Mastercard Subscription Rules Update: What Merchants Must Know

The tides in eCommerce have shifted in favor of the subscription economy, that is expected to touch $1.5 trillion by 2025. However, some corrections are occurring industry-wide as the economic scenario is changing. While the impact on demand is one essential factor, the increase in subscription chargebacks is another notable area that requires merchants’ attention. In light of the rising incidence of chargebacks, Mastercard has intervened with some new rules for subscriptions and recurring payments. This article examines the new Mastercard subscription rules updates in 2022 that merchants must comply with. We also analyze the context behind the updates, exploring the factors leading to the rise in chargebacks for recurring payments.

Mastercard has released two sets of rules updates in 2022, applicable from March 2022 and September 2022.

The card network’s revised subscription rules apply to merchants offering recurring or negative billing models, like low-cost/free trials, who accept payments with Mastercard. This rule encompasses all merchants selling physical and digital goods and rendering auto-provided services on a fixed frequency basis.

Let’s look at the upcoming Mastercard rules update first followed by the one that occurred earlier in the year:

• Mastercard has declared that merchants must clearly state the terms of their trial offers and the related subscription/recurring payment plan at the point of payment. 
• For merchants operating in eCommerce, the point of payment will include the screen where cardholders are required to enter their credit or debit card credentials. 
• It will also include any other screens that summarize their order for the final authorization before a customer completes checkout. 
• Providing redirected links to other pages explaining this or requiring scroll downs does not satisfy this requirement.

These regulations come as an additional compliance requirement, in addition to the rules announced in March 2022.

• Merchants must send a confirmation email to all subscribers at the time of enrollment. This email must clearly outline all the subscription terms along with clear instructions on cancellation details and policies.
• After every successful billing attempt, merchants need to send a payment debit receipt. This receipt, too, must always be accompanied by cancellation instructions.
• Specifically, merchants with recurring billing plans that are less frequent than every 180 days must send cardholders a reminder of payment. This notification should be at least seven days before and no more than 30 days earlier than the scheduled billing date.
• Merchants providing negative billing options must send a reminder about the upcoming revised billing terms at least seven days before the billing date. If the merchant or the cardholder cancels the recurring billing, merchants must send a confirmation email no more than seven days after the cancellation.
• Physical product merchants must obtain explicit consent from cardholders at the end of the free or low-cost trial before they start billing the customers at the regular rate.
• Merchants offering a free trial period that exceeds seven days must remind card holders that their subscription will be deemed as continued if they do not cancel. They must send this reminder three to seven days before the end of the trial.
• Finally, all merchants need to outline the online cancellation methods clearly. This information should be similar and at least as visible as the unsubscribe option in emails.

Despite the significant growth of subscriptions fuelled by convenience and personalization for customers and predictable revenue for merchants, there have been some suboptimal trends. Namely, there’s been a rising incidence of subscription chargebacks being filed by cardholders.

Based on an earlier study we conducted into consumer attitudes towards chargebacks, 21 percent of consumers in the US filed a chargeback to cancel a recurring transaction. Further, 38 percent filed or threatened to file a chargeback because of a debited subscription bill they no longer wanted.

Data from a Mastercard survey suggests that recurring transactions have been attracting a significant share of the chargebacks filed by their customers as well.

• 60 percent of chargebacks filed on the Mastercard network were related to recurring payments.
• 76 percent of chargebacks involving a recurring payment were disputed by the cardholder, stating they did not authorize the transaction charged to their cards.

Amidst these rising chargebacks, Mastercard intervened to introduce greater transparency into the recurring payments ecosystem.

Several factors seem to be feeding into the chargebacks for recurring transactions. Here are some key contributors:

As the subscription industry is reaching maturity, customers are now subscribed to more merchants and services than they can use or keep track of.

A study from C+R Research suggests that subscribers have been underestimating their monthly spend on subscriptions by 2.5 times their actual spending.

This underestimation commonly translates into shocks when people review their credit card statements – dotted with charges of subscriptions they’re no longer using. The result naturally feeds into the volume of card disputes and chargebacks filed.

As inflation levels are rising and whispers of an impending recession are floating around, consumers are turning cost-conscious. The changing economic scenario is reducing their willingness to pay for the “nice to have” expense options, including subscription expenditures. This leads to buyer’s remorse and an increased likelihood of disputing charges.

For consumers looking to cancel their subscriptions, there’s growing discontent with merchants’ lack of cancellation transparency and control. In addition, several dark patterns make it a time-consuming and vexing experience for subscribers to cancel. When subscribers cannot cancel directly with merchants easily, they resort to chargebacks with their bank.

The large and growing chargeback volume is not only resulting in merchants losing out on revenues but also impacting their bottom lines. Their chargeback fees are multiplying with the rising frequency of disputes filed, in addition to the transaction amounts lost due to chargebacks.

We expect that with the new Mastercard subscription rules update in 2022, there should be improvements for both merchants and end consumers.

These rules have come as a sequel to Mastercard’s changes in 2018, enforced starting from 2019, for negative billing merchants. In fact, the earlier intervention turned out to be quite effective, and merchants reported a decline in chargebacks by 18 percent in 2020. Hopefully, there will be a similar positive reduction in chargebacks following the implementation of the new rules.

If you’re a merchant struggling with fighting chargebacks, contact us today for proven chargeback mitigation solutions.