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How Facebook Cashed In on Tricking Kids

Facebook CEO Mark Zuckerberg. (Marcio Jose Sanchez/AP)

This story was originally published by Reveal from The Center for Investigative Reporting, a nonprofit news organization based in the San Francisco Bay Area. Learn more at revealnews.org and subscribe to the Reveal podcast, produced with PRX, at revealnews.org/podcast.

Facebook orchestrated a multiyear effort that duped children and their parents out of money, in some cases hundreds or even thousands of dollars, and then often refused to give the money back, according to court documents unsealed tonight in response to a Reveal legal action.

The records are part of a class-action lawsuit focused on how Facebook targeted children in an effort to expand revenue for online games, such as Angry Birds, PetVille and Ninja Saga.

The more than 135 pages of unsealed documents, which include internal Facebook memos, secret strategies and employee emails, paint a troubling picture of how the social media giant conducted business.

Facebook encouraged game developers to let children spend money without their parents’ permission–something the social media giant called “friendly fraud”–in an effort to maximize revenues, according to a document detailing the company’s game strategy.

Sometimes the children did not even know they were spending money, according to another internal Facebook report. Facebook employees knew this. Their own reports showed underage users did not realize their parents’ credit cards were connected to their Facebook accounts and they were spending real money in the games, according to the unsealed documents.

For years, the company ignored warnings from its own employees that it was bamboozling children.

A team of Facebook employees even developed a method that would have reduced the problem of children being hoodwinked into spending money, but the company did not implement it, and instead told game developers that the social media giant was focused on maximizing revenues.

When parents found out how much their children had spent–one 15-year-old racked up $6,500 in charges in about two weeks playing games on Facebook–the company denied requests for refunds. Facebook employees referred to these children as “whales”–a term borrowed from the casino industry to describe profligate spenders. A child could spend hundreds of dollars a day on in-game features such as arming their character with a flaming sword or a new magic spell to defeat an enemy–even if they didn’t realize it until the credit card bill arrived.

Outraged parents were forced to turn to the Better Business Bureau, their credit card companies or even the courts to get their money back.

The revenue Facebook earned off children had such large chargeback rates–a process in which the credit card company is forced to step in and claw back money on behalf of parents–that it far exceeded what the Federal Trade Commission has said is a red flag for deceptive business practices.

Despite the many warning signs, which continued for years, Facebook made a clear decision. It pursued a goal of increasing its revenues at the expense of children and their parents.

U.S. District Judge Beth Freeman ordered the documents unsealed on Jan. 14 after Reveal from The Center for Investigative Reporting intervened last year, arguing the public had a right to know how Facebook targeted children. The judge gave Facebook until Jan. 24 to unseal the documents, although she allowed the company to keep a few of the records sealed or partially redacted. The documents span a time period of 2010 to 2014.

Facebook, once a darling of Silicon Valley, has faced heavy scrutiny over the last year as users and lawmakers take aim at its questionable handling of user data and the spread of fake news. These new documents raise even more questions for the company and its CEO, Mark Zuckerberg, about the methods employees used to make it one of the wealthiest tech companies in the world.

The company continues to deal with the consequences of their push for revenue growth.

Facebook officials declined to answer specific questions for this story. In a statement, the company said: “we 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.”

Facebook Found a Solution but It Ignored It

Early in the afternoon of July 8, 2011, Tara Stewart sent out a message to her colleagues at Facebook. It was full of internal jargon.

“If the devs are really concerned about the cbs and not refunds it could make sense to start refunding for blatant FF-minor,” she wrote.

Stewart was suggesting to her colleagues that maybe Facebook should just refund money to parents when their kids clearly used their credit card without permission.

“Devs” meant game developers, and “cbs” meant chargebacks. “FF-minor” was Facebook’s term for “friendly fraud” involving a minor. Stewart was deeply involved in Facebook’s efforts to increase its game revenues.

A couple of months earlier, she had launched a project to help Facebook reduce chargebacks from the credit card companies, who were forcing the social media giant to return money spent by children on games after hearing from outraged parents who said they were duped.

Chargebacks were often the last resort for disgruntled parents, short of filing a lawsuit.

The problem seemed especially bad with certain games, and Stewart mentioned a few to her colleagues: “PetVille, Happy Aquarium, Wild Ones, Barn Buddy and any Ninja game.”

She and her colleagues began working on a solution to curb children from spending money without their parents’ permission.

An internal Facebook survey of users found that many parents did not even realize Facebook was storing their credit card information, according to an unsealed document. And parents also did not know their children could use their credit card without re-entering a password or some other form of verification.

