“Make €45,000 a year working from home”. “Free 30-day supply of weight-loss pills”. “Noticeably fewer wrinkles or your money back”. These are attention-grabbing offers. After all, who wouldn’t want to be richer, slimmer or look more youthful?
However, deceptive marketing practices by merchants means higher risks for acquirers and payment service providers (PSPs). In this blog post, we deconstruct a deceptive marketing scam to identify its red flags, plus offer advice as to how merchant underwriters can protect their businesses.
Deceptive practices mean higher risk exposure
Deceptive marketing practices prevent consumers from making an informed choice. This is usually through misleading actions, omissions, or aggressive practices.
If your merchants engage in deceptive sales and marketing practices, it may make sales for legal goods and services illegal, thereby increasing your risk exposure. According to card scheme rules, transactions must be legal (in both the buyer’s and seller’s country) to be entered into interchange. This is particularly relevant for e-commerce merchants, who may sell cross-border.
Acquirers who process illegal transactions or whose merchants generate excessive chargebacks are subject to card scheme compliance measures, including fines and a suspension of their acquiring license in the worst-case scenario.
Importantly, it’s not what the merchant sells, it’s how they sell it that creates or increases acquirer risk exposure in these cases. Some products and services may overtrade when it comes to deceptive marketing practices (e.g. nutraceuticals, weight loss and teeth whitening preparations). However, merchant category codes (MCCs) are not always a reliable proxy for illegal activity.
Anatomy of a deceptive marketing campaign
Consider the following example:
An online merchant advertises a 30-day free trial of weight-loss pills. The pills include all-natural ingredients which are scientifically-proven to boost metabolism and fight fat. They claim to enable rapid weight loss without dieting or the need to commit to an exercise regime.
Once consumers sign up for the free trial, they find that they have only 14 days to receive, evaluate and return the pills to avoid being charged €64.99. By accepting the offer, they also find that they have started a monthly subscription to this and/or other products. Contacting the merchant to halt shipments, stop recurring payments or get a refund proves to be difficult.
This example contains a number of red flags for acquirers and PSPs. Each increases their risk exposure. Some may even render sales illegal in certain jurisdictions.
The problem with ‘free trials’ is that they are not always free. The ‘fake free trial offer’ is a large and growing problem. Data available from the US Federal Trade Commission (FTC) shows that complaints about ‘free trials’ more than doubled between 2015 and 2017, though not all those complaining actually lost money. Around one million victims in 14 resolved FTC cases lost $1.3 billion.
In some circumstances the meaning of ‘free’ is fairly straightforward, for example handing out free product samples in the street. In others, it is less clear and open to abuse. Helpfully the Unfair Commercial 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.
2. Misleading claims
Misleading claims may arise from what merchants say as well as what they omit, plus how information is presented to the consumer.
When reviewing the merchant’s sales and marketing materials, consider the words used but also their effect. Something may deceive even if the information is factually correct.
Claims made about medicines, non-medicines, health-related products, cosmetics, weight control and slimming, food and food supplements may also be subject to additional regulation at a domestic or regional level.
Acquirers should be particularly wary if merchants claim products are able to cure illnesses, dysfunction or malformations. Products claiming to include “all-natural” ingredients that are “scientifically-proven” to “boost metabolism and fight fat”, “enable rapid weight loss without dieting or the need to commit to an exercise regime” as in the example above should raise red flags.
3. Negative option selling
Inertia or negative option selling is when merchants provide goods or services, which 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. This contravenes the Unfair Commercial Practices Directive.
The EU Directive on Consumer Rights (2011/83/EU) also explicitly states that “if the trader has not obtained the consumer’s express consent but has inferred it by using default options which the consumer is required to reject in order to avoid the additional payment, the consumer shall be entitled to a reimbursement of this payment.”
In October 2018, Mastercard announced revised standards to acquirers regarding high-risk negative option billing merchants (AN 2202) that effectively prohibit merchants from starting billing cardholders after a free trial if they haven’t given their express approval. This is effective 12 April 2019. If your merchants are using inertia or negative option to sell their physical goods, be aware.
4. Recurring subscriptions
Merchants cannot simply set up a recurring card payment without the cardholder’s consent. This has always been the case for both major card schemes. The Mastercard bulletin AN 2202 provides additional guidance.
After the trial period for a product has ended, but before the cardholder makes any additional payments, the merchant must provide information for the cardholder to authorize, namely:
- The payment transaction amount,
- Payment date,
- Merchant name as it will appear on the cardholder’s statement, and
- Instructions for cancelling the subscription at the cardholder’s discretion.
How to protect your business
Do not underestimate the effectiveness of reviewing the merchant website and conducting mystery shopping. If you shop at your merchants yourself by placing and returning an order, you will experience what a customer experiences and be able to spot anything unusual. It’s not an exhaustive list, but consider the following:
- Who is the merchant (or the merchant on whose behalf he is acting)?
- Where is the merchant established? Where does he conduct business and accept customer complaints?
- What are the merchant’s contact details (telephone, e-mail address, social media handles)?
- What are the main characteristics of the goods or services?
- Is the total price of the order, including taxes, delivery and currency, displayed?
- What are the arrangements for payment, delivery and complaints handling?
- If the consumer has the right to cancel or withdraw, is this right and any conditions (e.g. time limits, cost of returning goods) mentioned? Are they reasonable (or even legal)?
- What is the duration of the contract?
- Are there deposits or other financial guarantees the consumer has to make, and are they mentioned?
- How and where is the merchant generating his user traffic?
E-commerce merchants can quickly change the products they sell, plus the sales and marketing methods used to sell them, simply by updating their web pages. Ensure you have robust procedures in place to monitor the merchant website on an ongoing basis.
At Web Shield, we have been helping acquirers manage their merchant portfolios since 2010. Because there is such a high correlation between merchants who use deceptive marketing practices and those who deceptively generate website traffic, we offer a Deceptive Traffic Detection module for our InvestiGate on-boarding and Monitor monitoring solutions.