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Why was a scam company able to raise $76 Million Series B?
660 points by wenxun 652 days ago | comments
I just stumbled upon this piece on Business Insider "JustFab Raises $76 Million To Create The H&M Fashion Brand Of The Web". http://www.businessinsider.com/justfab-raises-76-million-to-create-the-hm-fashion-brand-of-the-web-2012-7

It kept me wonder why a company with very questionable (I will try to avoid using the word "fraudulent") business model was able to raise big money. Didn't the VCs have to do the due diligence?

I didn't have any direct experience with JustFab. The victim was my girlfriend. Back in January or so, one of her friends emailed her a link to JustFab, then she bought a pair of shoes from www.justfab.com and never visit the website again. Only 8 months later, in early September she was appalled to find out that her credit card has been charged a $39.95 fee for the last eight months. Yes, $39.95 for 8 months, without geting anything from JustFab.

I then did a bit research on the internet. It turned out my girlfriend wasn't the only victim. Apparently JustFab works like this: once you buy something from their website, you become their "VIP member". Then you will have to log into their website between the 1st-5th of each month and click “Skip This Month”. If no action is taken (either skip this month, or cancel your account), they just charge you a $39.95 fee every month.

According to the Business insider article, JustFab "will generate about $100 million this year" in sales, I wonder how much of this $100 million are from people like my girlfriend who simply didn't read their entire 2,500 words Terms of Service and were unaware that they were charged $39.95 a month for nothing.

p.s. After JustFab CSR refused to refund, I decide to post this story again, hoping it will get upvoted to the frontpage of HN so that more people get to know what is really going on behind JustFab

pps. Anyone could just simply google "justfab scam" to see how many others have been victimized. It's outrageous such large scale scam got unnoticed.



reitzensteinm 652 days ago | link

So I went through their checkout process, and up until the credit card stage there is zero indication that it's a membership site (I read everything on every page).

I've uploaded the credit card section here:

http://i.imgur.com/3di93.png

It says you'll be billed month per month on the right hand side under the VIP membership program, but I think it's pretty clear that the page is engineered to be misleading. It looks like a standard upsell, not a mandatory part of the purchase.

They're relying on people clicking the accept terms and conditions check box without realizing that it's signing them up for the membership, i.e. it's the terms and conditions of the program, not the site in general.

Terms and conditions boxes are common in the checkout process and nobody gives them a second thought. I'm not sure I would have caught this one if I went in naively.

Clearly unethical, IMO.

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vog 652 days ago | link

I don't know about the US, but here in Germany you can't put that kind of stuff into your terms and conditions.

Well, you could, but those terms would be ineffective. Of course, this doesn't help if they succeed to intimidate the victim. But if the victim doesn't pay, there's nothing the scammer can do, because this case would never succeed in court.

Having said that, it might help if the victim complains to the police. Depending on how serious customer protection is taken in the US, this business might be more than merely "unethical".

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revelation 651 days ago | link

Not only ineffective, but its planned to make this deceipt downright illegal. You have to state all of the costs in clearly readable text on the signup page itself and change the button to indicate that you are signing up with recurring costs.

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brador 651 days ago | link

Simple solution is check your CC statements regularly for discrepencies and request a chargeback from your card provider if you get scammed.

Enough charge backs and they lose their merchant account.

Most Credit cards users don't realize just how simple it is to run a charge back. It is literally one short phone call.

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RealGeek 651 days ago | link

There are plenty of offshore credit card processing companies & banks who provide "high risk billing" solutions for scammy businesses like this one.

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ricardobeat 652 days ago | link

Maybe I'm being too permissive, but that screen doesn't look fishy at all. I went through the purchasing/sign-up process, and it goes like this:

    1. create a profile (answer questions on style)
    2. fill in details, click a *JOIN NOW* button
    3. get a "*first month* for 50% off" offer
    4. get to this payment screen
At no point it implies you are buying a single product, there are no "buy now" buttons or calls to action.

To me it's pretty clear that it's a recurring service, like many others that exist for chocolate, wine, beer, socks, razors, etc. The right hand side on the checkout is clear enough, and the skip the month part is there highlighted, not in small letters.

EDIT: apparently this is just the flow after choosing something on the home page. If you choose one of the "special" products or go to the Featured section, it does go through a standard add to cart + checkout flow (http://minus.com/lA7snPkHUHOZR). That is actually terribly misleading.

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pbreit 651 days ago | link

But its not like any other subscription sites I'm aware of. The huge differences is that you have to visit the site each month or you'll be billed and receive NO product.

I was prepared to disagree with OP but the model does seem a little customer-hostile.

