Visa & Mastercard’s new approach to direct selling explained

How the regulatory environment is changing to protect consumers, and what that means for specialized businesses

By Shaun Lavelle, SVP & General Manager, Direct Marketing, Paysafe Group

One of the US verticals poised for ongoing change in the coming year is the direct selling vertical, specifically those that rely on subscription models, including offering free trials that convert into subscriptions.

Visa, Mastercard and regulatory bodies have focused on a number of concerns that seem to make the environment more hostile for direct sellers. That isn’t necessarily the case, but it’s important for merchants to be aware of these changes and take action where necessary. Here are some of the key changes that we expect to impact merchants most thanks this year.

A new method for calculating chargebacks may leave direct sellers without an acquirer partner

Direct sellers have traditionally had challenges managing chargebacks, and this is one of the main reasons they struggle to open merchant accounts. Acquirers consider direct sellers as high-risk because they are often susceptible to fraudulent behavior, particularly non-genuine claims for non-delivery of goods or services. For this reason, historically there have only been a limited number of acquirers supporting these specialized merchants. And, with these changes, that list of prospective providers may be getting even smaller.

One significant reason for this is that VISA adjusted its VAMP (VISA Acquirer Monitoring Program) system for calculating overall chargeback rates in Q4 2021. Acquirers’ chargeback rates for card present and card-not-present payments are now calculated separately instead of being combined into a single figure; this means that acquirers cannot use low-risk instore retail payments to offset the risk incurred by much higher risk e-commerce and mail order payments.

This tactic of processing large volumes of low-risk card present payments to balance the risk profile of an acquirer’s entire portfolio and keep overall chargeback rates low has been a favorite tactic previously. This strategy is now only available for acquirers with large low-risk volumes of card-not-present sales, and we expect to see many acquirers previously reliant on their card present volumes to balance their portfolio, to leave the sector as they do not have the risk appetite they will now have to assume.

The rules for subscriptions and negative option billing are becoming stricter

In the past, we’ve detailed why issuers have planned to upgrade the consumer experience when it comes to subscriptions and negative option billing. Mastercard has recently taken this a step further when it announced AN 4934 – its revised standards for merchants using subscriptions and negative option billing.

The focus of these changes is to provide consumers with greater transparency over the payments they are signing up for. And this is needed; when we asked consumers about this 46% said subscriptions are too difficult to cancel and tie them into long term financial commitments and 35% said that they had overpaid for a subscription service that they had stopped using but forgotten to cancel.

The new regulations require that merchants:

Disclose the full terms of any subscription including the cost and frequency of payments at the point card details are taken
Disclose the full terms of any free trial to the consumer at the point they sign up for the free trial, including the length of the trial and the cost and frequency of the subscription service once the trial ends
Inform consumers signing up for a free trial again that they will be charged for the service if they do not cancel the subscription between three and seven days before the end of the trial period. This communication must include details of how to cancel the subscription

These new regulations came into effect December 8, 2021, except for disclosure of the subscription terms at the point card details are taken which comes into effect June 8, 2022.

As well, Mastercard has informed merchants it is significantly ramping up its investigations into non-compliant merchant trial and subscription billing and are actively fining acquirers that fail to comply. So, merchants can expect to find themselves under increased pressure from their acquirer, and risk having their merchant accounts closed if they fail to follow Mastercard guidelines.

And it isn’t only Mastercard putting bad actors on notice. In October 2021, the Federal Trade Commission announced it would significantly step-up enforcement of its guidance in the areas of consumer consent and ongoing billing that are impossible to cancel.

Merchants who fail to conform to these new guidelines face the threat of legal action. But one of the other consequences of this step has been to dissuade acquirers from working in this space any longer as the risk now falls outside their appetite. Merchants who do not react to FTC warnings will be hit with a wave of chargebacks from consumers with their rights breached.

So again, the threats of excessive chargebacks are forcing merchants to rethink their acquiring relationships. There may be a temporary solution. Some merchants have partnered with lower risk acquirers that are less aware of the rules. However, this is only a short-term solution and it will not take long before non-compliance fines and excessive chargebacks remove this option.

How do we move forward?

Inevitably, based on the increased focus on consumer protection, this will remain a focus of the card schemes and regulators. Only merchants who can operate within the guidelines will succeed.

Despite this challenging environment direct sellers, including those offering subscription and negative option billing, shouldn’t be discouraged. There are big opportunities for growth in the next 12 months, but this will depend on partnering with an acquirer that wants to collaborate with you and has expertise in the space.

Succeeding in this new environment starts with learning about the regulations, and there are specialist acquirers with expert knowledge in this area. Direct sellers must work with these acquirers to achieve long term growth in this challenging environment.

We expect many acquirers will abandon their direct selling merchants this year. Those best able to manage risk appetite through detailed understanding of the regulations and a proven history of supporting merchants in this space will continue to work tirelessly to benefit the industry.

Shaun Lavelle is SVP & General Manager, Direct Marketing at Paysafe Group based in Irvine, CA. Shaun has more than 25 years experience to the payments industry leading risk management and operations in both established and entrepreneurial organizations in the UK, Republic of Ireland, and North America. Headquartered in London UK, Paysafe Group enables seamless and secure payments for individuals and businesses worldwide.