The Federal Trade Commission’s (FTC) proposed new rule could make canceling subscriptions much easier for consumers.
The “click to cancel” rule would require companies to offer an easy way to cancel subscriptions and recurring memberships. Cancellation would have to be as easy as signing up. For example, the ruling would ban requiring consumers to call to cancel subscriptions that they’d signed up for online.
The FTC’s proposed rule would apply to any retailers that sell products or services with subscriptions, automatic renewals, or similar systems. Retailers would also be required to give more information about subscription beginning and end dates and how to cancel. Retailers would also need to send annual reminders to customers for subscriptions that don’t involve physical goods.
“Some businesses too often trick consumers into paying for subscriptions they no longer want or didn’t sign up for in the first place,” FTC chair Lina Khan said in a statement. “The proposal would save consumers time and money, and businesses that continued to use subscription tricks and traps would be subject to stiff penalties.”
Subscriptions are a small but important piece of ecommerce
Subscriptions have long been promising territory for ecommerce retailers hoping to build a returning customer base. The global subscription box market reached $26.9 billion in 2022, according to Expert Market Research. The firm expects the subscription box market to reach $74.2 billion by 2028.
5.6% of retailers in the Top 1000 retailers in North America used a subscription model in 2022, according to Digital Commerce 360 data. That’s down slightly from 6.5% in 2021.
Subscriptions are more significant in certain sectors. 36.1% of food and beverage retailers in the Top 1000 had a subscription model in 2022. That’s up from 27.8% in the previous year. In the Top 1000, 28% of health and beauty retailers had subscriptions in 2022, and 10.1% of specialty retailers. Pet supply company Chewy, for example, heavily relies on recurring subscription orders. Autoship orders made up 73% of sales in the most recent fiscal quarter, accounting for $1.98 billion of revenue. Chewy ranks No. 13 in the Top 1000.
The legality surrounding automatic renewals is murky
The legality of automatic subscription renewals can be difficult to navigate, according to lawyer Robert Freund, who focuses on ecommerce.
Subscriptions and cancellations are governed by many laws across the U.S. The 2010 Restore Online Shoppers’ Confidence Act (ROSCA) requires retailers to provide “simple mechanisms for a consumer to stop recurring charges.” In 2021, The Federal Trade Commission issued a statement warning companies about employing “illegal dark patterns” to keep customers from canceling memberships.
Because the federal law is somewhat vague, many states have adopted their own, stricter laws. The combination of federal laws, FTC enforcement, and differing state laws result in a “patchwork of laws across the country” that are sometimes inconsistent, Freund says. “If you want to comply with every law in every state, it’s very difficult if not technically impossible.”
Automatic renewals can lead to “friendly fraud”
Retailers open themselves to friendly fraud when they automatically renew subscriptions or make them difficult to cancel, according to Chargebacks911. Chargebacks911 is a risk management software provider that helps retailers in billing disputes.
“While no retailer wants to see their customers cancel services, having a tedious cancellation process could push customers to file a chargeback, or file a complaint with entities like the FTC — even if the retailer is fully compliant and following all payment processing guidelines that govern their merchant account,” Chargebacks911 CEO Monica Eaton told Digital Commerce 360.
Customers who forget to cancel a free trial or don’t recognize a recurring subscription charge on their bank statement can file a dispute with their bank. Retailers may then have to pay additional chargeback fees, or pay to fight the charges. Too many chargeback requests can lead to a retailer losing processing capabilities, Eaton says.
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