Voice of the Industry

Why merchants should care about the German Fair Consumer Contracts Act

Tuesday 22 March 2022 07:26 CET | Editor: Anda Kania | Voice of the industry

Úna Dillon, VP Global Expansion & Advocacy at MRC, discusses a new regulation from Germany that regards subscription-based businesses and their further measures to meet compliance 

Germany’s Fair Consumer Contracts Act may not be as widely discussed as broader directives like the EU PSD2, but any subscription merchants operating in Germany should be aware of the changes this Act requires. Even for those not directly impacted, this move by the German Regulator signifies interest in modifying how subscription contracts are managed, and other European countries may follow this example.

Understanding what the Fair Consumer Contracts Act is, and what it was designed to accomplish, should be a high priority for any global subscription merchant concerned with compliance.

What is the Fair Consumer Contracts Act?

Simply put: the Fair Consumer Contracts Act limits the length of automatic subscription renewals and mandates a straightforward cancellation process to help improve consumer rights. The German regulation was released in August 2021, and came into effect in October 2021, with additional requirements coming into force throughout 2022.

The goal of the regulation is to provide more flexibility for consumers when entering and leaving longer-term contracts. This is achieved by mandating that consumer contracts can no longer bind customers for a year upon renewal, and that consumers are given the ability to cancel their subscription at any time.

As of 1 March 2022, the regulation impacts the ability for merchants to automatically extend subscriptions for another year, once the initial two-year period allowed in the regulation no longer applies. Subscriptions can still be binding for a period of up to two years but, thereafter, consumers must be able to easily cancel contracts.

Starting on 1 July 2022, impacted merchants will need to implement a ‘cancellation button’, referring to a straightforward, easily understood, prominently displayed button a customer can use at any time to cancel their subscription and receive a pro-rated refund. Rules regarding the cancellation button and the required features are extensive and should be reviewed in detail before implementation.

The above regulation applies to all subscription contracts ending from 1 March 2022 onward and applies to all contracts entered into after 1 October 2022. 

Reading the regulation first-hand is highly recommended, as is consulting with appropriate legal experts and any relevant acquiring processor to ensure compliance and a full understanding of the new requirements. 

Who does the act impact?

The Fair Consumer Contracts Act primarily impacts subscription-based merchants that rely on long-term contracts, for example, those in gaming, streaming media, or other digital services.

It’s important to note this is a German regulation, and it only impacts organizations doing business in Germany. That said, similar Acts may eventually be implemented in other countries, so considering a compliance strategy could be a useful exercise for any subscription merchant. 

Merchants should review the Regulation with their acquiring processor and legal counsel to ascertain to what degree they are impacted.

Potential concerns for merchants

Likely, the most pressing concern for those impacted is the immediate cost of compliance, including modifying checkout processes, along with the logistical undertakings of amending subscriptions and providing refunds. 

There are other, less obvious concerns, all of which will impact merchants differently depending on their size, location, industry, and business model. 

The additional communications required are one such concern. Customers comfortable with annual (or longer) contracts might not appreciate being consistently reminded about impending cancellations or renewals. When paired with separate card network rules around required cancellation notices, there is a risk of excessive communication, as well as increased interception and fraud risk resulting from the additional outreach required.

Another concern is the transition from annual to monthly subscriptions, potentially resulting in cancellations, customer churn, or lower renewal rates. It might also reduce flexibility in available pricing models; many merchants offer longer-term subscriptions with a discount as an incentive. Removing this option could eliminate those discounts and result in less flexibility overall for both merchants and consumers. 

Lastly, there’s the potential disruption to existing operational strategy. Because the regulation is specific to Germany, while many organizations have broader, European guidelines, there is potential for higher cost and logistical challenges incurred by maintaining one strategy for Germany and another for the rest of Europe, or beyond. 

What should merchants do?

The first step for each merchant is to ascertain how they will be impacted, if at all. If they do not have a presence in Germany, then no action is required, but keeping an eye on the results of this regulation is recommended as they may be impacted in the future.

If a merchant currently operates in Germany but doesn’t utilize a subscription model, or if they are already compliant with the new requirements, then all is well. However, even those merchants confident they won’t be impacted should check with their legal team or payment service provider to ensure they are operating in compliance with the new regulation.

For those impacted, it’s important to consult an appropriate legal advisor, along with the acquiring bank/payment service provider, who should have the answers to any questions. An expert on German law will be an invaluable resource in crafting an appropriate course of action, and a regional payment service provider might also have a helpful perspective, especially if they are familiar with a merchant’s payments technology stack.

The exact fines or penalties for non-compliance have not yet been published, but ideally, compliance should be the goal well before that becomes an issue.

Looking forward together

As with all new laws and regulations, understanding the changes will inform how best to adapt to the new normal with minimal disruption. 

Talking with other merchants, issuers, and payment service providers is an excellent way to stay on top of the latest in compliance. Joining a community of professional peers that face similar issues can be profoundly impactful and could potentially save organizations significant time and resources. 

The MRC has a wide variety of ecommerce-focused communities designed for this purpose,  with specialized expertise on a wide variety of payments and fraud topics. 

Asking and answering questions in a non-competitive environment and learning from the experience of other organizations in a knowledgeable community can be a significant advantage when navigating new regulations like the Fair Consumer Contracts Act.

About Úna Dillon

Úna is VP of Global Expansion and Merchant Advocacy at the MRC. Having worked in the payments industry for more than 25 years, she has chaired industry working groups at the European level, ran Laser Card (the Irish national debit card scheme) for 12 years, and was responsible for driving the development of policy on major initiatives such as SEPA. She was appointed to the European Commission Payment Systems Market Expert Group (PSMEG) to advise on regulatory policies on payments and payment fraud prevention. Here she brings the Voice of the Merchant to the European Payments Regulator’s table.

About the Merchant Risk Council 

The MRC is a global community connecting ecommerce fraud prevention and payments professionals through educational programs, online community groups, conferences, and networking events. As a non-profit organization, the MRC is headquartered in Seattle, Washington, but embraces members from across the globe.

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Keywords: ecommerce, subscription commerce, regulation, MRC
Categories: Payments & Commerce
Countries: Germany
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