Consumer Disclosure: Next Step for Phone CardMarketers

Posted: 03/2000

Consumer Disclosure: Next Step for Phone Card
Marketers
By Howard Segermark

Consulting firm ATLANTIC-ACM (www.atlantic-acm.com)
predicts that in 2000, approximately $5 billion worth of phone cards will be sold in the
United States alone. That’s practically one-half billion cards. The industry is fairly
crowded. And, although there have been numerous consolidations, many companies still are
getting into the business because of the ease of doing so. Thus, profit margins are razor
thin and competition is intense.

Much like the highly contested home business and long-distance postpaid markets, phone
card issuers are trying to innovate by offering to the consumer alternative ways of buying
their service. For several years, we have seen cards offering low per-minute rates in
exchange for a periodic or per-call surcharge. More recently, the per-minute rates have
plunged while the surcharges have multiplied.

Therein lies the rub. When does a multiplicity of surcharges cease to be innovative
packaging and begin to be a deceptive trade practice?

One response to that question is this: Don’t worry about cards that are confusing.
Worry about cards that are not providing service. There are still a number of those
around.

Factually, this is true: There are phone card companies that no longer provide service,
in turn, hurting both creditors and consumers. Nevertheless, at least two state attorneys
general–in New Mexico and Colorado–have opened investigations into deceptive phone
cards. The Federal Trade Commission (FTC, www.ftc.gov)
already has acted against one phone card company for an allegedly deceptive website.

The FTC and the FCC (www.fcc.gov) held in November a
joint meeting on "Advertising and Marketing of Dial-Around and Other Long Distance
Services to Consumers." The prepaid card industry association, International Telecard
Assoc-iation (ITA, www.telecard.org) attended.
Though prepaid phone cards were not specified on the agenda, the meeting quickly
evolved into a phone-card bashing session. (One representative of another majortelecom
trade association saw an opportunity to take attention away from his group by recommending
federal regulation of phone cards.)

New Mexico Assistant Attorney and Director of the Consumer Protection Division Robert
Reyna was quoted as saying (erroneously) that there were "no government
regulations" on phone cards. I have contacted him and offered the ITA’s cooperation
on this issue. In subsequent conversation with Reyna, it is clear he is concerned yet he
is looking to the industry to formulate its own guidelines on disclosure.

A Denver television station in November aired an exposi on a phone card issuer who
admitted the disclosure information on his cards was not true. The Colorado Deputy
Attorney General for Consumer Protection Garth Lucero promised to investigate such
practices. The ITA has been in touch with his office to assist and offer expertise in this
matter.

What are the bases for such accusations of deceptive practices?

According to the FTC’s "Policy Statement on Deception," there exists
deception "if there is a representation, omission or practice that is likely to
mislead the consumer acting reasonably in the circumstances, to the consumer’s
detriment."

Another relevant statement by the FTC regarding pricing is as follows: "Depending
on the circumstances, accurate information in the text may not remedy a false headline
because reasonable consumers may glance only at the headline. Written disclosures or fine
print may be insufficient to correct misleading representations."

The FTC concludes: "The Commission will find an act or practice deceptive if there
is a misrepresentation, omission, or other practice that misleads the consumer acting
reasonably in the circumstances, to the consumer’s detriment."

These excerpts constitute an invitation for a great deal of action and it is fair to
note that individual state deceptive practice laws follow closely the FTC’s rules. So,
what can the industry do? In response to this problem, ITA has delegated its Standards
Committee to develop new "Industry Guidelines" on consumer disclosure. This will
call for the first major revision in the association’s guidelines in more than four years.

The importance of this is the ITA Industry Guidelines have formed the basis for every
regulatory regime for phone cards that has been adopted over the past four years. Thus, it
is likely any new ITA guidelines concerning consumer disclosure will be seriously
considered by those who write the laws and draft the regulations on phone cards.

With that in mind, the ITA has asked for the input of the regulators prior to the
development of these new standards. In addition, groups, such as Consumer Action (www.consumer-action.org), have been asked also
for their contribution in this matter.

The scope of the survey administered by the ITA Standards Committee is very wide
reaching, covering such topics as whether the number of surcharges should be capped, what
information should be on the face of a vending machine and how a customer should be
informed of the rates for international calls.

In supporting revision of the industry guidelines, Gary Frank, ITA Chairman of the
Board and President/CEO of VoCall Communications (www.vocall.com),
has said, "It isn’t that the ITA wants to regulate how people market their product,
but it is far better for the ITA to develop fair and reasonable standards that we can all
live with."

The unfortunate hazard, of course, is unless the industry acts to propose reasonable
standards, harsh regulations might be imposed. Extreme rules might levy such a cost on the
legitimate phone card issuer, that he cannot profitably market cards in a given state.
Concomitantly, regulations may impose great costs on the legitimate issuer, thus allowing
the unscrupulous issuer to ignore the rules and undersell the legitimate cards.

Though there is great interest in other states, California may be the first to pursue
card issuers based on poor or misleading information. Laws that went into effect last year
will have teeth put into them by five new enforcement agents hired recently by the
California PUC (CPUC). The ITA took a group of industry leaders to San Francisco on Jan.
27 to meet with these regulators to discuss the issues facing the industry and exchange
ideas. The meeting was a productive one and ended with a commitment to maintain an open
and ongoing communication. The next six months or so will be important to watch, as cases
are brought to the fore and heat is put on particular companies that do not conform with
California’s rules.

Even though the California rules do not cover all the innovative ways of packaging
prepaid long-distance service, I believe other states will be watching the CPUC’s
enforcement actions very closely. This issue is of too great an importance not to grab the
attention of both regulators and enforcement officials nationwide. It is too important
also not to pique the interest of legitimate phone card issuers who are less and less
tolerant of scofflaw and/or rip-off phone card issuers.

There is also a major subissue when we talk about regulation and equal enforcement of
the laws, and this is taxes, including both the FCC tax and universal service fees. In
discussing this issue in public fora, I often have noted that the federal government did
not catch Al Capone on bootlegging charges. It got him instead on his failure to pay
taxes. Though the reasoning of revenuers is beyond mortal man, one may speculate that the
smoke generated from a phone card company being fined by a regulatory agency might find
its way to the nostrils of a tax agent. In fact, in hearings before the Senate Finance
Committee last year, IRS audit agents testified they were more likely to audit a company
when it was in the news. Just one more reason to walk the straight and narrow.

Howard Segermark is the executive director of the International Telecard Association
(ITA), a Washington-based trade group. He can be reached at +1 800 958 7824. The ITA
Standards Committee Survey may be accessed on the association’s website at www.telecard.org.

ROUNDTABLE

On local exchange competition …"I just want to say to all the
competitors, ‘Thank you for not leaving us to the mercy of the local phone companies.’ I
for one will advocate competition."

–Representative Thomas Bliley Jr., R-Va.

"In almost every sector, new industries have sprouted, and competition is driving
down rates, spurring innovations, bringing consumers more choices, better services. If
anyone tells you that this [1996 Telecom] act is not working, I hope you will set them
straight."

–William E. Kennard, chairman, FCC

"To me, competition means free and open markets. For instance, free and open
access to the facilities we [the competitors] need to be able to offer our services. But
transitioning from a monopolistic to a competitive marketplace is difficult in many
aspects. However, we can’t be premature about it, we can’t let down our guard, and we have
to remember that it just takes a while."

–Randall B. Lowe, executive vice president
and chief legal officer, Prism Communication Services Inc.