U.S. regulators should just ban premium SMS products outright

by tech on July 3, 2014

T-Mobile is hot water with both the U.S. Federal Trade Commission and the Federal Communications Commission for cramming practices, which allow scammers to attach unwanted charges onto consumers’ mobile bills. It just goes to show that the mechanism underlying such fraud should have been chucked a long time ago.

Premium SMS, as it is called, was developed in an age before the app store and the smartphone, when marketers wanted to sell you wallpapers, ringtones, Java apps or reality TV votes but needed a way to bill you. The answer was to package up your purchase in an SMS transaction and charge it to your carrier bill at a “premium” rate over your typical text message.

Obviously, the modern app store is how we buy much of our content and services these days and it has proliferated beyond the smartphone and postpaid plan to feature phones and prepaid services. Premium SMS is a throwback. Consequently most legitimate services have abandoned it, and it’s become fertile ground for the kinds of text spammers and scammers that are raising the ire of consumers and regulators. The common scam is to trick consumers into authorizing SMS subscription services like horoscopes, burying charges deep within their carrier bills.

An example of a premium SMS charge on a T-Mobile bill (Source: FTC)

An example of a premium SMS charge on a T-Mobile bill (Source: FTC)

Last year, the carriers finally got wise to the problem. AT&T, Sprint and T-Mobile came to an agreement with 45 states to stop billing for premium SMS, and Verizon said it had begun phasing out premium SMS charges as well. They also agreed they would work with their customers and regulators to recover money lost due to such SMS scams.

But as the FTC’s complaint against T-Mobile points out, carriers aren’t the ancillary victims they claim to be. They take a hefty cut of every premium SMS transaction sent their way and therefore have conflicting motives when it comes to cracking down on offenders. According to the FTC, T-Mobile kept charging customers for these SMS services for years after learning they were fraudulent (T-Mobile said the accusations are unfounded).

It seems there’s an easy solution here: just ban these kinds of SMS billing arrangements entirely. The conflict of interest the carriers face goes away, and given the datedness of premium SMS, no one is going to miss it except for scammers.

If there is going to be an exception to that rule, it should be charitable giving. In the last half-decade, SMS donations have had a big impact on donations to non-profits and humanitarian organizations, especially those that respond immediately to global disasters like the Haiti earthquake of 2010. Not only do they get funds to these relief groups quickly (carriers in the past were slow to deliver funds, but they’ve since accelerated payouts for emergencies), but it also allows them to collect micro-donations from millions of people that wouldn’t normally typically be donors.

Making charities an exception wouldn’t be difficult. For the most part, SMS donations are handled by two organizations: Mobile Accord and the Mobile Giving Foundation. It’s a lot easier for a carrier or regulators to police two organizations with good reputations than thousands of individual scammers.

Related research and analysis from Gigaom Research:
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