Senate Commerce Targets Web Retailers for ‘Mystery Charge’ Marketing

A committee spokeswoman told us CEOs from Vertrue, Affinion and Webloyalty would testify at a later hearing, perhaps after the holidays. The companies have responded to the investigation with changes to their business practices as recently as Monday, giving consumers more visible notices about the nature of their programs, during and after signup, and easier ways to cancel.

The subscription companies and their partner Web sites -- more than 450 so far -- have brought in $1.4 billion through the programs since 1999, with $792 million of that going to the online brands, the committee said. The biggest beneficiary was Classmates.com, which has earned $70 million by displaying the subscription offers, while 88 e-commerce companies have made more than $1 million, and 19 earned more than $10 million. Four million U.S. consumers were enrolled in the programs as of June, the committee said. Chairman Jay Rockefeller, D-W.Va., sent requests for information earlier this month to 1-800-Flowers, AirTran Holdings, Classmates.com, Continental Airlines, FTD, Fandango, Hotwire, Intelius, MovieTickets.com, Orbitz, Pizza Hut, Priceline.com, Redcats USA, Shutterfly, US Airways and VistaPrint USA.

“Generally, the more aggressively” an e-commerce site is willing to market the offers, the more it will earn from the subscription programs, with a “bounty” payment between $10 and $30 on average per customer that signs up, the report said. Sites also get paid based on impressions, with payment rates tied to conversion rates, so more aggressive offers earn higher payments. The report notes a February e-mail from a Webloyalty employee to partner 1800PetMeds that advises the company against discontinuing the “Continue” button on the offer, which 1800PetMeds customers found misleading. Such a change would “decimate” the “pure profit” the site was earning from Webloyalty -- $516,000 in 2008, the Webloyalty e-mail said.

The “join” rates for the offers are artificially inflated because partner sites pass along billing information to the subscription companies without asking customers to re-enter it, the report said -- Webloyalty’s partners practicing “card on file” transfers have a join rate four times higher than those without. Most enrollees in the subscription programs are unaware of it, according to documents the companies gave the committee -- Vertrue’s June 22 online survey of visitors to partner sites found 43 percent wanted to find the origin of an unrecognized credit-card charge and 44 percent wanted to cancel. A telephone survey of Redcats customers in 2004 found three in four didn’t remember being offered Webloyalty’s Reservation Rewards membership or said they had declined the offer, while less than 2 percent said they received the promised $10 cashback offer. Affinion’s tracking of customer complaints to the Better Business Bureau and state attorneys general found that 85 percent of 1,550 “serious complaints” were related to customers saying they never agreed to join, the report said.

Internal records show the subscription companies’ customer service departments are “are almost entirely dedicated to handling the large volume of calls from angry and confused consumers requesting cancellations and an explanation for the charge,” the report said. Affinion’s 2006 training manual tells reps that four in five calls on average request cancellation; at Vertrue, employees gave an estimate of 98 percent. The three companies on average lose a quarter of their customers within the 30-day trial window, 30 percent are still customers after six months, and 14 percent for more than a year. The committee wants the companies’ internal Web traffic records to analyze how often customers actually use the subscription programs, because a low usage rate probably indicates misleading practices, the report said.

A wealth of communications between the subscription companies and partner sites shows the latter group is well aware of customer complaints, known as “noise,” and have often asked the companies to post more “conservative” offers and change their wording, the report said. At the same time the partner sites recognize the aggressive offers are bringing higher returns.

The subscription companies outlined changes they've made in the past few months to respond to committee concerns. As of August 1, Webloyalty started requiring purchasers on partner sites to show the last four digits of a payment card to confirm their signup, the company said Monday. It also sends at least five e-mails during the trial period, encouraging customers to use the service, reminding them of subscription fees and which card will be billed, and multiple ways to cancel. Vertrue and its indirect subsidiary Adaptive Marketing, and Affinion said separately Monday and Friday they too will ask for the last four digits before signup. Vertrue called for the industry to develop “post-transaction online marketing standards” as well. All companies said they've long provided thorough notice throughout the signup and subscription process, but would add new notices with clearer language.

Disclosure of Terms Won’t Work

The changes made by the subscription companies are “totally insufficient,” Rockefeller said at Tuesday’s hearing. The committee will consider “legislative steps” to govern such practices, including penalties for sites partnering with the subscription companies, he said. Rockefeller found support from academics on the panel on the need for legal changes to prevent such marketing, including ending the use of “data passing” between partner sites and companies.

