As state and federal regulators sharpen their focus on mobile cramming, some wireless carrier advocates question whether the issue of unauthorized third-party is a growing problem for carrier-billed mobile payments.
Text message-based transactions have a similar potential for misuse as credit cards, says Michael Altschul, senior vice president and general counsel of the wireless industry trade group CTIA. Consumers have an obligation to regularly monitor their mobile carrier bills and the phones on their accounts, he says.
“Unlike some other financial instruments like, for example, credit cards, you don't have teenagers running around with credit cards, but you do have them using smartphones,” Altschul says. “And there is an opportunity and a responsibility for parents to supervise all authorized account holders on an account.”
Altschul was a panelist at a Mobile Cramming Roundtable presented by the Federal Trade Commission in Washington D.C. on May 8, alongside consumer advocates, regulators and payments and wireless industry participants. While acknowledging that all cases of mobile cramming aren’t reported to regulators, Altschul says recent studies don’t indicate the fraud scheme is on the rise.
“We're not seeing any more complaints to these agencies in 2012 than we have in 2010, even though we know the adoption of smartphones and these kinds of services have soared during that period,” he says.
Carrier-billed services are attracting more attention as an emerging payments option. Companies like Microsoft's Skype use such services, even as skeptics wonder how much appetite consumers have to treat their phone bills like credit card bills.
But many consumers don’t realize they’re paying bogus charges. When they do, disputes are handled differently depending on the carrier and third-party biller involved, says John Breyault, vice president of public policy at the National Consumers League.
“Consumers don't even know their bills can be used as a credit card essentially, and what's worse is mobile bills don't give you the same protection that credit cards do,” he says. “You can't dispute a charge and be protected. You're basically at the mercy of your carrier to take your word for it and take the charge off the bill.”
He adds that since the FTC regulates businesses like premium SMS vendors and the Federal Communications Commission regulates wireless carriers, monitoring and tracking mobile cramming is complex.
“I think we need to realize that the interesting thing about cramming is that it is a cross-jurisdictional problem…and relying only on a complaint volume or a lack of rise in complaint volume to say that there is not a problem is a little bit misleading,” Breyault says.
And wireless bills, especially for accounts with multiple devices, are increasingly complex and lengthy, creating more challenges for consumers.
“I think relying on consumers to spot these charges assumes consumers look at their bills. We know that most consumers don't look at their bills closely and on top of that, you have charges that are often labeled deceptively on bills,” Breyault says. “This is why mobile cramming has become so easy and lucrative for scam artists—small charges misleadingly labeled on bills that people don't read. It's almost a perfect scam for them.”
As the use of mobile wallets for retail point of sale transactions encourages consumers to treat their smartphones as payments devices, the potential for added confusion in carrier-billed transactions exists, says Jim Greenwell, president and CEO of South Korean-based alternative mobile payments provider BilltoMobile.
“This device that everybody is trying to figure out, this lovely mobile device…if you fast forward 10 years from now, there is no doubt that most of us will use this device in some form of transaction or mobile payments,” Greenwell says. “That whole notion of being able to transact on your phone is going to be interesting, it will present a whole other host of issues.”
Wednesday’s roundtable comes just weeks after the FTC filed its first lawsuit against a third-party biller accused of engaging in mobile cramming. The lawsuit, filed in a federal court in Atlanta, alleges the defendants billed consumers for text messages containing horoscopes, flirting, love tips and other content. The FTC claims consumers were signed up for the service “seemingly at random,” without consumer knowledge or permission for the service, which cost $9.99 per month.
In mobile cramming schemes, fraudulent charges are added to consumers' mobile phone bill either by sending deceptive text messages that consumers dismiss as spam or through so-called “negative options,” where consumer inaction triggers a confirmation of charges.
Another common occurrence is children inadvertently making purchases with their phones—a problem that mirrors issues that were raised about in-app purchases on some popular smartphone apps.
After parent groups complained about children racking up large bills buying upgrades in smartphone games, Apple implemented an additional password authentication for the transactions and developers like Capcom added warnings in games like Smurfs' Village, one of the early targets of critics' ire.
“It's not always ‘Oh, Johnny went off the reservation and bought something,’” says Kate Whelley McCabe, an assistant attorney general in Vermont. “It's often, ‘My child didn't understand; they thought they were signing up for something free.”
Mobile cramming threatens to undermine mobile carrier billing as a legitimate and trusted payment option, the FTC’s Division of Financial Practices wrote in a March report, adding that with the development of enhanced security controls and end-to-end data encryption, mobile payments could become a more secure method than traditional card schemes.
The CTIA issues the five- or six-digit “short codes” that merchants use to conduct text transactions. In addition to developing industry standards like requiring premium SMS merchants to have clear opt-in procedures, the organization vets commercial organizations before they’re issued a short code. Other organizations, like the Mobile Giving Foundation and mGive, vet nonprofits that use text message-based campaigns for their fundraising, like recent efforts following Hurricane Sandy.
Ensuring a secure commercial ecosystem for carrier-billed transactions is crucial for text-to-donate services to thrive, says Mobile Giving Foundation CEO Jim Manis.
“I don't want the philanthropic piece to be negatively tainted and if the premium space goes away, guess what? We go away, too. So there is a threat, if you will, to us,” he says.
“The problem isn't third-party billing. The problem is that billing that occurs outside of the real very stringent standards and best practices and technology that have been put in place to actually control it,” Manis adds.