Wednesday, December 25, 2013

Negative Option - what it is, and why it is dangerous

Negative Option deals can turn into scams, if the merchant is not trustworthy.

I have written several times before about "Negative Option" deals and why they are generally a bad idea.  But I realized I have not written a dedicated posting about Negative Option, what it is, how it works, and how scammers use it to steal money from people.

Negative Option is a term used to describe payment plans and subscription services, where a merchant or organization (bank, lender, etc.) debits your checking account or charges your credit card, periodically (monthly, usually) until you say "Stop".   In other words, the charges go on and on until you say no.

If you have a pulse in live in North America, chances are, you are signed up for one or more negative option deals.   And if they are with reliable merchants and businesses, you have little to worry about.   Chances are, you may be signed up in a Negative Option deal with your utility company, your mortgage holder, your phone company, cell phone provider, cable television provider, car loan company, or the like.   Every month, their bills come due, and every month, they automatically charge your credit card or debit your checking account.   It's no big deal, right?

Well, first understand the difference between negative option to your checking account and your credit card account.   When you hand over the account number and routing number of your checking account to a merchant, and authorize them to charge your account, you are authorizing them to make a demand draft which when automated, is called an ACH debit.

A demand draft is basically a check, and the concept goes back for ages.   In the olden days, a merchant could go to your bank and submit a demand draft for money, without your signature on the check.   The demand has to be legitimate, of course.   But it comes as a big surprise to many that a third party can just waltz into a bank and take money out of your account, provided they know your name, account number, and routing number.

So, when you give the mortgage company your checking account number and routing number and authorize them to deduct the mortgage payment from your account, you are handing them a lot of authority over your finances - and trusting them with the family jewels.

And it can go wrong - even in legitimate situations.  I recounted the story where I had a mortgage through Key Bank, and they sent me a letter suggesting I sign up for automatic payment by ACH debit (demand draft) which I thought was a swell idea.   I set it up with Riggs Bank (a real nasty bank, by the way) and everything was fine.   But like most mortgages, it was sold to another bank, and since Key Bank was doing an ACH debit on my account, they took out the money for the month of February, but did not forward the money to the new lender in time.  The new lender, meanwhile, was dunning me for the mortgage payment, and putting a "late payment" on my credit history (which really kills your credit score).  It took months to straighten out, and it wasn't until years later that I realized my credit score was affected.  A simple phone call to the bank straightened that out, however.

Since then, I am told by lenders that they do not report late payments when a loan is transferred, for at least a month, if not two months, as they realize that checks can be sent to the previous lender, or that ACH debits may take months to catch up to the new lender.

But it does illustrate how even a "legitimate" ACH debit can go awry.

Negative option with a credit card is a similar scenario, only instead of debiting your checking account, they charge your credit card.  A provider of online services, for example, will charge your credit card monthly, or annually, for online e-mail or whatever, unless you explicitly say "no more" and tell them to stop.

Are negative option deals a bad thing?   Well, not necessarily, if the merchant is trustworthy.   Regardless of whether it is an ACH debit or a Credit card you are using, you have to trust the merchant involved, not to mess up your accounts.   And if the merchant is basically a scam artist, well, they will mess up your accounts.

How does the scam work?    Like this:

1.  The scam artist offers you a service online, such as premium membership on a website, or even internet service, e-mail or whatever.   Or it could be a subscription service or magazine.

2.  The merchant requires a credit card for negative option billing, telling you that you can "cancel at any time!"

3. You sign up for the service and use it for a while.  Eventually you decide you no longer want to use the service and try to cancel.

4.  You go to the merchant's website to cancel and find that you are required to CALL to cancel.  Or, they have a link to cancel that does not work, or when you fill it out, they claim not to have received your submission.

5. You call and try to cancel.  They send you to a "cancellation specialist" who tries to convince you not to cancel the service - often browbeating you in the process.   They finally concede and say they will cancel your service.

6.  You get a bill next month for the service.  You call again, and they claim never to have received notice of cancellation.   This can go on for months, even after you have sent them registered letters.

7.  In some instances the charges eventually stop, but only after months of excess charges, which are never refunded.  In some instances, the charges stop - but mysteriously re-start after a few months.   In other instances, the only way to get them to stop is to cancel your credit card and get a  new one.