Perhaps even worse, the children didn’t even realize they were spending real money within the game, because as Stewart would later write, “It doesn’t necessarily look like ‘real’ money to a minor.”

So as a test, Stewart and her colleagues tried requiring children to re-enter the first six digits of the credit card number on certain games before they could spend money. Stewart called it a “good first step.” It worked, according to the unsealed documents. It lowered the number of refund and chargeback requests from children.

“It forces the minor to prove he is in possession of the credit card,” she wrote. “Often refunds/cbs occur because a parent permits his child to spend at a small denomination and doesn’t realize that the CC info will be stored.”

One of her colleagues agreed, responding a few hours later, “It should keep kids from running rampant with their parents CCs.”

“CCs” stood for credit cards.

But Stewart’s study had uncovered a downside of protecting children from unwittingly spending money. It would likely hurt Facebook’s revenue.

So despite their monthslong efforts, and results showing they could reduce the problem, and the fact that tech companies such as Apple were already using some similar form of authorization, Facebook decided to go in another direction. It would not try to block children from unwittingly spending hundreds or even thousands of dollars on its games.

Fixing the Problem Would Have Hurt Revenue

The problem Stewart tried to fix was not a small one.

A few months before she launched her project in mid-2011, Facebook had uncovered some troubling data about the children playing its games. They were requesting refunds and demanding chargebacks at extraordinarily high rates.

The company had analyzed data on game revenue from children for the time period Oct. 12, 2010, through Jan. 12, 2011. The children had “spent a whopping $3.6 million” during the three-month period, according to the report.

But the company had discovered that more than 9 percent of the money it made from children was being clawed back by the credit card companies.

In comparison, the average chargeback rate for businesses is 0.5 percent, according to the Merchant Risk Council, a nonprofit that helps businesses manage risk.

A chargeback rate of 1 percent is considered high, and credit card companies such as Visa and Mastercard will put businesses on probation programs for rates consistently that high.

The Federal Trade Commission said in an unrelated fraud case in 2016 that a 2 percent chargeback rate was a “red flag” of a “deceptive” business.

The makers of Angry Birds, one of the top games during that time, were also worried about Facebook’s high rates, according to an email the game maker Rovio sent to Facebook.

“We have been seeing refund rates of 5-10 percent in terms of credits spent so far on Angry Birds. This seems quite high to me, but it might just be normal for games on Facebook,” a Rovio employee wrote to his counterpart at Facebook.

Facebook launched an analysis to determine what was happening with Angry Birds. It found that in nearly all cases, about 93 percent of the time, the refunds were a result of credit card holders not realizing the game was charging their account.

“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),” a Facebook employee wrote.

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

Then the employee wrote what is a common theme throughout the unsealed documents: “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.

If Facebook tried to stop children and their parents from unwittingly spending money, it would hurt the company’s revenue.

Friendly Fraud – What It Is, Why It’s Challenging’

Facebook made a decision. Company policy was to tell game developers to let children spend money without their parents’ permission, according to an internal memo circulated within the company.

The memo stated, “Friendly Fraud – what it is, why it’s challenging, and why you shouldn’t try to block it.” “Friendly fraud” is the term Facebook used when children spent money on games without their parents’ permission.

Facebook made clear that game developers should let children spend money even without their parents’ permission.

The company was focused on revenue, not blocking friendly fraud. Its stated philosophy on chargebacks was “maximizing revenue,” according to the memo.

“There is a huge need to educate developers,” Elizabeth Williges, a Facebook employee wrote in the memo. It was sent to the head of Facebook’s payment operations and other employees, including Tara Stewart.

Rather than trying to stop children from making costly mistakes, the document stated that developers should just give free virtual items to users who complain, things such as flaming swords, extra lives and other in-game enhancements.

This was better than refunding money to kids because, as the Facebook employee said in her message, “Virtual goods bear no cost.”

And for those customers who turned to their credit cards for help, Facebook was devising another strategy. It would design a program that automatically disputed customer’s chargeback requests, without even bothering to review the merits of those requests, according to another unsealed document.

At the time the document was written, Facebook was waiting to see if it would win enough chargeback disputes to make it worth automating the process. It is unclear from the documents if Facebook won enough disputes and went ahead with its plan.

A 12-Year-Old Racks Up Hundreds in Charges

Glynnis Bohannon’s 12-year-old son asked if he could use her Wells Fargo credit card to buy $20 in virtual goods for his favorite game on Facebook, Ninja Saga.

The weather in Phoenix, where they lived, had been unseasonably hot that October in 2011. He wanted to play inside on his computer. His mom said yes, handing him the credit card, and in exchange he handed her a $20 bill he earned doing chores.