The committee investigation has already led several partner sites to drop ties to the subscription companies or promise to, including US Airways and Continental, Rockefeller said: “It should be stopped. It will be stopped,” just as Congress has gone after similar practices in telemarketing. “No one wants to withdraw the support that is necessary” for the Internet to work, such as advertising, but data-collection and sharing practices must be regulated, said Sen. Byron Dorgan, D-N.D., a purchaser of movie tickets on Fandango. Florida Attorney General Bill McCollum has filed several actions to stop such “click and scam” practices, but Congress should be involved, said Sen. George LeMieux, R-Fla. “The best prophylactic you can have for these scams is knowing about them.”

“This is nothing short of theft,” said Ray France, a 27-year-old disabled veteran of the Iraq and Afghanistan wars who unwittingly signed up for a subscription through a purchase on Intelius.com. He spent eight months trying to get in touch with the company that charged his account and finally got a response through the Better Business Bureau, securing a full refund, but was told by the company that he was at fault. Linda Lindquist bought movie tickets from MovieTickets.com, and after filling out a form for a $10 off coupon “I realized that this was probably a scam.” Caring for a daughter with severe medical problems, Lindquist didn’t realize she had signed up until she had paid $320 for a subscription. MovieTickets.com gave her a full refund after the subscription company offered her a $20 credit, she said. When she booked a flight for her son to Washington to attend Tuesday’s hearing, AirTran showed her another subscription offer, she said. Both witnesses emphasized they were Internet-savvy shoppers and were fooled by the offers.

Subscription offers use a “series of well-known psychological biases” to get consumers to pay attention to the offer and not the fine print, said Robert Mayer, a professor at the University of Pennsylvania’s Wharton School who has studied such marketing. The offers are targeted at “vulnerable populations” such as poor consumers who respond to “small cash enticements” and older people without Internet familiarity, he said.

Consumers expect to buy things online when they enter card information, a practice subverted by subscription offers, said Prof. Florencia Marotta-Wurgler of the New York University School of Law. “People simply don’t read” the terms of use where the charges -- and the pass-through from the partner site -- are laid out, she said. Her research has found only one or two consumers out of 1,000 buying software online actually read through terms, and quickly at that, even when the “agree” button is placed at the end of the terms. Consumers focus on “bells and whistles” in offers even when misleading, she said. “The fine print is just the greatest scam of all time,” Rockefeller said, pointing to printed displays of typical offer pages held by aides. “If I had a Galilean telescope, I would not be able to read that fine print.”

Unlike most consumer regulatory problems, “this is one of those rare cases where there is a clear and obvious solution,” which is to block data passing between sites and subscription companies, said Prof. Prentiss Cox of the University of Minnesota Law School. A former assistant attorney general, Cox said he dealt with several “pre-acquired account marketing” practices offline. But some courts have ruled against consumers, saying “like it or not [the terms] are fully disclosed,” he said. “It has been a very frustrating decade,” and Tuesday’s hearing has done more to remedy the problem than any previous work.

State officials are ill-equipped to deal with such practices, Cox told Rockefeller: “They don’t shake a lot of money” on attorneys general offices, making a federal change necessary. He also cautioned that the issue was distinct from the “trickier” questions of internal data-retention practices. Rockefeller said he would press to hold partner sites liable. “If I was still in the AG’s office, I would love to go after” such cases, LeMieux said. “We ought to be putting people who do this in jail,” said Sen. Tom Udall, D-N.M., a former state attorney general. Cox told him that the Federal Trade Commission had trouble dealing with such practices because officials can’t separate good from bad parties in civil enforcement when it comes to subscription offers. Technically federal regulators can go after such practices under the Gramm-Leach-Bliley financial disclosure law, but the regulatory implementation inadvertently left Internet companies out of enforcement, Cox said.

The four-digit card number confirmation step that the three subscription companies recently instituted won’t stop consumer confusion, Marotta-Wurgler told Rockefeller. She bought movie tickets on Fandango on Friday, after Affinion announced its change, and clicked on a $10 off coupon during her purchase. After being asked for the last four digits, Marotta-Wurgler simply copied the digits from her Fandango account online, she said. The process is “a little bit better” than what the companies were doing, but the problem is that such requests online are usually associated with confirming one’s identity, not agreeing to a new purchase. And they still appear to be coming from the partner site, she said.