Facebook Exceeded FTC Legal Rates with Friendly Fraud Policy

Facebook Friendly Fraud Lawsuit - Reveal Sues Facebook

According to the reports, Facebook staffers devised a fix in 2011, but executives rejected the fixes in order to maximize profits on gaming apps.

According to internal memos disclosed through a Reveal News lawsuit, as early as 2011 Facebook supported “Friendly Fraud”, a Facebook term used to describe users accidentally spending money on games. Due to the level of Friendly Fraud committed, Facebook might have violated the law when it allowed such practices.

Facebook’s term “Friendly Fraud” may sound harmless. However, “Friendly Fraud” happens when an app deceptively convinces a mobile user to spend money without meaning to.

To a certain extent, Facebook’s revenue relies on it. While Facebook receives its massive revenue streams from a variety of sources, one of those sources is allowing unknowing spenders to waste their money, usually in games they play on Facebook. Because of the hidden costs, some never even realize they are spending money at all – or at least until it’s too late.

The Federal Trade Commission (FTC) has laws which limit the amount of money which a company can allow to be spent through Friendly Fraud. In one case, the chargeback rates were 9%, which is four-and-a-half times the legal rate of 2% set by the Federal Trade Commission.

Friendly Fraud and Big Spenders

For many games it is often hard to tell. And though for adults, they can state the fact that, you are an adult, pay more attention. But the problem is, is that their big spenders are kids. Underage children end up spending thousands of their parent’s money on games without even realizing it.

Many children with Facebook accounts do not know their account is connected to their parent’s credit card or bank account. This is not a recent phenomenon. Like the policy where Facebook sold users’ private information to third-party companies without telling their users they were doing so, the policy goes back at least 8 years.

“Friendly Fraud: Why You Shouldn’t Try to Block It”

In 2011, Facebook employees received a memo to help them to better educate game developers on the company’s fraud practices. One of the topics at hand read: “Friendly Fraud – what it is, why it’s challenging, and why you shouldn’t try to block it.

In telling their employees to ignore Friendly Fraud, Facebook ignored the fact thousands of customers were wasting money. In some cases, parents lost thousands on gaming apps with no help from Facebook.

Even when complaints came, the company continued to look the other way because despite the chargebacks from credit card companies or the many angry parents calling in to resolve the problem. Friendly Fraud became a cottage industry, so if Facebook fixed the issue, they would have to take a drastic financial lose.

Gizmodo on FB’s Friendly Fraud

Concern for shareholders outweighed concerns about the public interest. Tech website Gizmodo wrote, “Facebook was aware that underage children routinely used their parents’ payment information to spend large sums of money on in-game purchases, and the company chose not to fix the problem. For years, it allowed for what it called ‘friendly fraud’ because it feared implementing protections would harm revenue, according to the documents.”

According to some unsealed court documents (dating between 2010 and 2014) that were used in an investigation report done by Reveal, Facebook has demonstrated a pattern of fraudulent behavior.

Reveal’s report said, “The documents come from 2010-2014 and demonstrate that Facebook was well aware that kids were playing simple games like Angry Birds and purchasing virtual items without their parents’ knowledge.”

Over the years, children were spending so much of their parent’s money that the chargeback rates for Facebook games hit a shocking high of 9%. That is 18 times that the average normally would be for a business and 4.5 times the amount considered ethical by the FTC. The Federal Trade Commission consider the red flag threshold for a deceptive business to be 2%.

Shareholders over the Public Interest

What really takes this issue over the top is the fact that not only has Facebook knowingly continued to scam children, they have turned away any ideas of trying to fix it. In fact, social media companies and tech companies have used the prevalence of Friendly Fraud to justify inaction.

With so much online access, Facebook sees itself in competition with other rivals. Apple and Google each have had similar issues, though both of those companies fixed the problem by implementing basic checks on in-game spending. In both cases, the verification process requires kids to enter in a password or credit card info before any purchase.

According to Reveal’s report, employees of Facebook attempted to find a solution. One of the being an internal Facebook team, led by Tara Stewart, back in 2011. Reveal reported, “She [Stewart] and her colleagues began working on a solution to curb children from spending money without their parents’ permission.”

Facebook’s Proposed Fix

The article from Reveal stated, “An internal Facebook survey of users found that many parents did not even realize Facebook was storing their credit card information, according to an unsealed document. And parents also did not know their children could use their credit card without re-entering a password or some other form of verification.”

“Perhaps even worse, the children didn’t even realize they were spending real money within the game. It [the money] doesn’t necessarily look like ‘real’ money to a minor.”

As a test, Stewart and her colleagues tried requiring children to re-enter the first six credit card numbers on certain games before they could spend money. Stewart called it a “good first step.”

The system worked, according to the unsealed documents. It lowered the number of refund and chargeback requests from children.”

Facebook Execs Rejected Fix

However, though the plan seemed foolproof, Facebook decided against a fix for the problem because it would hurt the company’s revenue stream, which might in turn have hurt Facebook’s stock price. Instead, Facebook executives started to use terms from the gambling industry to refer to underage gamers the social media site was fooling into spending cash.

Facebook referred to children who unwittingly spent a lot of their parents’ money as “whales“, which in the gambling world are mega spenders. Only five years later (2016) did the company take a step to curb children away. Five years of neglect allowed Facebook to collect hundreds of millions of dollars from unwitting victims.

Fixed Problem 5 Years Later

When the news came out that people had lost massive amounts of cash through Facebook apps, the company did not offer refunds. Instead, Facebook offered ‘free’ in-game items as a way of buying out angry customers. These virtual goods cost the company and developers nothing.

Meanwhile, the company put no extra steps in place to prevent friendly fraud and when it did happen, gave angry parents virtual freebees. When confronted with the Reveal story, Facebook said in a statement, “We routinely examine our own practices and in 2016 agreed to update our terms and provide dedicated resources for refund requests related to purchased made by minors on Facebook.”

The report shares several stories from families that were affected by Facebook’s neglect, including the lawsuit that brought all the documents to the surface. It is quite surprising that, after so many years of neglect, Facebook did not see a lawsuit sooner. Friendly Fraud could lead to a series of similar lawsuits or the kind of regulations that social media companies have dreaded for years.