Credit Card Companies Put Heat on “Brand Damaging” Practices of “Negative Option” and “Forced Continuity” Internet Sites
Membership Sites are definitely in vogue. If there was any doubt, the success of the product launch of Ryan Deiss’ Perpetual Traffic Formula this week has soundly resolved any such question.
Yet, let’s make sure we throw some caution to the wind when it comes to Membership Sites.
Yes, they are a tremendous business tool for recurring revenue. In fact, if conducted appropriately, Membership Sites can easily compound income exponentially. However, in attracting those initial customers to “sign on” one must be very, very careful not to cross the legal lines of “negative option” and “forced continuity.”
The Internet Legal Advisor - Credit Cards and the FTC Take Stance Against “Negative Option” and “Forced Continuity”
Our big protective brother, the FTC, has already implemented rules regarding “negative option” sites and telemarketing (to be covered in another post very soon). Based on the most recent rule changes, initiated more than a year ago, and due to a plethora of consumer complaints, chargebacks and other issues that cost the credit card companies money, the credit card companies are taking a stance against “negative option” and “forced continuity” sites to save their own financial hide.
Which companies? Well, Visa and Mastercard. And, that’s enough.
Early this year, a merchant account provider sent out the following letter (edited slightly for grammatical purposes only) to its customers. READ IT, weep, and take heed (actual names have been omitted to protect the innocent):
[Merchant Account Provider] wants to inform everyone of changes expected from the Payment Brands regarding practices that are considered “Brand Damaging.” As you may be aware, both Visa and MasterCard are taking action in response to increases in consumer disputes related to card-not-present and direct response products and services. [Merchant Account Provider] is endorsing the adoption of Best Practices to support our merchant base in conducting business in a manner that protects both businesses and consumers from fraud. To date no formal announcement has been received, however [Merchant Account Provider] is issuing this communication now in an effort to educate and assist our agents/merchants in complying with anticipated Payment Brand mandates and actions.
MasterCard has recently warned the acquiring community that “Negative Option” enrollment will be considered a “Brand Damaging” business practice. “Brand Damaging” is a very broad term and is still being defined, but in light of recent fines to our counterparts, we must be proactive. Indications are that MasterCard will require immediate termination of merchants identified as using this business practice, along with any other practices considered “Brand Damaging”. This follows recent policy changes from Visa regarding descriptor formats and disclosure of corporate entities related to Direct Response offers, with the intent to enforce all chargeback and transaction monitoring programs as defined by the associations.
[Merchant Account Provider] cannot accept merchant applications for products and/or services employing “Negative Option” enrollment, in addition to the following practices:
- Marketing models that employ “Free-Trial,” “Deferred Billing” and/or “Shipping Only.” Customers must be receiving a tangible good or contracted service in exchange for charging of payment cards. Incentivized discount offers are acceptable when the cardholder is receiving something in exchange for payment, however we will be unable to support accounts engaging in hidden or delayed charges and ‘free’ offers that are not truly free.
- “Cross-Selling” and “Up-selling” business practices. All sales should be directly between the business entities (merchant) processing the transaction and the cardholder, with cardholder authorization for all purchases.
- Per Payment Brand guidelines, the use of multiple merchant accounts, billing descriptors and merchant processors may be viewed as an attempt to avoid chargeback monitoring programs and is prohibited. Perceived non-compliance has led to termination of processing relationships. [Merchant Account Provider] will review the business consideration for opening multiple merchant accounts to ensure compliance with Payment Brand guidelines.
Transactions generated from Internet traffic and all other lead sources must be managed and monitored for potential fraud using an approved system. Third Party service engagement may be a requirement for account approval.
The FTC has recently published guidelines regarding “Negative Option” enrollment programs and is taking a very aggressive position against merchants utilizing/employing this business practice. Recommendations take in part from the FTC’s website may include, but are not limited to, the following:
- Material terms should be disclosed in a clear, concise manner. Unnecessarily long or inconsistent terms are viewed as an attempt to mislead the consumer.
- Terms should be disclosed in a conspicuous manner, clearly placed and labeled on websites in a location that indicates the importance and relevance to the transaction. Fonts and colors must be easy to view.
- Material terms must be disclosed prior to completion of the transaction and before a financial obligation is incurred by the consumer.
- Customers must provide affirmative consent to any offer, examples include a mandatory “I Agree…” statement checkbox, where the customer is acknowledging the Terms and Conditions of the offer and consents to be entered into continuity program as a result of completing the transaction. Pre-checked boxes do not qualify as affirmative consent.
Merchants must not discourage or make difficult in any way the disclosed cancellation procedures and all cancellation requests must be honored in accordance with the stated terms of the transaction.
**END OF LETTER**
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So that there is no misunderstanding, there is absolutely nothing wrong with Membership Sites per se. In fact, it is our intention – someday – that this site will have a membership area component. And, if you are working with Ryan, Eben Pagan, Mike Filsaime or any of the other top Internet Marketing people out there, I am confident that their products, seminars, courses - whatever – appropriately cover this legal landscape. However, ignorance of the law is no excuse, so always make sure that you err on the side of being overly compliant with FTC mandates than falling short.
Peace Out, Aim High and enjoy tomorrow morning’s cup ‘o coffee while checking the status of overnight in-payments.
Catmandu