and require more detailed disclosures. It would also require sellers to adopt a simple, streamlined cancelation process.

As the FTC explains, this “click-to-cancel” provision seeks to make it just as easy for customers to cancel a recurring subscription as it was for them to initiate it.

Related: The Subscription Economy Is Growing Fast. Here’s How Your Business Can Adapt and Thrive.

What’s changing?

The proposal is part of the FTC’s review of their Negative Option Rule. This decades-old legal framework requires sellers to disclose the terms of a sale before initiating a subscription. The existing ruleset also requires that merchants provide information about how consumers can cancel a subscription service.

Despite this rule being in place, the regulatory agency reports that they receive thousands of complaints each year from consumers regarding subscription services. These complainants typically claim to have either been billed for services without giving consent or to have dealt with a retailer who makes it incredibly difficult—even impossible—to cancel.

The updated rules would mandate that if customers can sign up for a service online, they must be able to cancel on the same website. This process should also involve the same (or fewer) number of steps as were involved in initiating service. It would also prohibit misrepresentation and require that merchants give people important information in clear ways so that buyers know what they’re agreeing to.

The amended rules would “set clear, enforceable, performance-based requirements” and be applicable to all subscription features in all media. The FTC ultimately wants to ensure that people can cancel services “without jumping through lots of hoops.”

“Some businesses too often trick consumers into paying for subscriptions they no longer want or didn’t sign up for in the first place,” said FTC Chair Lina Khan, regarding the agency’s rationale. “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.”

Related: ‘Click to Cancel’ Rule Could End the Cycle of Subscription Traps

Better subscription practices will reduce chances of disputes and chargebacks

Buyers expect convenience and efficiency in the digital marketplace. One clear indicator of this is the rapid growth of first-party misuse of the chargeback process.

Visa asserts that first-party fraud of this variety is responsible for 75 percent of digital eCommerce chargebacks. So-called “friendly fraud” commonly happens to subscription retailers when consumers contact their bank, rather than the merchant, to cancel a subscription. The retailer on the other end of the chargeback is often unaware that a dispute is being raised against them until it’s too late.

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Relative to the number of ecommerce transactions in the US, the growth of chargebacks has surged ahead by nearly 20 percent, according to a study published by Chargebacks911. This is a worrying statistic, as the chargeback process penalizes retailers with “guilty-before-innocent” fines and fees. Add to that the fact that chargebacks typically require significant resources for merchants to address. That’s assuming they can look beyond false dispute reason codes and identify chargeback sources to address the problem at all.

Unfortunately, in the absence of information exchanged between the customer and retailer, an open door for first-party fraud becomes a permanent wedge.

Related: Your Subscription Service, Just More Successful

Better communication will be essential

Reducing friction when it comes to canceling subscriptions is a net-positive move for both consumers and merchants. It will naturally improve the customer experience and aligns with growing market demand.

The best approach for merchants is to try and avoid this problem by meeting customers’ expectations. By streamlining the customer experience and providing better lines of communication, merchants can prevent many disputes before they happen. Providing the means for customers to cancel a subscription is only part of the challenge, though. Merchants need comprehensive, self-service experiences to remain competitive and address growing demands.

Today’s consumer wants intuitive flexibility, payment scheduling options and frictionless convenience. If retailers can’t live up to those expectations, they will face steep competition with their customers’ banks and credit card companies, many of which supply a “concierge-like” service to address customers’ needs efficiently and wants.

As mentioned above, the year-over-year growth of chargebacks is largely attributed to disputes filed on subscription products and services. We’re not going to see this shift in consumer expectations reversed, either; instead, merchants must adapt to evolving customer expectations.

Related: How to Give Your Subscribers an ‘Ease of Ordering’

Adapt to survive in the new digital space

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. This is no longer enough, though.

Merchants should act now to streamline their subscription cancellation process. A tedious cancellation process could push customers to dispute charges or even file complaints with entities like the FTC or Better Business Bureau, regardless of whether the retailer is compliant and following payment processing guidelines that govern their account.

I advise that companies include recurring billing information, as well as terms and conditions, within the checkout process and to make sure the information is easily accessible for customers. I also suggest that companies increase the frequency of reminders and billing confirmations before renewal dates. Finally, merchants should invest in tools that provide more self-service options for reactivating subscriptions and managing automated billing schedules.

There’s no “silver bullet” to solve the problem of subscription and negative-option chargebacks. However, bringing processes up to standard in terms of providing better, more transparent service can allow merchants to prevent many disputes from happening in the first place.

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Gravy Smith
Gravy Smith
Gravy Smith is a mechatronic engineer who pivoted her career towards content writing, online marketing, and entrepreneurship.