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rory096 651 days ago | link

The grandparent's link says "Each credit can be redeemed for any JustFab style on the site."

Seems to me that they're saying if you're a member but didn't make your decision for your free (sunk cost) product by the 6th, they charge you and turn it into store credit. It's not like they're charging you and saying "too bad, you don't get anything."

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pbreit 651 days ago | link

Ok, I see. So that's probably reasonable. And it's now even more clear that the whole thing is somewhat confusing.

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speby 649 days ago | link

It may be different, yes, and I can relate to the OP's original complaint from his girlfriend. Still, given the language used on the site and the (albeit weird) use of a "credit" that can be used in the future for each month you don't buy something, it doesn't seem unfair at all to me.

I will say that the negative attention this confusion could bring them is more harmful to them than if they revamped the purchase process to just make it crystal clear what you're buying.

From my experience at Poll Everywhere, the "sidebar" on the checkout process does not get read by anyone, anytime. For some reason, the sidebar becomes a blindspot and is ignored (at least in our testing) during a checkout process and so is thus not a great spot to put reminders about how you're joining a membership and will be charged monthly if that is the only place is is put.

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tripzilch 651 days ago | link

> or you'll be billed and receive NO product.

Actually it says you'll be billed for a "Member Credit", which "can be redeemed for any JustFab style on the site".

I'm not sure what that means exactly, but if you can actually redeem one of those credits for $39.95 worth of product, then 1. it's still very misleading because you spent a lot more money in their store, on their products than you intended to, but 2. at least your money didn't just evaporate, except 3. is there anything preventing them from at some point deciding "From now on, we will only sell novelty dish-washing sponges, at the great rate of one credit per sponge!", making all out-standing credits worthless in a single TOS change?

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jiggy2011 651 days ago | link

It would seem reasonable that to assume "skip the month" just means "don't buy anything this month" as opposed to having to do a specific action.

After all , it would seem strange to be voluntarily charged unnecessarily.

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mapster 651 days ago | link

Logged on and signed up. selected a shoe by clicking 'add to bag', aka 'add to cart' then went to checkout whereby I was introduced to the slimy payment page.

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nsns 651 days ago | link

I agree it's unethical. This is a commercial site, it tries to offer goods in exchange for money, anything that costs money should be emphasized and explained. How would they feel if someone managed to take some of their merchandise by stealth?

I don't think this is some grey area: if you tricked me into paying a sum I never chose to pay, you're stealing money off my pocket.

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simias 651 days ago | link

That reminds me of certain ads I sometimes see on the french TV for ringtones or silly phone games: if you read the small print you realize they actually offer a membership, not a product, and you actually pay something like 3 euros a week instead of a one-time fee. They call that "clubs" or something.

Those ads usually seem to target teenagers (they're mostly on music channels or channels aimed at kids) who probably aren't in charge of the bill and if they're not careful they might end up with a bad surprise. This is beyond shoddy.

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tripzilch 651 days ago | link

Thankfully that shit has been made illegal in the Netherlands a few years ago. One of the more important motivations was, like you say, how blatantly those scams are targeted at teenagers.

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fleitz 651 days ago | link

It depends on how you do it, you could definitely use mail laws about unsolicited mail to get a package you didn't solicit delivered to your door. If you can do this then you can keep the goods.

The law like anything else is a system, justfab is exploiting it for fun and profit.

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tripzilch 651 days ago | link

If you'd care to re-read the GP post, you'll find he's talking about ethics, not laws.

I really hope you are aware of the difference.

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chinmoy 652 days ago | link

Thanks for the screenshot. This is outrageous IMO. Few people will notice that the TOS checkbox actually reads "JustFAB VIP membership program". Most people will take it as a normal TOAS checkbox that you have to agree every time you order from any website. So, yes, the page is designed to be misleading a.ka scam some subscription fees.

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true_religion 651 days ago | link

However the entire right side of the screen is about the VIP program.

What exactly could people instead be lured into thinking they're doing here?

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chinmoy 651 days ago | link

Considering the fact that, you end up on the checkout page trying to purchase an item, the jibber-jabber on the right side hardly helps.

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true_religion 651 days ago | link

Well all their copy tells me that they're a personalized "boutique" aka personal shopper who chooses items for you based on your style.

I'd expect that to be a re-occurring cost.

I suppose it may be out of the norm of some people, especially the HN crowd, but this kind of thing isn't really unusual.

Brick and mortar stores have VIP programs all the time.

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columbo 651 days ago | link

> Brick and mortar stores have VIP programs all the time.

Yes. But you can also show up and buy a pair of shoes. I don't believe what you are describing is a fair analogy.

When I order a pair of shoes I expect a pair of shoes. I don't expect a hat, jacket, or a personalized VIP shopper.

