The subscription economy has become the preferred commercial model in the digital era. From its early pre-digital beginnings supported by Standing Orders and Direct Debits, the acceleration in adoption happened because three powerful trends converged:
- The digitisation of products and services
- The ability to store payments credentials securely
- The recognition within the investment community that recurring revenue is far more valuable than transaction revenue
Today, regulators, card schemes, banks and consumer protection agencies are introducing controls designed to place consumers firmly in control of the recurring payments underpinning the global subscription economy. Although regulatory approaches differ the UK, European Union and North America are all moving towards a common objective:
Consumers should retain effective control over recurring payments throughout the entire subscription lifecycle.
This principle is driving reforms relating to transparency, consent, authentication, renewal notices, cancellation journeys and dispute rights.
So how should organisations react? What does a reasonable response look like to respond to change and maintain revenue flows whilst reducing cost and risk?
To answer that, let’s look at what is driving change globally. Perhaps the most significant changes have come not from regulators but from the card brands themselves. The distinction between Customer Initiated Transactions (CITs) and Merchant Initiated Transactions (MITs) sits at the centre of modern subscription governance. A CIT occurs when a customer actively authorises a transaction. The initial subscription purchase normally falls into this category. An MIT occurs when the merchant subsequently charges the customer using previously obtained authority. Subscription renewals, annual renewals and usage-based billing are common examples.
Card schemes increasingly require merchants to demonstrate a clear link between the original CIT and subsequent MITs. In addition, Visa and Mastercard Stored Credential Frameworks require merchants to identify and categorise recurring transactions, maintain evidence of consent and provide stronger consumer disclosures.
As well as demanding more from their merchants, the card schemes are making it easier for consumers to request a ‘chargeback’. Historically subscription disputes were resolved between merchants and consumers. Increasingly consumers bypass merchants entirely and seek refunds through their card issuer. Issuers now possess more transaction data, improved recurring payment visibility and stronger dispute rights. Less control for merchants brings more and higher costs.
When we look specifically at geographical markets the UK has emerged as one of the most active subscription regulation markets. The Digital Markets, Competition and Consumers Act introduces enhanced consumer protections including reminder notices, cooling-off rights and simplified cancellation mechanisms. In addition, The Competition and Markets Authority has also signaled increasing scrutiny of subscription retention practices. The UK is additionally positioned to become a leading market for Open Banking Variable Recurring Payments which may begin to challenge card-based subscription models, even without any chargeback mechanism being in place to protect the consumer.
Irrespective of the markets organisations (merchants) operate in, those that are going to thrive in this new pressurised environment will have three things in common:
- Firstly, a customer engagement platform capable of analyzing customer interactions across all engagement activity, irrespective of customer engagement channel, across all business outcomes, right through to full payment history. Which means having the ability to view and analyze data across historical data silo’s to identify and deliver targeted conversations with customers and prospects capable of delivering desired outcomes
- Second, a payments capability that is absolutely focused on delivering more customer payments, more easily and at less cost. Which means leveraging a new generation of payment gateway functionality capable of orchestrating payments across multiple merchant acquirers in real time to uplift payments acceptance rates and reduce transaction costs. It also means (for those trading in the UK) adjusting to card scheme mandates for no PAN on cards beyond 2030 and migrating stored payment credentials to card scheme network based tokenisation.
- And finally, a broad and robust data governance capability embracing consumer rights and protections, regulatory compliance, third party oversight and merchant acquirer contractual obligations (PCI DSS compliance).
Recurring revenue remains attractive. Consumer convenience remains attractive. However, what we are likely to see in the next 12 to 36 months is greater cost and risk pressure on established workflows and business process supporting the subscription model.
Recurring revenue and convenience that cannot withstand regulatory scrutiny, issuer challenge or consumer dispute is increasingly becoming recurring risk.
