Staying Compliant: Four Payment Regulations For Recurring Transactions

One of the key concepts in payments that has completely revolutionized the eCommerce market is the subscription business model.

Over the past decade, recurring payments, especially for streaming services, gym memberships, or magazine subscriptions, have made it clear that this is the model for the future.

And let’s not forget that major corporations like Adobe or Microsoft are moving to the recurring automatic billing rather than relying on one-time purchases for their products.

Due to the appeal of recurring revenue streams along with the push from the COVID-19 global pandemic, the subscription economy is no longer a theoretical concept but an economic reality.

If you don’t believe us, take a look at the results, which speak for themselves.

• The subscription economy is expected to reach $1.5 trillion by 2025.
• 69% of households have at least one subscription to a video streaming service.
• The average subscription business is growing 30%–50% annually.

But along with the accelerated adoption of recurring payments came the need to regulate the new landscape to ensure proper operational standardization and security.

So, how do you handle compliance effectively without losing your focus on what matters most, your product?

Well, here’s a friendly suggestion: consider teaming up with a Merchant of Record.

Once we explore the payment regulations your subscription business needs to follow, you’ll quickly see why a partnership with an MOR makes all the difference:

The 4 Recurring Billing Regulations To Follow
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4 Recurring Billing Regulations To Follow

One of the major problems subscription businesses face is the rise of chargebacks.

Customers are issuing these disputes on their subscriptions for a number of reasons. While card schemes cannot directly influence consumer behavior, they can regulate the recurring billing landscape and set universal guidelines merchants must follow.

These rules prioritize consumer protection, emphasize the need to directly manage disputes, and maintain clear documentation on recurring automatic payments, which is vital in order for merchants to win chargebacks.

1. Visa Subscription Payments Regulations

Visa initially rolled out its guidelines in 2011, but key updates focused primarily on improving communication between businesses and customers came in 2020.

Keep in mind that these rules affect merchants accepting Visa cards and practicing free trials, upselling, and negative option billing (the cardholder has the right to cancel a subscription upon a specific point, as mentioned in the agreement, and should they fail to do so, implies their agreement to be billed for the product or service).

Now, let’s examine Visa’s regulations for subscription based services:

Detailed Disclosures

The new Visa free trial billing rules require merchants to offer enhanced disclosures that ensure informed consent, which consequently leads to reduced chargeback rates.

Additionally, Visa regulations require that you offer:

• Merchant details: name, address, phone, website, and billing information
• Customer information: payment data used to pay for the subscription service
• Payment currency
• Enhanced and accurate product description
• Trial period length, start, and end date
• End trial notice, clarifying and confirming in writing that the cardholder will be charged once the trial period ends.
• Initial transaction date and amount
• Future payment dates and amounts
• Cancelation rules and any helpful links
• Written notification of account changes for existing subscribers
• Written notification of how stored customer data will be used

Obtaining and storing informed consent from your customer is mandated for subscription businesses under Visa regulations.

Simplified Cancellation

It is crucial to provide cardholders with a straightforward subscription cancellation process.

This allows you to uphold the image of a legitimate operation, and cardholders will trust your services, thereby preventing chargebacks caused by suspicious merchant activity.

Therefore, subscription businesses are encouraged to offer customers simple unsubscription methods, such as SMS or email, and cancellation links provided in all communications.

Transaction Receipts

Once the cardholder has agreed to your subscription’s terms and conditions, even before a charge has been made, you must send transaction receipts, which should be electronically signed and sent via SMS or email.

The transaction receipts should contain the above-mentioned payment details, cancellation links, and instructions, as well as any changes or updates in the subscription terms.

Clearer Dispute Processes

In the Visa Claim Resolution Initiative released in 2018, the card scheme presented its list of chargeback reason codes.

To limit chargebacks, however, Visa implemented the following rules for subscription businesses:

• In free trial recurring charges, merchants are required to use unique billing descriptions that allow the cardholder to distinguish the transaction correctly.
• Once the trial ends, the merchant must use the phrasing “ongoing payment, recurring, or subscriptions” for clarification.
• Customers can file a chargeback if they have not been appropriately informed further billing will take place upon the trial’s end.
• Businesses can fight chargebacks by providing compelling evidence to support their claims. This includes the cardholder’s signature on associated legal and payment agreements, as well as evidence that notification has been sent to the cardholder at least seven days before the trial’s end.

Visa’s Compelling Evidence 3.0 (or “CE3.0”) initiative was created to help merchants solve the chargeback issue. Thanks to this initiative, merchants have a specific evidence to present through streamlined protocols.

Ongoing Monitoring

Visa will conduct ongoing monitoring to ensure compliance is achieved.

The card scheme will analyze your recurring indicator and statement descriptor to keep fraud and chargeback levels low.

2. Mastercard Recurring Billing Rules

Mastercard has also updated its rules and regulations for subscription businesses, just as Visa did, with features like free trials and negative option billing. But they also included several provisions regarding payment processing for subscription businesses as well.

When creating new user accounts, Mastercard will apply specific recurring payment rules based on merchant classification. The existing groups are:

MCC Classification
These are four-digit identifiers that specify the type of services a merchant offers.

Another example is business models with the code 5968, which are Direct Marketing — Continuity/Subscription Merchants and include the selling of subscription products or services.

High-Risk Status

This category includes merchants that utilize the subscription business model but are considered risky, so this usually entails higher fees, regular account monitoring, and several processing restrictions.

MRP Compliance

This category includes merchants that use the negative option billing. Being categorized in this group means you are required to register your merchant credentials in the Mastercard Registration Program.

When it comes to processing recurring payments, merchants need to be mindful of the following regulations:

Subscription Term Disclosure

Provide the following information on the payment page:

• A valid description of your goods/services
• Subscription price and billing frequency
• Clear cancellation and refund policies
• Your business details, including address, email, and phone number
• Evidence of written confirmation

In addition to the above requirements, you’ll need to do the following:

• Make sure you obtain the cardholder’s consent regarding your terms and conditions.
• Should the transaction authorization fail, the cardholder will need to be notified.
• In case a customer’s account credentials are used to process payments across multiple merchant accounts, the merchant will need to obtain the cardholder’s consent.
• If you are employing the negative option billing, you will be required to offer information regarding your free trial offering, including existing initial charges, trial length, price, and billing frequency.

Completed Subscription

Once the cardholder has completed their subscription, the merchant is obligated to send a notification to the cardholder containing the terms and conditions.

During the Subscription

Once the payment is approved, the cardholder must receive a receipt containing clear instructions as to how the subscription can be canceled, accompanied by a valid link.

For subscriptions with a billing cycle of less than 180 days, a payment reminder must be sent to the cardholder at least seven but no more than 30 days prior to the next billing date.

The payment reminder must contain:

• A clear subject line indicating the message is connected to their upcoming charges.
• Subscription terms
• Straightforward subscription cancelation instructions

Additionally, should the merchant utilize the negative option model, the cardholder must receive a reminder no less than three days and no more than seven days prior to the end of the trial period, indicating that the subscription service will begin if it is not canceled.

Read more about payment regulations for recurring transactions on PayPro Global’s blog.