Negative Option billing refers to a business practice where a merchant provides a free trial or sample of goods/services, requires a credit card upon sign up and then bills the customer in the future unless they proactively cancel with the merchant.
The Card Associations (Visa, MasterCard, etc.) came under pressure from Congress last year because businesses offering products such as weight loss and nutraceuticals were using Negative Option billing to compel customers to sign up for their product. For example, certain merchants would offer a free trial or a discounted one-time price to compel sign up, and then charge regularly without allowing the consumer the chance to opt-in. The problem was consumers didn't always realize what they were signing up for and the merchant didn't go out of their way to explain. This resulted in a lot of chargebacks when merchants refused to offer refunds or customers didn't recognize the charge. Congress was upset about the situation for consumer protection reasons and hauled in the Card Associations to testify. The Card Associations then started to crack down on the worst offenders. The quick action taken by the Card Associations put a lot of merchant account providers on notice for what their merchants were doing and forced them to develop policies about this type of billing method used across the board. This is how Visa approaches the issue with their cardholders.
Negative Option billing puts merchants and their payment providers at risk because of the high number of chargebacks that can result from this type of billing. To minimize the risk, many providers prohibit merchants from collecting credit card data during sign-up for the free trial. If allowed to collect credit card information, they typically ask the merchant to give the customer the opportunity to opt-in at the end of the trial period.
Here are some recommendations on how to minimize the risk of chargebacks and to avoid issues with your merchant account provider when offering Negative Option billing to customers:
- Try to adhere to Card Association recommendations. For example, Visa suggests avoiding the use of negative renewal options or other marketing techniques that may create a false expectation to cardholders that the product or service is "free".
- Communicate when the first charge will come upfront. Send reminder emails to cardholders starting 5 days before the first time you charge them, to give them the option to cancel their account while still in the trial period.
- Do not require credit card information to sign up for the free trial. Send an email at the end of the trial period allowing the customer to opt in and provide their credit card information.
When you're obtaining a merchant account, we highly recommend that you clearly explain your business model and whether or not you plan on offering free trials. Full and clear disclosure will go a long way towards preventing problems down the road, for both your business and your relationship with your merchant account provider.
If you have questions about your specific situation, don't hesitate to speak with your Braintree account manager.