Rising Rates and Regulation: The Latest in Payments for Subscription Merchants

While an intuitive business model, recurring revenue is a whole different ball game when it comes to payments management – one that got even more complex this month.

Why are subscription payments different?

When we think of payments, it’s typically a consumer-initiated payments that come to mind. For example, a customer sending funds to a merchant when they pay for groceries using their card. Subscription models work in the opposite direction; a customer authorizes a merchant to pull funds from their account for services received on an ongoing basis. Given that the customer is typically not present following the initial payment, these ‘Merchant Initiated Transactions’ face a slew of additional regulatory and technical considerations that create a unique optimization challenge for retailers.

This month, two new additions to the equation – the biannual release of fee updates from the global card brands, and intervention from the Federal Trade Commission – should be at the forefront of any subscription merchant’s mind.

1 – Fees are on the move

Complex often means costly when it comes to payments, and the latest round of fee changes from the global card brands brought some subscription-specific surprises. New fees for network token services, for example, such as the Digital Account Updater Fee (charged when a token is used for the first time following an update to its PAN or expiration date⁶) are likely to affect subscription or card on file merchants who use tokens to store customer card details for future use. While merchants may benefit from these services, the new fees could also alter the business case for using network tokens, especially given their potential to limit access to domestic debit routing opportunities online.

That’s not all. Another area subscription merchants have been perfecting is the timing of transactions, as initiating a payment at different times – or trying it again following a decline – can significantly affect the probability that the funds are available. Merchants’ retry strategies can be costly already, with fees to penalize “excessively” retrying transactions introduced in 2022. This month, merchants heard about the Authorization Optimization Fee from Mastercard, which charges a fee for all transactions declined due to insufficient funds. ⁷ Following the work of merchant advocates such as the Merchant Risk Council and Merchant Advisory Group (MRC), its implementation has now been delayed to later this year for the U.S. and Canada, and to January for EMEA. More than ever, these fees mean that understanding decline reason codes is crucial for building a dynamic optimization strategy that maximizes approvals without incurring unnecessary penalties.

2 – Regulators are stepping in

Most of us have subscribed to a service that bills us monthly until it is explicitly cancelled. That process has been referred to as Negative Option Marketing, and it was originally regulated in the U.S. in 1973.⁸ Today, the regulation only covers ‘pre-notification plans’, where sellers ship merchandise to subscribers automatically and bill them if they do not expressly reject the goods within a certain timeframe.

On March 23, the Federal Trade Commission proposed⁹ amending those rules by:

• Increasing coverage – by extending requirements to all forms of negative marketing, including continuity plans, automatic renewals, and free trial marketing
• Prohibiting misrepresentation – to avoid deceptive practices around costs, product efficacy, fees, and more
• Obtaining consent – that is unambiguously affirmative and maintained over time
• Allowing cancellation – in a way that is simple, through the same mechanism used to enter the agreement (e.g. a ‘click to cancel’ online)

For subscription merchants, the FTC’s proposals could mean increased signposting at the checkout page, the development of ‘click to cancel’ solutions and more, making it crucial that merchants have their say before any final decisions are made.

The FTC is stepping in across other areas of payments, too, such as the Federal Reserve’s recent clarification which aims to ensure that dual network routing choice is available to merchants in the Card Not Present environment. CMSPI estimates that this increased competition could offer $4bn in additional savings for merchants, but a number of threats to its implementation have been identified already.¹⁰ In December 2022, the FTC attempted to address one of the key risks by proposing an Order intended to prevent Mastercard from ‘blocking the use of competing debit payment networks’¹¹ through its use of network tokens. Between these two interventions, according to CMSPI’s Global Advocacy Manager, Christian Johnson, “[The] FTC may be the biggest regulator for subscription merchants in 2023. Knowing how to engage effectively with their comment periods will be crucial for influencing the future of the business model.”

Next Steps for Merchants

With new fees for tokens, declines, and authentication methods such as CVV¹² on the horizon, many merchants could find that their optimal subscription strategy has changed in 2023. And that’s even before considering the impact of the FTC’s announcements on domestic network access and marketing, or the launch of instant payment options such as FedNow with the potential to disrupt the predominance of cards in the subscription market. For now, merchants need to be quantifying the impact of the April fee changes to avoid any nasty surprises for their bottom line, as well as understanding the implications of their tokenization strategy on their ability to take advantage of the revamped debit optimization opportunity.

If you have any questions on how to respond to the Federal Trade Commission, reach out to CMSPI’s Global Advocacy Manager at cjohnson@cmspi.com.