Negative option billing is a practice that often comes under scrutiny by card associations due to the perceived high-risk nature of this business model.
What is Negative Option Billing?
The term “negative option billing” (also known as “continuity billing”) refers to a method by which a customer is automatically charged on a periodic and recurring basis for goods or services until the time that the customer opts out of the agreement. Common types of negative option marketing include free trial offers, entertainment services, and subscription plans. With negative option billing models, the merchant interprets the customer’s silence or failure to take an affirmative action to cancel an agreement or reject goods and services as consent to being charged for said goods and services. Typically silence means there is no sale, but with negative option billing, silence actually does mean a sale. Consumers are expected to take action to prevent the sale from happening.
The Risk
While state and federal governments do have rules in place intended to protect consumers from unintentionally committing to purchases through continuity billing, many consumers still feel that they are being victimized. Ramifications tend to fall back on banks and credit card companies because charges are reported as unauthorized, resulting in a high number of chargebacks and putting providers at risk. Banks also view higher-risk merchants as more likely to pose the threat of reputational risk. As consequence, banks and credit card processors have long implemented guidelines that regulate future transactions.
Companies like Visa and MasterCard strictly regulate merchants that use negative option billing and have even warned that enrolling customers for these types of programs could be considered brand damaging. MasterCard has recently updated its regulations regarding negative option billing and, in the case of those merchants who sell products. The presumed high-risk nature of these type of merchants make them susceptible to additional processing restrictions and higher fees by credit card brands.
Because banks view merchants that use this billing method as posing a greater risk of harm to the consumer, and therefore the card acceptance ecosystem, these merchants are scrutinized more diligently during the underwriting process. Businesses that practice negative option billing are generally characterized by a high number of chargebacks. Since providers want to avoid chargebacks, they are often wary of merchants that have been involved in a large number of chargeback events in the past and may even avoid negative option billing businesses altogether. As underwriters evaluate applications, it is helpful for them to be extra cautious about any potential risk they might incur and will therefore want to be extremely careful when it comes to negative option billing businesses.
When Do Negative Option Billing Businesses Get Sponsored?
Negative option businesses often find it difficult to obtain merchant accounts that support their company’s sales model. Negative option billing is generally frowned upon by most banks and payment processors because the majority of banks actively aim towards minimizing their risk. They do this by only working with low-risk businesses, making it difficult for merchants that use negative option billing to get approved for merchant accounts, process payments, and keep their accounts active. However, certain banks will process continuity billing payments as their specialty. These banks have a higher tolerance for and understand the risk level involved with allowing their merchants to use this type of billing.
In order to sponsor high-risk merchants, banks must have a strong and knowledgeable staff that is experienced in negative option billing processing. Underwriters operating in this sector have teams that specialize in this specific type of billing and have in-depth knowledge of the practices and procedures that go along with it.
If providers do accept merchants that use negative option billing, they will typically implement billing guidelines in order to minimize the presumed risk and prevent issues. It is important that merchants operating in the continuity space choose their merchant account providers wisely, as those who have little experience in this space may quickly exit, causing undue harm to the merchant.
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