Appearances can be deceiving, especially in marketing

Confidence tricks are as old as commerce. So are confidence tricksters. However, with consumers out-of-pocket, regulators exercised and the payment industry coming under increasing scrutiny, the fight against deceptive marketing practices is intensifying.

Deceptive marketing practices

According to the Better Business Bureau, US Federal Trade Commission (FTC) data shows that complaints about ‘free trials’ more than doubled between 2015 and 2017. As an example, let’s take the case of Tarr. The FTC announced earlier in 2019 that it was to return more than USD 6 million to consumers, who purchased health products online from the company and the 19 subsidiaries it controlled. The case revealed how Tarr used a vast network of websites to sell more than 40 different products, which mostly promoted weight loss, muscle building or wrinkle reduction.

The defendants used unsupported claims, fake magazine and news ads, bogus celebrity endorsements and consumer testimonials to market their products. Another tell-tale sign: their websites deceptively offered ‘free’ and ‘risk-free’ trials while failing to disclose that consumers would be enrolled in recurring billing arrangements, unless they cancelled within a short period of time. The process for cancelling orders was not clear, and as a result many customers who signed up for free trials were charged hundreds of dollars for often unwanted products.

Regulatory scrutiny, complaints from consumer groups, increased chargebacks and negative publicity have contributed to the growing focus on deceptive sales and marketing practices. For card schemes in particular, it has become a brand and legal issue.

Hidden high-risk

Deceptive sales and marketing practices can render any card transaction illegal, even if the goods and service sold are legal. If merchants operate negative option sales models — that is to say, assume that customers have bought the product unless they inform the merchant to the contrary — it could make transactions illegal. The same goes for merchants who process transactions without cardholder consent or fail to disclose material information prior to the sale.

This is what makes deceptive marketing practices such a pernicious risk for acquirers and payment service providers (PSPs). It challenges traditional acquirer risk management thinking and controls as it is not what the merchant sells, it is how they sell it that creates the acceptance risk. Merchant category codes (MCCs) are not a reliable proxy for illegal activity. Every merchant type can be affected.

This is complicated by the fact that the internet still leaves ample room for anonymity. Low startup costs mean that unscrupulous merchants can change their locations and websites almost immediately. Legitimate transactions can occur quickly and simultaneously, as can illegitimate ones. With no centralised authority online, what is legal in one country may not be in another. Trade crosses borders, yet legal enforcement seems to still be resolutely national.

Notwithstanding, the fight against deceptive sales and marketing practices has taken a sharp turn. It is no longer enough for the card payment industry to point to a general prohibition on processing illegal transactions. It is time for specifics and for enforcement.

High-risk negative option billing merchants

Mastercard has taken the lead in this regard. In October 2018, it announced revised standards to acquirers regarding high-risk negative option billing merchants*. This effectively prohibits merchants from starting to bill cardholders after a free trial if consumers have not given their express approval. The revised standards came into effect on 12 April 2019 and apply to acquirers whose merchants use inertia or negative option to sell physical goods.

In summary, acquirers must now register negative option billing merchants as high-risk, identify all third parties that provide services to such merchants, plus monitor and match authorization messages. Some specific points are as follows:

the trial period must begin on the date that the product is received by the cardholder;

the merchant must re-confirm the order and billing details and obtain the cardholder’s explicit consent after the trial period for a product has ended but before any additional payments are made by the cardholder;

the merchant must send details of how to cancel the subscription with every attempted authorization;

the merchant must provide a direct link to an online cancellation procedure for recurring payment transactions on the website the cardholder made the original purchase;

the merchant must send written confirmation to the cardholder when the trial period and/or billing plan has been cancelled.

Building on card scheme requirements

The Mastercard provisions offer a useful baseline on how to evaluate new merchants and monitor the existing ones operating such marketing models generally, including those who use such models to sell digital goods or services.

Any entity underwriting merchants should seek legal advice in respect of the countries in which they and their merchants are active. For example, the EU Unfair Consumer Practices Directive (2005/29/EC) lists practices which are considered unfair in all circumstances.

One of these is describing a product as ‘free’, ‘gratis’, ‘without charge’ or similar if the consumer has to pay anything other than the unavoidable costs of responding and collecting or paying for delivery of the item.

Another relates to business-to-consumer inertia selling, where merchants provide goods or services to consumers, which the consumers have not ordered or requested. Merchants then tell their customers (often erroneously) that unless they expressly reject the goods or services, they are required to pay for them.

The absence of a response does not constitute consent. For instance, an invoice or similar document in marketing materials requesting the payment, which gives the consumer the impression that he has already ordered the marketed product when he has not, is considered unfair in all circumstances under the EU Unfair Consumer Practices Directive.

In summary

Some sectors overtrade in terms of their use of deceptive sales and marketing practices. However, risk exposure resulting from deceptive marketing practices is not dependent on what the merchant sells, rather how it sells. Merchant category codes (MCCs) are not a reliable proxy for illegal activity.

With the fight against deceptive marketing practices intensifying, acquirers and PSPs are under increasing pressure to improve their merchant onboarding and monitoring. Confidence tricksters are by definition tricky customers, particularly for acquirers and PSPs. Any merchant scamming their customers is also scamming their acquirer. It pays to underwrite wisely. Appearances can be deceiving.

*AN 2202 — Revised Standards — High-Risk Negative Option Billing Merchant Requirements, Mastercard, 19 October 2018

About Christian Chmiel

Christian A. Chmiel, CEO and founder, Web Shield is responsible for the development and implementation of investigation techniques to identify fraudulent or brand-damaging online merchants. He is also a lecturer at the Web Shield Academy and has published several books about fraud, investigations and accounting.

About Web Shield

Web Shield has been equipping the payments industry with tools to protect businesses from merchants involved in illegal or non-compliant activities since 2010. Our highly precise solutions enable acquirers, PSPs and other financial organizations to evaluate new merchants and monitor existing ones, thereby saving both time and money.

There is a high correlation between merchants who use deceptive marketing practices and those who deceptively generate website traffic, which is where the Web Shield Deceptive Traffic Detection module can help. Deceptive marketing practices will also be the subject of the fifth book in Web Shield’s ‘Fundamentals of Card-Not-Present Merchant Acceptance’ series. You will be able to get your hands on a free copy at the RiskConnect conference in Warsaw - Poland, 19-20 November 2019.