Facebook’s 'friendly fraud’: What to know about the latest controversy

 MANILA, Philippines – Early into the year, Facebook faces its next big controversy: the unsealing of internal documents on its strategies to profit from videogames on Facebook.

The documents were unsealed on January 14, revealing, yet again, questionable ethics on the way the company conducts business. The documents are being used as evidence in a class-action lawsuit that accuses Facebook of allowing an environment on its platform where children are cleverly led to make in-game purchases using their parents’ credit cards.

Categorically, the company has an actual name for this: “friendly fraud.” As reported by Reveal News, the website of The Center for Investigative Reporting, the company appears to encourage game makers and its own employees to engage in it as it helps revenues.

Below are a summary of the facts, taken from Reveal News. Reveal News is part of the lawsuit, having intervened beginning last year.

Facebook knew what was happening

Facebook knew that children had been unwittingly spending loads of money on in-game items.

Employees knew it, and even devised a way to help the children avoid accidental spending, but according to the report, Facebook didn’t implement any such measures because it was focused on revenues.

Facebook also knew that parents didn’t know that their children would be able to buy something without their authorization. A Facebook employee wrote about Angry Birds for example: “In nearly all cases the parent knew their child was playing Angry Birds, but didn’t think the child would be allowed to buy anything without their password or authorization first (Like in iOS)."

“The average age of those playing Angry Birds was 5 years old, according to Facebook’s analysis,” said Reveal.

The employee then said, “If we were to build risk models to reduce it, we would most likely block good TPV.”

“TPV is total purchase value, also called revenue,” said Reveal, adding that this attitude is “a common theme throughout the unsealed documents.”

What are the damages?

One of the biggest cases involved purchases totaling $6,500 after two weeks of playing. In a 3-month period from October 2010 to January 2011, children reportedly spent $3.6 million on the games. About 9% of that or $324,000 were being asked to be refunded.

Some of the games notorious for duping the children are Angry Birds, PetVille, Happy Aquarium, Wild Ones, Barn Buddy and Ninja Saga.

When a parent would complain and try to ask for a refund, citing that their child had not known that they were spending real money, Facebook’s first action, often, is to deny the request.

One document even revealed that Facebook was thinking of implementing a program that would automatically dispute chargeback requests. Chargeback requests are made by the credit card company, when a user complains to them after initial refund requests are denied by a vendor.

High chargeback rates a red flag

Games on Facebook were getting chargeback rates of 9%. According to Reveal sources, the average chargeback rate is 0.5%; 1% is considered high; and 2%, according to the US Federal Trade Commission, is a “red flag” indicative of a “deceptive” business.

Reveal illustrated how parents and kids can sometimes be deceived: “As he played, he occasionally clicked on a corner of the screen that gave him more abilities, such as magical items, or new ninja attacks for his character. It didn’t ask if he wanted to pay for it, or let him know that his mom’s credit card was being charged. ‘There was no indication he was spending money,’ [Glynnis] Bohannon said. ‘So, 20 minutes later, I rechecked my credit card statement online. And sure enough, there was another $19.99 charge from Facebook.’”

Bohannon was the first to file a lawsuit in 2012 against Facebook regarding these practices, before it became a class-action suit starting in 2014.

Children as 'whales'

In the documents, big-spending children were called “whales,” a term “borrowed from the casino industry to describe profligate spenders,” said Reveal.

The children typically didn’t know that they’d been spending real money until the credit card bill arrived. The big problem was that Facebook kept credit card details logged in, requiring no authorization for every purchase. Reveal notes that other tech companies such as Apple used some form of authorization when making a purchase.

At one point, Facebook had the opportunity to implement such a measure. Tara Stewart, leading an internal team trying to address the problem, put in a measure that required buyers to put in the first 6 digits of the credit card. The method worked according to the documents, reducing the disputes and chargebacks considerably.

But Reveal says the method would also most likely reduced revenues, so Facebook decided not to implement it and opted instead to let children keep spending unwittingly.

The friendly fraud memo

In spite of its knowledge of what was happening – that parents clearly do not want these purchases and that they were dealing with children who don’t know any better – Facebook appears that it actually wanted it to continue, according to the documents.

So they sent out a memo “Friendly Fraud – what it is, why it’s challenging, and why you shouldn’t try to block it.”

The memo communicated several things:

Facebook has also issued a statement to Reveal saying that they "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 unsealed documents number at around 135 pages, coming from 2010 to 2014. The lawsuit is ongoing. – Rappler.com

Gelo Gonzales

Gelo Gonzales is Rappler’s technology editor. He covers consumer electronics, social media, emerging tech, and video games.