Editor's note: The story below originally ran May 14, 2010. See June 16, 2011, story: "FTC: BadCustomer.com a bad company, involved in $275 million scam ." Under orders from the Federal Trade Commission, the BadCustomer.com website has been shut down and its founders charged with running a massive criminal enterprise.
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Have you ever disputed a purchase you never made that appeared on your credit card statement? Then you could be one of more than 13.5 million shoppers on a blacklist that is raising alarm among consumer protection groups.
The customer database maintained by California-based BadCustomer.com spotlights shoppers who have sought to reverse a credit card charge, a process called "charge-backs" that retailers hate because it cuts into their profits.
Charge-backs protect consumers from having to pay for a purchase that never arrives, is defective or is not what they expected. If you've ever initiated a charge-back, however, you could land on the shopper-watch list BadCustomer.com makes available to 1,200 of the 1.6 million retailers in the United States. Ninety percent of BadCustomer's retailers are online.
Brien Heideman, BadCustomer.com's co-founder and vice president, says he opened BadCustomer.com in Santa Monica in July 2009 after seeing the problem firsthand as the owner of an online retail store. Heideman's firm was frequently hit by "friendly fraud" committed by dishonest shoppers trying to get out of paying for their purchases. In some cases, customers told their credit card company that they never received items ordered when they really had.
"Consumers have the Better Business Bureau to help them look at and get reports on companies," he explains, "but we retailers don't have a whole lot to help us look at customers."
Industrywide, the total number of charge-backs -- legitimate and fraudulent -- rose 37 percent between 2008 and 2009, and now likely exceeds $15 billion, according to estimates from payment processing firm Total Systems Services.
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How your name gets on the blacklist
Here's how the BadCustomer.com works: If a consumer trying to buy something online appears on the company's "no shop" list due to prior charge-backs, the retailer is notified and could choose to deny the person's credit card. Blacklisted customers may also be screened out of receiving sales solicitations and offers.
Retailers supply customers' names, mailing addresses and billing addresses to the database without a consumer's knowledge, so the first time people find out there's a problem is likely when a purchase is denied. That means shoppers placed on BadCustomer's list are unfairly branded guilty until proven otherwise, says Paul Stephens, director of policy research for Privacy Rights Clearinghouse, a consumer advocacy organization. "It seems to place the onus on the consumer to demonstrate, if they charged back a purchase, that they are innocent," Stephens says. "But the charge-back is a right under federal law."
Consumer rights vs. angry retailers
Under the federal Fair Credit Billing Act, shoppers can petition their bank to reverse charges on a credit card for several reasons, including if the charge is fraudulent or the item was not what the shopper originally ordered. Merchants must issue a credit to settle legitimate consumer claims. The card processing companies impose fines on retailers with charge-back ratios that are considered too high; some merchants may even lose their ability to accept certain credit cards if their charge-backs run out of control.
Initially, BadCustomer.com promised to remove shoppers who contested being in the database for a $99 fee -- an offer that drew fire from consumer groups and in the media. No customers were ever made to pay, Heideman says, and the controversy prompted him to rethink the service. Earlier this year, BadCustomer.com dropped the fee.
Now the company highlights its free mediation service where representatives from BadCustomer.com help consumers iron out the billing disputes that landed them on the blacklist in the first place. Uncooperative retailers are barred from accessing the database, Heideman says.
Customers may get details about why they ended up on the list, after verifying their identity by supplying answers online to questions associated with the credit card, according to BadCustomer.com's website.
Stephens, of Privacy Rights Clearinghouse, says his group has not received any complaints about BadCustomer.com. Heideman says the U.S. Federal Trade Commission and credit reporting agencies that he declined to name have asked for details about the company's operations. If those groups had found negative issues, according to Heideman, "we would have been shut down by now."
"As far as getting off the list, if you call and talk with our dispute department, we take care of it. That is the only way," Heideman says. He added that being on the list alerts merchants that you're someone to watch due to past charge-backs, but they may still chose to accept your credit card and complete the sale.
Consumer groups wary of service
In January, BadCustomer.com also started a new line of business. Now the company charges retailers a fee to process shoppers' checks and guarantees to cover any checks returned for insufficient funds. Income from that service is keeping BadCustomer.com profitable, Heideman said.
Some consumer watchdogs don't think one company should play the dual roles of advocate and enforcer. "First, I create the problem, and then I offer to fix it for you? What's wrong with that?" said Gail Hillebrand, staff attorney at Consumers Union.
Other consumer groups also fear that information submitted to BadCustomer.com by retailers could be out of date or incorrect.
In testimony before the FTC late last year, Pam Dixon, executive director of World Privacy Forum research group, questioned whether identity theft victims -- people who often must dispute fraudulent credit charges -- could end up in the database. Dixon called BadCustomer.com's consumer profiling part of a troubling broader issue of consumer data collection that is "out of control."
Also in question is how long BadCustomer.com retains the database information that its retailer partners provide. Heideman says he has not determined how long details will be kept. He stated that a policy is coming "down the road."
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