War on 'cramming' makes progress

Here's great news, if you've ever been victimized by telephone cramming, the placement of unauthorized charges on your phone bill. A stepped-up war on cramming by government investigators, phone companies, and savvy consumers appears to be making progress.

But indications of this gain come from an unexpected source: the financial filings of a Bermuda corporation that controls more than 85 percent of the U.S. bill-it-to-your-phone industry.

First, a quick primer: Cramming might occur when small fees are placed on your bill by "aggregators," which are middlemen between your local phone company and "third-party billers"—companies that sell such services as voice mail, collect calls, Web hosting, e-books, software downloads, online games, donations, and subscriptions.

Third-party billers send their charges to aggregators, who compile and send the charges on to the various phone companies, who then add them to their customers' bills. In most cases, such charges are legitimate, but if you didn't order the service, the charges could violate federal law as unfair and deceptive billing practices.

Billing Services Group Limited (BSG) is an aggregator that says it "invented" the bill-it-to-your-phone industry, and now controls more than 85 percent of the aggregation market in the U.S., according to the Federal Trade Commission. Recently, its profits have suffered, because of a rising war on cramming. According to BSG's 2010 year-end financial report to shareholders, profits plummeted 60 percent to just $6.6 million, thanks in large part to restrictions by phone companies, specifically AT&T, designed to prevent cramming.

A BSG spokeswoman, Leslie Komet Ausburn, wouldn't provide details, but AT&T issued a general statement about its restrictions, without referring to any specific companies. "AT&T has taken several steps to reduce cramming complaints, including limiting the billing of certain services and the prohibition of any billing by certain billing providers," said Michael Bennett, an AT&T spokesman.
Among the tighter strictures, AT&T has put in place:

• Authorization requirements on all transactions, with tougher standards for Internet transactions, including a "double opt-in" process, in which the customer must confirm each purchase and its price twice.


• Consumer access to live help with complaints through "800" numbers, as well as self-help via the Internet.


• Annual audits of all third-party billing "clearinghouses" (which would include BSG).


• Restrictions on how bill-to-your-phone services can be marketed and promoted.


• Maximum monthly cramming complaint thresholds. (So be sure you complain when you have a problem.)

AT&T says that "substantially less than 0.5 percent" of all bills that include any third-party charges result in cramming complaints and that the frequency of complaints has declined significantly. Of course, one reason cramming is a problem is because many consumers never notice the small charges and thus never complain about it.

Nevertheless, AT&T's tighter restrictions seem to be paying off. "Since the beginning of 2010, AT&T has reduced cramming complaints received by our customer service representatives by more than two-thirds," Bennett says.

BSG also blamed sagging profits on three other factors: an expanding cramming investigation by the U.S. Senate Committee on Commerce; the "ongoing negative perception" of consumers and phone companies toward "enhanced service" billing, which typically involve higher complaint rates; and a reduction in "complaint fees."

"It was a difficult year," Pat Heneghan, BSG's non-executive chairman, lamented in a press release announcing the company's 2010 results.

When we asked Ausburn to explain what "complaint fees" are, we couldn't get an answer, so we asked Bob Schoshinski, a staff attorney at the Federal Trade Commission, which settled charges against BSG in 2008 related to its placing more than $30 million in bogus collect call charges on consumer phone bills on behalf of co-defendant Nationwide Connections. (Although BSG paid $1.9 million in consumer redress to settle that case primarily against Nationwide Connections, BSG admitted no wrongdoing and agreed to adopt practices intended to thwart third-party crammers.)

"We've been told that in many instances the phone companies charge aggregators for any complaints they receive about cramming," explained Schoshinski. "The aggregators then charge their merchants a complaint fee."

In the first six months of 2010, the greater number of consumer complaints resulted in more revenues for BSG. "In the short-run, this situation has worked to our benefit. In the first half of 2010, billable customer service revenue for enhanced transactions was $4.1 million higher than in the first half of 2009. This increase was entirely related to complaint fees charged by the local exchange carriers that we, in turn, charged to the respective customer [BSG client third-party biller company] providing enhanced services," the company reported in its 2010 six-month financial statement to investors.

That dollar stream dried up in the second half of 2010, as cramming was apparently choked off by AT&T, Senate investigators, and fed-up phone company customers. BSG management forecasts that revenue from complaint fees will continue to be "down significantly" in 2011.

Tough luck for BSG, but good news for consumers.

—Jeff Blyskal