Priority Technology Blames a Mastercard Subscription Rule for Its $19.5 Million Revenue Hit

Merchant processor Priority Technology Holdings Inc.’s fourth-quarter revenues fell by $19.5 million, a drop of 16.5%, in the face of a new Mastercard Inc. rule change tightening consumer notices on subscription billings.

“This decline was being driven by one factor and one factor only,” Priority chairman and chief executive Thomas C. Priore said Thursday morning in reference to the rule change. Online subscription billers have been a significant merchant segment for Alpharetta, Ga.-based Priority, but Priore said the company closed the accounts of 1,200 such merchants to assure that it would be in compliance with Mastercard’s rules. 

“The closure of these merchants was not necessarily the issue, but rather, the delay on the part of Mastercard to provide the necessary revised merchant guidelines that would allow us to resume boarding [biller merchants],” Priore said on a conference call with analysts.

Priority received the guidelines in mid-October and subsequently has “re-established our boarding activity in this segment,” he said.

Merchant acquirers heard about the coming rule changes long before Mastercard announced them to the public in January. The revised rule takes aim at so-called negative-option billers who, after getting a consumer to sign up for a trial subscription for a product, automatically bill the customer’s card on file after the trial ends until the consumer cancels. The rule change, which takes effect next month, requires merchants to gain cardholder approval at the end of the trial before they start billing. Merchants must send the cardholder, either by email or text message, the transaction amount, payment date, and merchant name along with clear instructions on how to cancel, according to Mastercard.

Priority probably isn’t the only merchant processor struggling with the rule changes. “These Mastercard negative-option billing rules are going to shake things up in the subscription goods and services sector,” says a February blog post by Chargebacks911, a Clearwater, Fla.-based chargeback-management services provider.

A Mastercard spokesperson tells Digital Transactions News by email that “while I do not have any insight or comment on their earnings call, I’d quickly note that the rules change does not go into effect until mid-April. It was originally shared with customers last October and more broadly shared earlier this year.”

Priore and chief financial officer Michael Vollkommer told analysts on the call, however, that they believe the issues with subscription billers will pass soon, and that the company is poised for strong growth. Like other acquirers, Priority is pursuing independent software vendors, and another big focus is payment and other services for landlords. Last July, Priority acquired RadPad Holdings Inc., a rental real-estate marketplace, and Landlord Station LLC, a provider of tenant-screening services for independent landlords, for a total of $4.3 million.

Now a “transformational partnership” involving real estate is in the works and will be formally announced soon, Priore said. The deal reportedly will generate $10 million in pre-tax earnings.

“This partnership provides an explosive launching pad into the high-growth real-estate payments space by creating a single platform that addresses the needs of a wide range of landlord constituents,” Priore said. Users could include everyone from real-estate investment trusts down to small, local landlords, he said.

Priority reported fourth-quarter merchant bank card transaction volume increased 2% year-over-year to 114.3 million. Full-year transaction volume grew 6.1% to 465.8 million.

The company posted a net loss of $3.67 million compared with a $1.88 million profit in 2017’s fourth quarter on revenues of $100.5 million versus $120 million the year before. For all of 2018, Priority reported revenues of $424.4 million, off 0.3% from 2017, and a net loss of $15 million compared with the prior year’s net income of $4.59 million.