On this website if I pretend to order a pair of shoes there isn't anything to indicate (aside from the fine print) that I'll be receiving more than a pair of shoes.

I'd expect this place to suffer a pretty serious class-action lawsuit soon. If I was an investor I'd run as far away as possible.

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true_religion 651 days ago | link

I don't really think so. When I visited the website, the first thing (it took up 50% of the page) that I saw was a call out asking you to rate items, and reveal your fashionable interests so you'd get personalized advice. Then it asked me to join their VIP program.

Honestly, I'd have to click around a little bit to even figure out how to just search something without first joining them and going through the VIP program upsales processs.

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bmj1 652 days ago | link

Thank you for posting the screenshot. A clear example of a UI anti-pattern IMO.

http://wiki.darkpatterns.org/Main_Page

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antonej 651 days ago | link

Note that regardless of what the screen shot looks like today, it's very possible the site already improved its disclosure in response to complaints/threats. It would be interesting to go back in time and compare the disclosure at launch to what's on the site today.

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sltkr 651 days ago | link

At least the bullet points on the right clearly describe how the site works. I'm not saying it's not misleading, but I think OP's complaint that customers have to “read their entire 2,500 words Terms of Service” to see what the deal is, is basically wrong.

(Also you don't get “nothing” for $39.95; you get store credit. That sucks if you didn't want any, of course, but given the fact that people actively sign up to be able to purchase from that store, I can't imagine it's entirely worthless.)

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robryan 652 days ago | link

So the site doesn't force you to join the VIP program? The way it is structured would definitely see a lot of people check it and click through without checking. In my experience stuff we make a lot more obvious than this is plain ignored during checkout.

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reitzensteinm 652 days ago | link

Just tried it without the checkbox ticked, and it does appear to be mandatory.

"You must read and agree to the JustFab VIP Membership Terms of Service."

Which makes sense - I bet they're making a killing on zombie subscription fees and little on legitimate users.

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raphman 652 days ago | link

And there does not seem to be any opt-out option in the profile settings (at least not without having completed checkout).

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robryan 651 days ago | link

Even that line which you say comes up when you don't check the box is likely to be misread by users who are used to having to check a terms of service box on most of everything.

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tlogan 651 days ago | link

I wonder how this company (and these kind of companies) can keep their merchant account open for so long. There has to be some trick here.

For example, maybe they keep enough to funds for last 6 months of chargebacks and have some special kick-back to bank? Or maybe the game plan is to always open a new merchant account after the first one is closed? Or maybe the bar is so low and they never need to worry to lose their merchant account?

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dsl 651 days ago | link

You sign up for what is called a "High Risk" merchant account.

Porn sites, bail bonds, check cashing locations, dating sites, weight loss centers, and dozens of other types of businesses use this category of services which has a very high tolerance of chargebacks.

The sad part is if you get enough chargebacks you can actually bake in a higher transaction cost and not have to pay per-chargeback fees like other normal merchants do.

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lakeeffect 651 days ago | link

Definitely unethical. The reason to buy says, "over half a million subscribers save hundreds a year". This statement could burn them in court if proven to not be a factual statement. I would surmise that it could be shown that the half a million subscribers paying $480 a year each, (240 million total) may not save hundreds a year. The least they would have to show for a forgiving jury would be that subscribers saved a total 100 million in personalized boutique purchases and general shipping. A demanding jury would require 340 million in savings. I would wager that argued by a savvy attorney the statement could be read as a misrepresentation in advertising. It would also be based on how it read at the time of original subscription, so there wouldn't be much value in changing the statement now and only provide more validity toward it being a misleading statement. The defense would argue that people read the the info on the right, understood the terms and checked the box in agreement. The prosecution would argue that the claims in bold of so many saving so much resulted in more making the purchase, which was a false misleading statement. Sales people make these types of claims all the time over the phone or in person to get a sale, putting it in writing is a huge mistake, and online retailers shouldn't be so brash.

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jyothi 651 days ago | link

They must be seeing a large number of chargebacks which means visa or mastercard would be behind them to get this set right by the 2nd or 3rd month.

I wonder how they managed to have the site up for so long - may be some kind of a high risk merchant account provider who approved their payment gateway.

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jdh 651 days ago | link

Regarding your comment: "It says you'll be billed month per month on the right hand side under the VIP membership program, but I think it's pretty clear that the page is engineered to be misleading."

I'm sorry: you're talking about the section that explains "How the JustFab VIP Program Works"? Whose 4 bullet points say:

1. Get a boutique the first of the month 2. Browse and Buy 3. Don't like anything, skip 4. If you don't buy or skip by the 5th you'll be charged anyway?

