G2 Best Practices: Deceptive Marketing Merchants

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1 G2 Best Practices: Deceptive Marketing Merchants Key Risk Overview: A new type of merchant fraud is causing significant brand damage to the card schemes, the issuers, and acquirers alike. Moreover, the actions of a relatively small number of merchants are undermining the consumer promise that is at the heart of the value proposition offered by the card industry. Specifically, these merchants are engaging deceptive and / or aggressive marketing tactics that pose sales process organizational risk. Deceptive marketing merchants typically offer legitimate or quasilegitimate goods, but at some point in the check out or billing process, they can create great risk to the acquirers and significant problems for consumers. The most common examples are as follows: Cross Selling: Merchant offers existing or new customer an opportunity to purchase additional goods Re-Billing / Continuity: The merchant and consumer enter into a continuity agreement where the consumer will continue to purchase additional goods (or pay off the current goods) over time Free Trial Offer: The merchant will offer the consumer a free or low cost trial of a service or product followed by a paid subscription (usually a continuity model) As should be clear, each of these business models is perfectly legal and non-problematic provided the merchant properly notifies the consumer of the transaction they are entering. The recent activity of deceptive marketing merchants shows that they are deliberately obfuscating the nature of the transaction (from the consumer) and are usually combining one or several of the sales methods listed above. These practices were investigated by the U.S. Senate Commerce Committee Supplemental Report (May 2010) and are the target of recently introduced legislation by Senator Jay Rockefeller (S3386). In the pages that follow, G2 offers suggestions of best practices for our acquirers to help identify and remove aggressive, deceptive, or questionable marketing practices from acquiring portfolios. When it comes to online ads and web based offers, the basic principles of advertising law apply: 1. Advertising must be truthful and not misleading; 2. Advertisers must have evidence to back up their claims (i.e. substantiation.); and 3. Advertisements cannot be unfair. G2 best practices for deceptive marketing merchants are grouped into several primary categories Offer Structure, Pricing, Marketing, Merchant Identity, and Contact Information / Customer Service. These are the key areas of concern around deceptive marketing sites. Please note: G2 strongly recommends that any acquirer with aggressive marketing merchants monitor merchant sites no less than daily for changes and new risks. Additionally, while we recommend acquirers utilize these and other best practices during due diligence, merchant boarding, and ongoing monitoring, these best practices constitute our recommendations and do not constitute a legal opinion.

2 Best Practices: Offer Structure: 1.0 Using the Word Free : The most common risk to acquirers is the use of Free Trials or Risk Free Trials. In both cases, the offer is structured to promote the suggestion that the consumer has nothing at risk. Best practices suggest: Any use of the word or implication of free must be without cost to the consumer Any costs to the consumer must be clearly and conspicuously identified Any trial periods must clearly state their length and conspicuously identify any additional costs to the consumer at the end of the trial 2.0 Trial Periods: Many deceptive marketing merchants who pose sales process organizational risk use a trial period of a product or service to attract consumer adoption of the product or service. Best practices suggest: Any trial period must be at least 10 days long All periods should not start until the product / service has been shipped to the consumer Any trial period must include a reasonable time period for the consumer to determine the efficacy of the product or service Any trial period must clearly disclose the length of the trial and the terms under which it is entered. 3.0 Continuity Offers: Often, deceptive marketing merchants offer a monthly subscription or ongoing continuity shipments / service access. Best practices suggest: Any continuity offers be clearly and conspicuously disclosed, including any terms and conditions that may have a financial impact on the consumer Continuity programs cannot include enrollment in other offers without explicit and positive consumer action 4.0 Negative Option Enrollment: A frequently abused offer structure is to include consumers in offers unless they remove their name or uncheck the box. Such programs lead to high chargebacks, fraud complaints, and may violate the law. Best practices suggest: No offers should include the negative option for consumers All offers should require a consumer to make a positive response to accept an offer 5.0 Cross Selling: In many cases, deceptive marketing merchants have caused problems by automatically signing up consumers for additional products or services without their explicit knowledge. This practice leads to high levels of chargebacks and can violate card scheme rules on data pass notifications. Best practices suggest: Merchants may not cross sell without explicit notification of the consumer, which must include a detailed description of product /service / terms and conditions All cross sell offers must be clearly and conspicuously presented and should not include a negative option Any time a cross sell includes the sharing of consumer data, PAN data, or other protected information with a party that is not the exact same merchant (and merchant account), the consumer should be prompted to positively re-enter their data including card number

