The tides in eCommerce have shifted in favor of the subscription economy, that’s 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:
These regulations come as an additional compliance requirement, in addition to the rules announced in March 2022.
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.
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.