And a default unchecked box that you read and agree?

I think the concept of "engineered to be misleading" might just put the points in say, a small font, or in the terms and conditions behind a link. If someone describes it clearly in bold font in a section explaining how the site works, well, that's a pretty strange way of misleading people.

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tripzilch 651 days ago | link

The misleading part is that (in at least one common usage path), the site sets itself up to look like every other online shopping site. The kind that people expect to use by putting stuff in their "shopping cart" and proceed to "checkout" and pay once.

Think of the people in your life not quite as tech-savvy as yourself, like maybe your next-door neighbour or your mother. Would you expect them not to be misled by this? Sure, I'd hope my mother would be critical enough to notice, but I can easily see it happen otherwise.

Another indication is, I assume that a lot of people who do notice will instead decide to bail out entirely and not buy anything, rather than (like I would do, if I really wanted the item) pay, log in, and cancel the account immediately. Because that's not really an obvious thing to do, given the set expectation of being a regular online shopping store.

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kevinalexbrown 651 days ago | link

To answer the question at hand: "Why was [this] company able to raise $76 Million Series B?" They make money.

What's more concerning to me is that the coverage in TechCrunch[0] and Business Insider wasn't able to raise a modicum of doubt. If googling "JustFab" returns "Class Action Lawsuit" in the first 5 results, it would seem that the reporters either didn't do the absolute minimum required for effective journalism, ignored it, or were instructed to ignore it.

We've all heard the "online journalism is broken" refrain, so I won't repeat it here.* I'll just note that if it's so far gone that googling the topic of interest is out of the question, this form of journalism is worse than I thought.

[0] http://techcrunch.com/2012/04/26/fashion-retail-and-styling-...

* Edit: some forms appear to be doing quite well, e.g. nytimes.com. I'd also point out that there are some online articles I've found on TC or TheNextWeb, or AllThingsD that were quite good.

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chinmoy 651 days ago | link

Then again since when TechCrunch really practiced journalism?

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nikcub 651 days ago | link

https://www.google.com/search?q=scamville

led to an entire industry being changed

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alanh 651 days ago | link

Nik, your articles would seem to be of a much higher standard (and, accordingly, posted with greater infrequency) than most others on TC.

Plain and simple, it seems that most of the time, most of TC’s homepage is not investigative, but sensationalized triviality.

Thanks for being a part of the exception.

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chinmoy 651 days ago | link

I respect you man. Not gonna argue with you. Just before the re-branding of Hotmail to Outlook, there was an article on TC, claiming it takes '14 seconds' for Gmail to load. And posts like that one are not rare on TC.

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thaumaturgy 651 days ago | link

[2009]

C'mon, you really don't think TC is well on its way to being Valleywag II? With articles like the recent, "Color CEO Bill Nguyen Checks Out Of Day-To-Day Operations..."?

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tisme 652 days ago | link

Don't ask for a refund, go to your bank or CC company and charge back the 6 months. That'll hit them where it hurts. Little known fact about chargebacks: the merchant pays an administration fee, typically $20 to $50. Per charge!

That is why the smarter scammers refund to everybody who complains, not refunding is plain dumb. This scam has been around for a long time, usually it's adult companies that sell you a 'free' membership with an age verification which comes with a pack of subscriptions tacked on for other stuff that you will never use.

This practice of selling unsuspecting consumers a subscription with auto-renew when they think they're doing a one time transaction needs to be stamped out.

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tehwebguy 652 days ago | link

I cannot stress this enough.

If the company continues to receive chargebacks claiming fraudulent charges (which this really does appear to be) they will find themselves in a difficult place with card processors.

Some processors drop clients if they crack 0.5% a chargeback rate.

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lopatin 651 days ago | link

I have no idea how complicated this is, but with 76 million in funding, what are the chances they found a way to process credit cards them selves?

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tisme 651 days ago | link

Zero.

The credit card processing chain is quite complicated, with banks, card companies, ISPSs, processors and merchants all having fairly clearly delineated roles. A merchant - no matter how big - implementing the whole chain is unheard of.

Visa, MC and other cc companies care a lot more about their reputation than they'll even care about a company like this.

Much larger fish have been put on the bbq over less substantiated claims of fraud.

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sylvinus 651 days ago | link

Hasn't Amazon implemented their own?

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tisme 651 days ago | link

Do you have an amazon credit card?

As far as I know they use GE as the issuing bank, they may have other deals in place.

As far as I know - but this may very well be wrong or at least out of date - amazon does not have a banking license and the network used is VISA.