In every case, the fraudulent merchant says "mea culpa!  Our computer broke down!  So sorry!"  And this is how they get away with it.  If someone really pushes the matter - by calling the Attorney General, or suing them in court, the merchant will claim that (a) they never received the earlier cancellation notices by phone, e-mail, or online, and (b) their computers "went haywire" and an innocent mistake was made.

And from an evidentiary point of view, you can't prove them wrong.   And for a $13.95 a month charge, chances are, you aren't going to court anyway.

Moreover, there are a number of people in this country (I used to be one of them) who never check their bank statements or credit card statements carefully and thus never figure out they are still being charged, until months after the fact.   Many of these people end up paying for service fees until their credit cards expire (the merchant can't charge unless he knows the expiration date of your new card - but they can always guess at that, too!).

In other words, for a con artist, this scheme works well, as you can claim you are doing nothing illegal and also rake in a ton of dough.   A few bucks here and there really add up, over time.

Yes, you can call your credit card company and try to dispute the charges.  Guess what?  The merchant will dispute your dispute - and claim they never received your cancellation notice.  Who is the credit card company going to believe -the merchant who charges millions of dollars a month on their cards (and generates a 2-5% fee for them with every charge?) or you, Mr. Schmuck who can only "take his business elsewhere!"

And even "legitimate" companies do this - when they start hitting the skids.   Middle managers, pushed to keep retention rates high, will simply tear up cancellation requests, to boost their own personal numbers.  It is a system that encourages fraud.

In a way, it is like magazine and newspaper subscriptions.  When I lived in an apartment in Fairfax County, Virginia, I started receiving the County newspaper at my door (as did all my neighbors).  At first, I thought this was a free promotion.  But then a bill came in the mail.   I called the publisher and found out that they had hired kids to go door-to-door to sign up people for subscriptions.  The kids were paid based on how many people they signed up.   So more than one clever kid figured out that if you just wrote down the names and addresses of all the people in the apartment building, you could game the system, make a ton of dough, and walk away before it all blows up.

In other instances, however, I am not so sure that Negative Option abuses are accidental.  Some companies appear to plan these gags as a means of making money.

What sort of companies are abusing Negative Option?

Well, the grandaddy of them all was AOL, just as it started losing subscribers by the thousands, tens of thousands, and then millions.   The internet back then was rife with complaints by people who claimed that AOL continued to bill them, even after they called several times to cancel.  And of course AOL claimed innocent error in the matter.

But if you go online today, you will see complaints from others regarding Negative Option difficulties.  Angie's List is one of them.  People allege that they sign up for Angie's list and then try to cancel with little success.

Webshots apparently took this whole idea to a new level by re-instating their website (which was converted to something called "Smile!" earlier) and then digging up the names of their old subscribers from previous years and then charging the $2.99 premium membership fee.   Many people assumed that since the site went dark, they did not need to cancel their membership.   Apparently not....

Should you avoid all negative option deals?  Of course not!   But limit them to legitimate merchants, such as your utility company, mortgage company, and the like - and not for some fly-by-night Internet website operator.

How do you tell if a Negative Option deal is going to be raw?  There are a number of ways:

1.  Is the service for something as dubious as a "premium membership" on a website or some other unnecessary expense in your life?  If so, just walk away.

2.  Do they offer "30 days free trial!  Cancel at any time!"?  If so, it probably is a con-job.   You may eventually get them to cancel - but long after the 30-day period.  They will get you.  Remember that FREE ISN'T and whenever someone dangles out "FREE" in your face, you should run away as fast as possible.

3.  Is the Merchant a nationally recognized "legitimate" company?  This is not always indicative, as companies such as AOL and wireless companies (and cable companies) have all been accused of using this gag.

The main things to ask are this:  Is this service or subscription really necessary?   Do I trust the parties involved?  Is it worth the hassle of getting something for "free" to have to jump through hoops?

Chances are, unless it is something major in your life, like a mortgage payment or utility bill, the answer is "Hell No!"
And in this era of online bill payments, you could argue that using negative option for anything is really unnecessary.