3 Pricing 1.0 Consistency: The price (and terms) of any offers must be clearly stated and remain consistent throughout the webpage of the offering site. Best practices suggest that pricing is consistent on: The main site offer page The terms and conditions page The payment page All other locations on the site 2.0 Pricing Detail: The site must state the full product/service price on the home/main page of the site and should include: Any additional fees like shipping and handling or membership Full terms surrounding any trial periods Explicit identification of what the customer gets with a purchase (i.e. does the customer get a physical product, access to a list, a membership card, downloaded content, etc?) 3.0 Pricing Refund / Exchange / Returns: All merchant offers should include a clear and concise statement of policies and steps to obtain a refund, exchange, cancellation, or return. Best practices suggest: Any non-refundable fees be clearly stated Any return policies or procedures be clearly stated Any return or cancellation process be clearly stated and meet a reasonable standard of execution (it cannot be so complex as to create intentional confusion) Any contact numbers or methods listed in refund / exchange / cancellation policies be working and responsive to consumer inquiry Marketing 1.0 Marketing Claims: Many deceptive marketing merchants make wild or unsubstantiated claims about the efficacy of products and do not put reasonable disclaimers in plain view. Best practices suggest: All claims meet a standard of commercial reasonability and include scientific or other documentation as necessary (i.e. sites should not claim to cure cancer or facilitate the instant loss of 50 pounds) Any specific claims as to product usefulness must include a reference to supporting documentation If any advertised benefits are not typical or normal, these should be specifically disclaimed clearly and prominently If any part of the product is ingested or applied to the body in any way, the materials should either include the specific review documentation from the relevant U.S. Government agency (The FDA) or specifically state that these products have not been reviewed by the FDA. Marketing materials should not claim that any product treats, cures, or offers antidote for any disease or condition, unless that product has been specifically approved to do so by the FDA. Any product that is ingested or applied to the body should offer a specific disclaimer of use to cure or treat a disease or condition unless specifically approved by the FDA as noted.

4 2.0 Endorsements or Affiliations: Deceptive marketing merchants frequently use celebrity images, reference celebrity comments and / or reference trademarked entities to create a false impression of affiliation. Best practices suggest: Any celebrity images should only be shown when the merchant has specific written approval by the celebrity for use of the images in connection with an advertisement Any corporate images (trademarks, logos, or likenesses associated with branded companies) should only be included when specifically approved by the image owner for use in advertising 3.0 Testimonials: Deceptive marketing merchants can use false or misleading testimonials to create a false impression with consumers. Best practices suggest: Any testimonial presented by a merchant should include a record on file of the speaker s positive and explicit agreement that their words / comments be used in an advertising context All testimonial uses should be documented as actual product users who can be uniquely identified by the merchant through their records (those records should include date of purchase, date of testimonial, and written agreement to use testimonial onsite) No testimonials should include language that cannot be scientifically or reasonably supported by documentation (i.e. the speaker should not suggest that the product cured his cancer, etc.) Merchant Identity 1.0 Corporate Identification: It is imperative that all merchants clearly list their proper legal entity and / or DBA name on and throughout the merchant advertising site. Best practices suggest: Merchant corporate information should be identified clearly on the website Any corporate entity listed onsite should be consistently listed throughout the site If the owner of the website is different than the owner of the merchant, both parties should be listed and their relationship clearly defined A real world address and phone number (which may be a customer service number) should be provided for any entity listed on the website The address and contact information listed for a merchant onsite should match the merchant records held by the acquirer. Any discrepancies should be identified and investigated by the acquirer 2.0 Billing Descriptor: Deceptive marketing merchants will sometimes use multiple or vague billing descriptors in their descriptions to consumers. Card scheme rules require specific and direct notice to the consumer of how they will be billed. Best practices suggest: Clearly state a single, static billing descriptor before the customer makes a payment The billing descriptor must remain consistently listed throughout the website The billing descriptor should match the records on file with the acquirer and the data that is forwarded through interchange / the card networks in the clearing file

5 Customer Service / Contact Information 1.0 Customer Service Contacts: Deceptive marketing merchants use both in-house and third parties to manage their consumer relationships. Best practices suggest: Merchants should provide clear contact information, with instruction on how / when to contact the merchant All customer service phone numbers / addresses / s must be operational and in working order Customer service hours must reasonably fit standard business hours in the markets in which the products were sold (regardless of the location of the merchant) Hold times for any customer service lines should be no more than 1 minute on average Response times on any s should be no longer than one business day 2.0 Customer Service Security: If a merchant is providing in-house or third-party customer service, best practices suggest: All merchants and their customer service providers should be PCI compliant and provide such documentation to the acquirer Any third-party customer service providers should be clearly identified to the acquirer and the nature of their relationship to the merchant should be clearly disclosed G2 Web Services, LLC (G2) owns the intellectual property rights in the text, data sets, trademarks, HTML, source and/or object code, and other content (collectively the Content ) within this deliverable and or that is otherwise made available to you by G2. Permission is hereby granted to lawfully access and use the Content only within the limitations of service and/or non-disclosure agreement(s) with G2. You may not copy, reproduce, republish, upload, post, transmit, modify, resell or distribute in any manner, the Content, including text, data sets, trademarks, HTML, source and/or object code without the prior written permission of G2. Copyright 2010.