This seems to confirm that:

http://www.cardhub.com/d/amazon-credit-card-1015c/

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paulsilver 651 days ago | link

I've got an Amazon credit card (in the UK) and it's a Mastercard run by MBNA.

I would guess Amazon have looked at replacing as much of the payment chain as they can and done the parts that are profitable to replace. But they have a long way to go before the enormous hassle of becoming a bank is going to be attractive and possible.

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PeterisP 651 days ago | link

It's not nearly enough. Some major conglomerates (If I recall correctly then GE, GM, Samsung and others) do stuff like that in-house by creating bank-subsidiaries in their largest markets, but I'd guess that it would be reasonable at 78 billion revenue, not 78 million.

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tisme 651 days ago | link

And even then that's not the whole chain. After all, a GE capital card is backed by another card company:

http://www.gemoney.com.au/en/credit_cards/index.html

Piss off VISA/MC/JCB/AMEX and you're in trouble.

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fffggg 651 days ago | link

That's just to become an acquiring bank, to save on exchange fees.

Ultimately VISA determines who gets to participate in the VISA credit exchange network and will fine acquiring banks who participate in things like this. No one can force their way in and avoid responsibility -- period.

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brazzy 652 days ago | link

Even worse are scams that look like a free service (doing stuff like horoscopes) but require you to enter an address and then send you a bill for a 12 month subscription, and threatening legal action if you don't - quite common here in Germany. There's actually new legislation since July that requires all online transactions to explicitly say there's a fee right on the confirmation button, otherwise they're not legally binding.

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tzs 651 days ago | link

However, be careful and only do a chargeback when you are sure you never want to deal with that merchant again. Many will blacklist you if you do a chargeback, because of that high chargeback fee (which they have to pay even if they have sufficient documentation to successfully fight the chargeback).

I'm kind of surprised no one has started a service for merchants to warn them of chargeback prone customers (there are people who go straight for the chargeback without even trying for a refund first).

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tisme 651 days ago | link

> I'm kind of surprised no one has started a service for merchants to warn them of chargeback prone customers (there are people who go straight for the chargeback without even trying for a refund first).

There are plenty of such services. You don't see them because they don't normally operate on the merchant level, they operate on the IPSP / processor / card company level.

The reason why they don't usually operate on the merchant level is because that would allow a merchant to pollute the pool with their 'known good' cards to stop people from buying a product with competitors. You have to wonder when you buy this information as a merchant whether it is clean or not. But when an IPSP / processor or card company uses their aggregate knowledge then it starts to be really useful.

You can do AVR checks and so on all by yourself as a merchant but most if not all reputable IPSPs will have an anti-fraud system in place that does all kinds of checks.

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dangrossman 651 days ago | link

Look into MaxMind MinFraud. In addition to providing a 'risk score' for your online orders, it's also a kind of collective blacklist like you described. Any MaxMind customer can report an IP or e-mail address as associated with a fraudulent order, and any other MaxMind customer who recently scored an order with the same IP or e-mail gets a warning about the increased risk.

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navditt 650 days ago | link

There is a service that warns merchants of fraud-likely customers. Precharge. I was surprised to not see it anywhere on HN to date.

You can learn more at http://precharge.com/guaranteed_chargeback_protection/

Essentially you pay Precharge to qualify the customer and if it passes their fraud checks, they will reimburse or fight the chargeback.

They might be maintaining their own repository of problem customers here: http://www.chargebackfile.com/

Hope this is helpful to anyone considering mitigating chargeback risk.

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omarchowdhury 651 days ago | link

There was one, it was called BadCustomer. I don't think it's around any longer, since the people running were running shady rebill scams like Fab.

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mseebach 651 days ago | link

Don't forget that doing a chargeback doesn't absolve you from having to pay for services you've legitimately signed up for, it just denies the parties the convenience of settling through the credit card companies.

They can take you to court for breach of contract, and if (IANAL) the subscription contract is found to be legit, you have to pay + fees.

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tisme 651 days ago | link

That is true in theory, but in practice, especially in situations like this that does not happen.

For that there would have to be a much more transparent sign up process and actual delivery. Non-performance is not a good basis to start a law suit, especially if you're on the non-performing side.

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mseebach 651 days ago | link

I agree, but the GP made it sound like a get-out-of-jail-free card.

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tisme 651 days ago | link

Well, it's sad in a way but there are consumers that use it exactly like that. They order stuff and then charge back the money in the hope that the merchant won't care enough to fight the chargeback, which can cost a multiple of the original transaction.

Most large merchants have risk mitigation strategies that attempt to detect this before a charge gets processed and goods are shipped but that's a less-than-perfect mechanism.

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Confusion 651 days ago | link

They'll argue you checked the checkbox. You'll argue you didn't. It's their word against yours and they will lose, because they can't prove you actually checked the checkbox.

