The Deceit of Recurring Subscriptions and the FTC

Executive Summary:

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The Federal Trade Commission (FTC) has again brought under review the usage of subscription pricing, often associated with software-as-a-service (SaaS) services. Over the years subscription-based services have seen a large increase in usage, due to the ease of signing up and the reliability of maintaining consumption of a product or service without lifting a finger. The more that the subscription model is being used and replicated the more complaints are filed by subscribers who feel they have been tricked and trapped into monthly payments. In this article, we will dive deeper into the understanding of the subscription model, learn about the government’s intentions to further regulate the issues at hand, and gain insight into how these regulations or lack thereof affect B2B.

1.0 The Subscription Model

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1.1  How the SaaS Subscription Model Works

The Subscription model is set up for the ease and convenience of the consumer and as a reliable source of revenue for the business. The customer agrees to pay a set amount each month for a service that will be automatically billed/taken out of their account on a set date. More frequently than not subscription businesses use “the negative-option” billing. This is a subscription practice that entails if there is no communication, inaction, or silence from the consumer then that is equal to consent to the charge, and the subscription is automatically renewed without the consumer having to lift a finger. 

The subscription industry has been growing rapidly since 2010 when the last act was put into place for the consumers of subscription services. Everything’s becoming a subscription and the pandemic is partially to blame.

1.2 How the Model is Abused 

With a model that relies on silence or the absence of action as consent to payment, you can imagine that it would be easy for companies to take advantage of this model and the consumer. Regulators, law enforcement officials, and consumer advocates have all acknowledged the dark side of this practice. “Rampant abuse and the steady sapping of Americans’ bank accounts, often without their knowledge or consent. That’s because consumers often aren’t “billed” for the services and might only notice the changes as they come upon their debit or credit card statements.” 

Many of us have experienced some of these issues first hand, or know of friends or family that have been taken advantage of. Many consumers feel they have been tricked or placed into recurring monthly payments without their consent. Another common complaint from the consumer is that companies have made it a breeze to sign up for subscription services online, but when it comes to canceling the subscription there seems to be no way to get ahold of the company to do so. 

These deceptive practices are widespread. Many of these cases of abuse are carried out by businesses in the margins of American commerce, however, there are still many well-known companies that have complaints and lawsuits out against their subscription practices. Sirius XM, ABC Mouse, Apple, NY Times, and The Washington Post have all had multi-million dollar suits filed against their practices. 

2.0 The FTC’s Intention 

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2.1  What’s Under Review?

The FTC has been searching for ways to close many loopholes in their past Act, making it harder for companies to trap consumers in these recurring subscriptions that drain their bank accounts without their full knowledge. The FTC was pushed to do so, due to the great number of complaints they’ve received and fought over in the past few years.

Rules were first put into place by the FTC in 1973, and the only federal statute primarily designed to address this type of marketing was passed in 2010. The FTC believes that clarifying these rules that are already standing will decrease the loopholes that in 2021 now seem so obvious. The negative-option policy is one of 23 FTC rules that are now under review.

The subscription business has expanded dramatically since 2010, with an even larger spike in just the past year, due to the pandemic. In light of this, many states have taken it upon themselves to regulate these subscription practices on a federal level, leaving an uneven set of standards across America. 

2.2 The ROSCA Act of 2010

As mentioned, the last time the subscription model was assessed on a national level was back in 2010, when The Restore Online Shoppers’ Confidence Act (ROSCA) was passed. This act combated some of the abuses that were taking place, such as sharing sensitive customer data with third parties or requiring companies that use the negative-option approach to provide a “simple mechanism” for customers to stop recurring charges.

Although this Act was a step towards protecting consumers, ROSCA unintentionally built-in loopholes, such as the failure to define what a “simple mechanism” entails. This has allowed businesses to make it easy and quick to sign up for a service online, but canceling a subscription may only be possible by calling customer service. The consumer may be waiting for hours on the phone to cancel, making it nearly impossible.

2.3 The Obstacles 

The FTC has reportedly been relatively active on the issue of negative-option abuses. However, a staff of a little under 1,200 (500 less than they had in the 70s), a limited budget, and a heavy obligated rulemaking process, all make it impossible to keep up with the rapid growth of these marketing practices.

It is also difficult for the FTC to understand the true scale of the problem at this time. There is little data out there for the FTC to pull from, and not all negative-option marketing is deceptive.

3.0 The Impact of Regulation & Natural Market Regulation ______________________________________________________________

3.1 Potential B2B Impact

Although protecting the consumer sounds like the right direction to be heading toward, we need to also reflect on how this will affect business to business. Further regulations put into place could have implications for the B2B side of the model. In efforts to further protect the consumer, the FTC could create rules that courts and other regulators could apply in a non-consumer context, furthering the importance of clear and concise rulemaking.

For many of these companies, especially the technology companies, subscription-based recurring revenue is integral to attracting capital; It gives investors peace of mind and confidence in a stable revenue source for the company. Technology CFOs across the board say annual recurring revenue is integral to their growth plans.

3.2 Lobbies Opposing

With little data to support their concern, it is being argued that the FTC should take no stronger steps towards reforming the negative-option subscriptions, due to the “absence of clear evidence that there is a significant problem justifying governmental intervention”.

It is also argued that these subscription-based services offer more good to the consumer than bad; Automatic renewals offer the consumers convenience and security. The business lobbies opposing the FTC’s intervention with the negative-option rule include the News Media Alliance. Consumer advocates said pushback by newspapers against stricter rules tends to have more heft than other businesses that use automatic renewals.

“We believe these market-based guidelines should be given time to enhance the consumer experience rather than turning to a federally imposed standard or regulation”.

3.3 Credit Card Company’s Effect

News Media Alliance has pointed out that some of the merchant guidelines that have been issued by credit card companies need more time to play out and balance the playing field. Many credit card companies are first in line for complaints about recurring charges on consumers' billing statements. In light of the time and resources, the credit card companies are wasting dealing with this issue, they have put guidelines in place to discourage bad practices. For example, in April of 2020 Visa enacted a policy that applies to merchants offering free or introductory trials, that requires them to notify the cardholder at least a week before the expiration of the free trial. In addition to the notification of an upcoming charge, Visa also requires them to provide a link or “other simple mechanism” to cancel the subscription.

4.0 Conclusion

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