Data Suggests New Free Trial Rules Increased Chargeback Ratios

Mastercard® recently implemented new rules that impact free trial offers and negative option billing. How have the rules affected merchants and the industry as a whole?

Transactions Decreased, Ratios Increased, and Revenue Dropped

Mastercard’s newly updated rules took effect April 12, 2019. To gain a better understanding of how those rules are impacting merchants, Midigator® analyzed year-over-year transaction data from over 1,500 merchants.

Data from nearly a million transactions associated with free trial offers was collected in Q2 (April to June) 2019 and compared to Q2 2018.

The specially-chosen subset of merchants used for this study made very few changes to their business during the last year. While other, smaller variables could have influenced sales, the primary factor for these merchants was the new free trial rules.

The following is a high-level overview of what the year-over-year analysis revealed.

Mastercard Transaction Volume

 18.54% decrease

after rules took effect

Mastercard Chargeback Ratio

 66.74% increase

after rules took effect

By updating the free trial rules, Mastercard aimed to improve communication, minimize shopper confusion, and reduce the number of chargebacks.

Required customer consent was the biggest change to existing regulations. The policy was updated to help shoppers know exactly what they are agreeing to and make it easier to cancel unwanted subscriptions. As a result, chargebacks would theoretically decrease.

Based on the data, it seems the new consent requirements made it harder to finalize sales; fewer transactions were processed in 2019 than 2018. Since fewer sales happened, merchants had a higher portion of chargebacks. The percent of Mastercard transactions that turned into chargebacks increased from 2.23% to 3.71%.

If merchants terminate transactions that don’t have customer consent, they reduce the risk of future chargebacks. However, disputes happened despite assumed compliance. This likely indicates two things.

  • Friendly fraud and invalid disputes remain an ever-present concern.
  • Protecting consumer interests during free trial offers has become a top priority for issuers and acquirers along with the card brands.

Many merchants reported that it was too difficult to make brand-specific updates; they couldn’t change policies just for Mastercard transactions. Sweeping updates ended up impacting Visa® transactions too. The result was a decrease in gross revenue across all card brands.

Gross Revenue

 24.75% decrease

after rules took effect

BOTTOM LINE: The new free trial rules accomplished many of the intended goals. Communication has improved and less-attentive customers who would later dispute their purchases are being filtered out. However, friendly fraud and false customer claims remain as prevalent as always. 

What Happens Now?

How should merchants respond? There are four things that can help protect profitability going forward.

1. Experiment and be flexible. 

While it’s possible to draw general conclusions based on the available data, there will always be exceptions. One merchant might excel where another struggles. And what works for one merchant might not be effective for another.

For example, some merchants temporarily stopped accepting Mastercard transactions while they worked on creating new strategies. Other merchants switched from a recurring billing model to a straight (one-time) sales structure.

Trial and error can help merchants determine what’s best for them and their customers.

2. Create a multi-layer prevention strategy.   

These new free trial rules have the potential to help reduce payment disputes, but there are no silver bullets when it comes to chargeback management.

Merchants should comply with the new communication and disclosure expectations, but they can’t stop there. These efforts need to be woven into a comprehensive prevention strategy that addresses every part of the customer experience.

3. Fight friendly fraud.  

Unfortunately, the payments industry is yet to discover an effective way to prevent friendly fraud. As the data shows, it’s hard to stop these invalid disputes

That means it’s more important than ever before to fight back and recover lost revenue. By complying with these new free trial rules, merchants will have more data associated with each transaction. This means there will be more compelling evidence available when it’s time to fight. 

More compelling evidence potentially means stronger chargeback responses and higher win rates

4. Prepare for Visa updates. 

Visa also has plans to update free trial rules; policy changes will go into effect April 18, 2020. 

Visa’s rules are similar to Mastercard’s but unique enough that merchants will need an entirely different compliance strategy. 

To optimize profitability during the transition, merchants should start updating policies and practices as soon as possible. Again, trial and error can help determine which strategies will be most effective.

Need Help Managing Chargebacks?

Are you struggling to comply with new free trial rules and wondering what the best course of action would be for your business? Schedule a time to chat with our team. Our experts would be happy to help walk you through the options and discuss management strategies. 

At Midigator, we believe the challenge of running a business should be delivering great products or services, not managing payment risk. Let us remove the complexity of payment disputes so you can get back to growing your business.

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