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mseebach 651 days ago | link

First: You're in court. That's a whole lot more than you bargained for.

Second: Are you a lawyer? Is that the guaranteed outcome of such cases? Will it really carry no weight that they can (probably) substantiate their claim that you checked the box with a technically sound argument that their website actually works? A manual release test plan, unit tests, cucumber scripts?

That one, single checkbox, and the fact that you have to manually check it, is the legality upon which the entire business hinges. Especially if they're a little shady, they'd be sure to have their stuff in order around this.

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Confusion 651 days ago | link

The first is certainly true, but won't happen if they are bound to lose.

I'm not a lawyer, but I am a programmer. I would never swear that my software works so correctly that I will use the actions of the application as proof that a user did check a box. If he claims he didn't, well, he just may be right. I've seen enough weird things happen not to trust any software to behave correctly all the time.

Now my technical reasons may not be relevant for a judge, but I doubt judges are very trustworthy of technology (they should have heard plenty of cases where technology failed and they will be users of all kinds of awful consumer technology, that sometimes, suddenly fails for no clear reason) and won't think favorably about a company with these kinds of practices. Perhaps I'm naive, but those things combined will lead a judge to believe you over the company.

  That one, single checkbox, and the fact that you have to
  manually check it, is the legality upon which the entire
  business hinges.
It can be entirely legal, while at the same time anyone that claims otherwise should immediately be refunded and let go. In fact, it would be smart to do that, as it prevents bad publicity. Any user that is dissatisfied should be compensated and should be free to leave, always. That saves money.

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antonej 651 days ago | link

How hard can it be to retain this data upon registration? Site operators would be insane not to. It's one bit per user in a database: Checked box or not?

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borlak 652 days ago | link

Also, if 1-2% of your charges through a merchant result in a chargeback, the merchant will drop you completely. However, a good scam company will have a few merchants lined up just for this reason.

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tisme 651 days ago | link

> the merchant will drop you completely

You mean processor/bank/merchant account, not merchant. In the parlance of the payment industry justfab is the merchant in this story.

And yes, there are scammers that have processors / banks lined up but they burn through them at a rate of about 1 every 8 weeks or so, and each time that happens they forfeit a large amount of cash. There are not that many merchants willing to play the game that way.

50 chargebacks or 0.5%, whatever gets hit first and you're in trouble. Reputation damage to the CC companies and you're out for good. Merchant account hopping is not a long term viable strategy.

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encoderer 651 days ago | link

Another little known fact about chargebacks: You lose some of your rights if you pay charges before disputing them.

Try it, absolutely still try it, and good luck!

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tisme 651 days ago | link

That's nonsense. The only time a chargeback makes sense is after the payment has already gone through.

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encoderer 650 days ago | link

Nonsense? You're a real charmer, tisme.

There's a bit of mis-information here.

First, while credit card companies and banks can chose to honor disputes of any age, your rights under the FCBA protect you for only 60 days -- and the FCBA doesn't apply to debit cards at all.

My tip -- that you should never use a debit card and with credit cards you should dispute charges before paying the bill -- is correct in spirit but not in the letter of the way I worded it, so mea culpa on technicalities but the point is correct. The FCBA only grants you 60 days to dispute a transaction (after the statement cut, not the transaction itself).

Also, CC disputes have some consequences. Companies aggregate & share lists of customers that have charge-backed. Finding yourself on the list can see you turned-away from legitimate, good businesses that have to protect themselves against dispute-prone customers.

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niggler 651 days ago | link

What the parent meant was "after you paid the bill". It's hard to go back later and say the charge was fraudulent after you received the bill and opted to pay it. In theory, payment = acceptance of charges.

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tisme 651 days ago | link

Theory doesn't matter much here. Especially not with automated debiting of checking accounts to pay the balance or some amount of interest or a combination of those.

As a customer of the card company you have the right to dispute charges as far back as you want, whether they'll honor that or not is a different question but typically up to 6 months in a card-not-present situation should give you no problem at all. And once the complaints about this company start rolling in it will get even easier.

Mass chargebacks are a very powerful weapon in the hands of organized consumers.

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ceejayoz 651 days ago | link

> It's hard to go back later and say the charge was fraudulent after you received the bill and opted to pay it.

Not when it's lumped into a single balance that you pay significant monthly interest on.

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jhferris3 651 days ago | link

He means after you've paid your credit card bill with the included charges on it.

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tisme 651 days ago | link

I see 6 month chargebacks on a regular basis (dealing with consumer fraud is fun), so these definitely happen, they're possible and if consumers can do it when they are the ones defrauding the merchants there will be a lot less trouble when it is the merchant doing the defrauding.

