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Subscription services have received a fair amount of press, both good and bad, concerning best business practices. Confusing small print, faulty customer service, and complex revenue tracking have all been brought up as a drawback of subscription. One of the most controversial initiatives that has been brought up is negative option billing. But what does this term actually mean and how does it affect both the consumer and the merchant?
Negative Option Billing Described
This practice is when customers are given goods or services and must pay to continue the service or cancel their subscription before the next billing cycle. There are also situations in which free samples are sent to customers unannounced in the hope to get them to subscribe because they enjoyed what they received. This form of negative option is common practice in magazine subscriptions such as Scholastic and the New York Times. In subscription, this is when consumers sign up for a free or discounted trial, give their bank information, and continue to paid consumption once the trial is over.
In the U.S., this practice is closely followed by the Federal Trade Commission to prevent fraud. And the scrutiny applied to businesses who utilize this method is increasing because of the popularity of subscription in the marketplace. This makes conforming to lawful requirements even more crucial to merchant success.
How the Merchant and Consumers are Effected
Many times when a customer is signing up for a free trial, they don’t take the time to read the small print. This phenomenon is so prevalent that over 90% of consumers accept the terms and conditions without even glancing at them. The explanations for this include their inability to understand the jargon, laziness, and an understanding that if they do not accept, they will not be able to use the products or services. This puts customers in a precarious position, weighing whether or not it is worth the risk to accept without full understanding.
Fortunately, this isn’t always the case. People understand that if they need to enter credit card information, there is a good chance that the business intends to use it. And if it turns out to be a product or service that the customer wants to continue using, being already subscribed removes an unnecessary step.
Stay on the Good Side of Negative Option Billing
- Disclosure should be your first step. Telling people exactly how much the product or service will cost when they do pay is your primary form of defense. This should be followed by how often and the cancellation policy, as well as how the charges will be displayed on the customers’ statement. The information here should be displayed prominently and not hidden in the fine print.
- Customer service is key. Someone should be easily accessible to the subscriber, facilitating their wants and needs. It is often better to have more leniency with refund issues because it is better to process a return than be hit with a chargeback later on. Accommodating the customer is a great way to stay on their good side and foster a healthy relationship, which is something subscription businesses need to achieve.
Subscription-style businesses using negative billing methods can be successful when done right. By following these basic steps, you are one step closer to running smoothly under these conditions. Of course, there is so much more that goes into a company such as this. From marketing to fulfilling orders, there are more hurdles and more rewards. Unfortunately for businesses starting out in this space, there is another drawback to continuity billing: payment processing. Banks are still wary of the subscription industries practices and take a reserved position on supporting their business.
Subscription Services are High Risk
As mentioned above, chargebacks are a big issue in this industry. Even more common with negative option billing and the propensity for customers to skip over the fine print. A chargeback is essentially when a customer reaches out to their bank to refund a charge on their account instead of the company who issued it. This could be due to customer fraudulency, but acquiring banks penalize a business’ ability to process transactions if it happens frequently.
On top of that, high-volume sales, fraud concerns, low credit history, or little card processing history are all reasons continuity/subscription merchants are considered high risk. And even though not every business falls victim to these, just the possibility makes the banks nervous.
By implementing stricter underwriting and acceptance procedures, banks take extra time ensuring that you and your business are as low-risk as possible. Common precautionary steps that banks are enforcing could include a chargeback reserve, previous personal or business bank statements, or a cosigner.
Secure a Continuity Merchant Account
Negative billing or not, customers expect to be able to pay for goods and services with a credit card. This means that you need to partner with an account provider that can handle your business type. Hard-to-place and high risk merchant accounts don’t have a solution with the majority of payment processors. So as you research a provider that can facilitate your account and growth, consider this:
1. Do they work with the high risk industry?
Look for chargeback protection and flexible underwriting as a requirement. Without those bases covered, you will not be able to grow or scale your business.
2. Do they have experience with subscription-style accounts?
Recurring billing businesses have specific needs and require a processor with expertise in the subscription space. Pick a payment processor with experience who can handle the additional procedures necessary.
3. What services do they offer?
Their focus should be on mitigating chargebacks and prioritizing customer security. But other services that help your business scale include a tailored gateway, seamless platform integration, and access to an open API.
4. Are they invested in your success?
The number one requirement to partnering with your payment processor is if they are invested in you. Be sure to select a processor that wants to work hard on your behalf.