By John Breyault, Vice President of Public Policy, Telecommunications and Fraud
Wireless cramming is at the top of the Federal Trade Commission’s agenda today, as government officials, advocates and industry representatives gather to discuss the issue and potential solutions at the FTC’s Mobile Cramming Roundtable. I am honored to present at the event, along with a number of other experts on the topic. For those loyal readers unable to watch the live webcast, I can sum up my comments thusly: Wireless cramming is a big problem and is only going to get worse without action by regulators to protect consumers.
Cramming fraud has been around for decades. Beginning in the late 1990s, enterprising scam artists learned that they could get small charges placed on consumers’ landline phone bills. With doctored “authentications” and poor policing by the phone companies and billing aggregators, scammers made millions of dollars. As consumers increasingly adopted wireless phones, the scam artists moved to those bills. Wireless cramming is proving to be just a lucrative for the fraudsters. In its first enforcement action against alleged wireless cramming outfit Wise Media, the FTC stated that the company made millions of dollars in less than two years of operation.
Wise Media is likely just the tip of a very large iceberg. While there is precious little data about the scope of the wireless third-party billing market generally and the cost of wireless cramming on consumers, we can make some educated estimates based on the data that is available.
Earlier this year, the California Public Utilities Commission (CPUC) published its Cramming Report, which reported that in 2011, wireless carriers in California billed $171 million for third-party products and services. According to the Federal Communications Commission’s most recent Wireless Competition Report, there were an estimated 34,892,000 wireless subscribers in California and 298,293,000 wireless subscribers nationally in 2011. Extrapolating the California data to a national scale therefore yields an estimated $1.46 billion in third-party charges were assessed on consumer bills nationally in 2011. According to recent reports from the Illinois Citizens Utility Board and the Vermont Attorney General, between 44 percent and more than 50 percent of charges on consumers’ wireless bills are fraudulent. This means that we are potentially looking at $643 million to more than $730 million in wireless cramming losses annually.
How did things get this bad? First of all, wireless cramming is practically the perfect scam for its perpetrators. Unlike muggings, carjacking or other types of crime, cramming victims are often unaware that they have been harmed. This is because the scammers typically only charge small amounts per month on consumers’ wireless bills – usually less than $10 per month. Lost in the maze of fees on consumers’ bills and often deceptively labeled, these charges are easy to miss, even by those few consumers who check their wireless bills regularly. With the ease of paperless bills and auto bill pay, it is even easier for consumers to overlook these charges.
Second, the structure of the wireless billing ecosystem is inherently insecure. There are typically three main actors in this ecosystem: the third-party service provider who provides a service (say, horoscopes by text message), a billing aggregator who contracts with dozens or hundreds of third-party service providers and bills the wireless carrier on their behalf and the wireless carrier who bill the consumer and collect payment (typically 1/3 to ½ of the total charge). Given this lucrative line of business, there is an incentive to overlook instances of cramming at all levels of the billing ecosystem. Even worse, phone bills aren’t protected from fraud the way that credit or debit cards are. Therefore, consumers are essentially at the mercy of their carriers to refund the fraudulent charges when the end-user detects the scam.
When consumer groups and government agencies examined the issue of landline cramming in 2011 and 2012, the solution seemed self-evident to many – simply prohibit third-party billing that was unrelated to the underlying telephone service. Given that the vast majority of third-party billed charges on landline phones were fraudulent, this was an easy call. The solution is more complex when it comes to wireless bills. By all accounts, legitimate commerce is conducted via wireless third-party billing. For example, relief agencies raised more than $43 million via text-to-donate programs after the 2010 Haiti earthquake. Simply prohibiting wireless third-party billing would clearly be regulatory overreach.
However, there are steps that can be taken to address cramming fraud. For example, cramming fraud operators often set up shell companies so that they can continue to operate even when consumer complaints get their operation shut down by wireless carriers or billing aggregators. If billing aggregators were to require all third-party service providers to post a significant bond before they can start billing consumers, it could make it prohibitively expensive for scammers to set up shell companies.
Another solution would be to prohibit the use of “negative options” in confirmatory text messages. Industry guidelines require the use of a “double opt-in” before a third-party service provider can begin billing. This is most often provided in the form of a reply to a confirmation text message (i.e., “are you SURE you want this? Text ‘YES’ to confirm”) Unfortunately, cramming fraud operators like Wise Media often use negative options – assuming that most recipients would simply ignore the confirmation text message and thus agree to be billed.
Third, the lack of public data on wireless cramming is a significant impediment to effective consumer protection. Wireless carriers in California are currently required to report cramming complaints to the California Public Utilities Commission, which makes this data public. Wireless carriers should be required to report all cramming complaints to the FCC so that regulators have an accurate picture of the scope of the problem.
These are just a few common-sense reforms that would do much to better protect consumers from fraud on their wireless bills. We look forward to working with the FTC, FCC and all parties in the wireless billing ecosystem to address this important issue.