In many cases the cc company debiting your checking account is automated and there is no step for you to verify other than to periodically go through your statements to see if you have taken on any ghost charges.

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keammo1 651 days ago | link

I definitely second this. I used to work a children's website, where kids would often take their parents' credit card and make purchases, and we'd inevitably end up with many chargebacks (even though we offered refunds, many people went straight for the chargeback option instead of contacting us). The chargebacks not only cost the company extra - even if the company wins the dispute - and if chargebacks happen too frequently, banks may shut down the account.

I have also won 3 chargebacks against companies who never delivered their product or used deceptive practices. The process was not too difficult, and I believe the CC companies tend to side with the consumer. Verdicts on the disputes can take several months to process though.

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tisme 651 days ago | link

That's pretty accurate. As far as the verdicts are concerned, yes, they can take a while to process but if a company gets a negative reputation the process tends to be expedited considerably.

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pbj 651 days ago | link

This is the best suggestion, but unfortunately may not be possible for them to recover everything depending on how they paid/their credit card company. Most banks only allow you to do a chargeback for charges within the last 1-2 months on debit purchases and 6 months on credit card purchases.

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antidoh 651 days ago | link

Do the 1-2 month chargeback, and then when you've got that, take the company to small claims court. The chargeback may bring you extra weight (or not, IANAL).

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kylebrown 651 days ago | link

Banks and, at least VISA, are not as quick to do chargebacks they used to be. Now, they'll only do them if the customer says their card was stolen. Found this out when my mother was scammed by a moving company for the 50% deposit (company never showed). She called the number on the back of the card to dispute the charges (I believe its the bank's customer service number, not VISA's). But the bank told her they couldn't reverse the charges since she was the one who authorized them. To get her money back, she'll have to take the moving company to small claims court.

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d2ncal 651 days ago | link

I have used AMEX since the last 9 years, precisely for things like these. They are REALLY good at processing disputes and chargebacks, and in the last 9 years, there has never been a time when I 'lost' a claim against such fraudulent charges (I've had around 5 such claims).

On the other hand, both Visa and Mastercard are pretty much useless to 'protect' you against charges like these.

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tisme 651 days ago | link

There is a huge difference between a card present, authorized charge and a card-not-present unauthorized rebill.

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lmm 651 days ago | link

Debit cards (which from the way you're talking about a bank it sounds like this was) are like that. It's why your best practice is to always use a credit card when buying things (it's not like it costs you anything, as long as you have the discipline to not run up a bill you can't pay).

(disclaimer: I'm not from the US)

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jonnathanson 652 days ago | link

This business model reminds me of those fly-by-night mobile subscription services from the early 2000s. The ones who'd make you think you were buying a single ringtone, and the next thing you knew, you'd been surreptitiously signed up for a $29.99/month subscription.

I remember evaluating the books for one of those companies back in the day. It was wildly successful at the surface level. But if you dipped below the surface, you noticed that its biggest strategic weakness was "Breakage," i.e., the rate at which people eventually discovered they'd been duped and then cancelled their subscriptions. It turned out that the average subscription lasted 2 to 3 months, and nobody kept a subscription longer than 5 months. This basically meant that the company's entire business model was predicated on scamming new users at a rate quicker than its existing users could break away. While not a Ponzi scheme in the true sense, the model operates on a similar assumption. But the assumption is not sustainable in the long run.

I look at a lot of companies these days -- especially all the companies in the pop-up sale business, the subscription-box business, etc., and wonder how many are following this playbook. And I wonder why VCs keep backing them. Obviously it's a fantastic way to earn tremendous growth up front. And, while the getting lasts, the getting is pretty darned good. But it's sad to think that legitimate startups may get turned down, or underfunded, for the quick buck and easy exit that can be made on this crap.

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Vivtek 651 days ago | link

That business model is alive and well in Hungary. A single SMS was sent from my phone in August (nobody in the family knew anything about it, so we can only assume it was sent by somebody else who may have gained access to the phone while the kids took it to day camp). This SMS "authorized" three different companies to send me "premium SMSs", each of which cost $2.50 (roughly, converted to USD).

My phone's a prepaid, so this ran the balance down to the minimum $1.50 in short order, but I didn't know whether perhaps somebody in the family had simply used those minutes - so I recharged it with $50. In three days, it was back at $1.50 and it had done nothing but vibrate in my desk drawer occasionally.

The "premium SMSs" were sent as system SMSs so they wouldn't appear in my Inbox; if I hadn't noticed one or two I wouldn't have seen them at all. I thought they were simply SMS spam, not even knowing that a "service" like premium SMSs even existed. They seemed to include a URL and nothing else - on a phone that only supports Internet on GPRS, which is no longer even available in Budapest.

T-Mobile said that for privacy reasons, they can't divulge the identity of those companies. Of course, T-Mobile gets about half of the cost of each premium SMS, so it's not terribly surprising that they're not highly motivated to stamp out scams. I told them to remove my ability to enjoy the premium SMS service, and they obliged, but that's as far as they would go.

(Nothing against Hungary. Same thing happened to me once in America with 900 numbers; the only thing the phone company would say is that somebody must have plugged a phone into our outside service jack - we turned off 900 numbers then and made sure they were off for every subsequent landline we obtained, but a scam's a scam.)

I have no recourse under Hungarian law, incidentally. Since a subscription was entered from my phone, there's nothing I can do to recover that money. It's no great problem for me, but that's a lot of money to the average Hungarian, who is absolutely powerless against a big foreign company like T-Mobile.

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marshray 651 days ago | link

But you're not powerless. I (and I'm sure many others here) are purchasers of mobile servcies and are influential in recommend them to others.

I currently have T-Mobile in the US and haven't had the problem you describe, but based on your story I'll probably be a bit more willing to shop around next time I need to change my contract.

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kamaal 651 days ago | link

This scams are happening big time here in India.

Sometimes they are enabled without your permission. My mom's phone number auto-magically gets subscribed for 'premium SMSs'. She doesn't understand how to send SMS's and cant use the phone interface apart from dialing a few numbers. Yet she often complains of money getting deducted from her pre paid account.

Called the customer care numerous times and every time all we get is - 'We are sorry sir, may there was an error in our system'.

Needless to say these mobile company thieves make millions from these 'errors in the system'.

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Ntrails 652 days ago | link

It reminds me more of the book catalogues. 5 books for a pound or something as a joining perk, but you then had to buy a book a month for 6 months or they would automatically sell you the default book etc.

I never thought that was a shady business model, per se, and whilst it wasn't entirely intuitive how they worked to a 14 year old, I blamed myself for screwing up by joining- not the company.

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anonymouz 652 days ago | link

But at least the book clubs (at least the ones that I know) make it obvious that you sign up for a membership and have to buy something (monthly or yearly).

This site seems to be entirely designed to mislead you into thinking you're just ordering one item, while in fact you are signing up for a membership.

Signing up for the first one (book club) may be a bad business decision on the customers part, but this second style simply seems fraudulent to me.

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htmltablesrules 651 days ago | link

>This site seems to be entirely designed to mislead you into thinking you're just ordering one item, while in fact you are signing up for a membership.

Bingo!

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ljf 651 days ago | link

As a child my father had pointed out to me that those book offers (in the UK at least) were only for adults (18 and over). So I used to fill in the form without ticking the 'I'm and adult' box, and see if they sent me the books. Most did, though as I was a minor they had no recourse to ask for payment. If only you'd contacted them and told them you were too young to sign a contract!

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tedunangst 651 days ago | link

When books you didn't order start showing up in the mailbox, you pretty quickly catch on to what's happening. Charges that just show up on your credit card statement are a lot less obvious to most people.

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mgkimsal 652 days ago | link

Those ringtone companies were just promoting ads and whatnot to get people to 'buy' something that made them, on average - what? - $70? If the cost of customer acquisition was, say, $20, they're making $50/head. For many people, having an automated business making $50/customer profit is pretty good.

Not every business is 'sustainable' through repeat customers - funeral homes come to mind. However, if the only way to be sustainable is to break laws, that's where the problem lies.

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jonnathanson 651 days ago | link

"Not every business is 'sustainable' through repeat customers"

Sure, but at the scale the ringtone business grew (and burned through users), they eventually ran out of suckers to scam. A lot of them would fold shortly thereafter, or move on to a different market (usually a completely different country), or consolidate with another company overseas and tap the suckerbase there.

This model is basically a modern, bigger-scale version of the old snake oil sales model. Set up a shop in town, sell a bunch of bad merch, get run out of town, find a new town. Rinse and repeat.

Eventually, though, your model catches up to you. Either you're closing up shop in old markets and opening new ones that aren't as big or lucrative, or you're keeping a toehold in the old markets -- but the costs of doing so grow faster than your revenues. Or you flee Market A for Market B, only to have a competitor or two leap into Market B the next month.

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chinmoy 652 days ago | link

These companies exist even today. The have an army of affiliates promoting their offers on all ad networks out there. These companies are paying the affiliates $10-15 for each valid billing info.

Sad thing is, JustFAB seems to be just like these companies. Only it looks good and it is supposed to be a 'legitimate' business.

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