As he started playing, he had no idea Facebook had stored his mom’s credit card information, he would later tell his attorneys. He also didn’t realize that as he played, Facebook continued to charge his mom’s credit card far beyond the original $20. He thought he was only using fake coins that were just part of the free game, he said.

Facebook’s Tara Stewart had foreseen this exact problem a few months earlier. She even noted that Ninja games were especially problematic, and had developed a method that would have stopped Bohannon’s 12-year-old son from unwittingly spending money. But Facebook had not implemented her recommendation. And as he sat there, avoiding the dry heat of the Arizona desert, the 12-year-old boy was duped into spending several hundred dollars on his mom’s charge card.

When Bohannon came home later, her husband said, “The bank called.” So she went online to check their accounts.

“I saw all these $19 charges from Facebook,” she said. “It added up to nearly $1,000.”

She asked her son why he would do that. But he was flabbergasted by the charges too. So Bohannon asked her son to play the game so she could watch what he was doing wrong.

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,” Bohannon said. “So, 20 minutes later, I rechecked my credit card statement online. And sure enough, there was another $19.99 charge from Facebook.”

She went to Facebook’s website to dispute the charges. She thought there would be a form or an email, some way to contact Facebook for a refund. After searching for hours, she gave up.

“It was like driving into a brick wall,” she said. “It was just a dead end.”

Bohannon’s experience trying to get direct help from Facebook was not unique. The company knew customers were having problems reaching it.

The same month that the Bohannon family lost several hundred dollars playing Ninja Saga, Facebook employees discussed the problem. Their system that was supposed to let users report problems was itself riddled with issues, according to the unsealed documents.

“I was stuck in an infinite-loop of questions just today,” wrote an employee testing it. “It feels like the form is this Frankenstein beast that we’ve bolted together over the last 6 months or so.”

Another employee responded, “This makes us think – how many users give up.”

And that wasn’t the only problem. Only about 50 percent of Facebook’s customers were receiving receipts for their transactions, according to another unsealed document.

“I felt it was all very deceitful,” said Bohannon, who also never received a receipt.

So in April 2012, she and her son filed a lawsuit against Facebook to get their money back.

But now they had to deal directly with Facebook’s attorneys who wanted to depose Bohannon’s 12-year-old son.

“Facebook’s lawyers were extremely aggressive, and treated him terribly,” Parker said.

Bohannon said she felt awful watching her son being interrogated.

In 2013, more than two years after Stewart designed a solution that would have helped the company avoid duping children, and more than a year after Bohannon filed a lawsuit, an underage girl wrote to Facebook requesting a refund.

Seemingly, little had changed at the social media giant.

The girl told Facebook that the charges on her account were a mistake, according to an unsealed document. Two Facebook employees discussing her request referred to the child as a “whale.”

Gillian: Would you refund this whale ticket? User is disputing ALL charges …

Michael: What’s the user’s total/lifetime spend?

Gillian: It’s $6,545 – but card was just added on Sept. 2. They are disputing all of it I believe. That user looks underage as well. Well, maybe not under 13.

Michael: Is the user writing in a parent, or is this user a 13ish year old.

Gillian: It’s a 13ish yr old. Says its 15. Looks a bit younger. She* not its. Lol.

Michael: … I wouldn’t refund

Gillian: Oh that’s fine. Cool. Agreed. Just double checking.

The Lawsuit Grows

In August 2014, the Bohannons’ lawsuit grew in stature. John R. Parker Jr. and the team of attorneys representing the Bohannon family had filed for class certification, meaning other children and parents would be represented too.

But Facebook successfully fought to get most of the records in the case sealed, saying public access to the documents would hurt its business. So the trove of behind-the-scenes strategies and messages that Parker and his team had uncovered remained hidden from public view, until Reveal intervened in the case last year.

Among those sealed documents was one that showed Facebook’s problems had not gone away.

As of 2014, children and their parents were still clawing back money from Facebook at extremely high rates. About 9 percent of the revenue Facebook made off kids was eventually charged back by the credit card companies as recently as March 2014. That is nearly identical to the extraordinary rates Facebook first noticed more than three years earlier. In effect, the company had done nothing to change it.

In 2016, Facebook decided to settle the case, and agreed “to dedicate an internal queue to refund requests for in-app purchases made by U.S. minors.”

Facebook issued this statement in response to a request for an interview:

“We were contacted by the Center for Investigative Reporting last year, and we voluntarily unsealed documents related to a 2012 case about our refund policies for in-app purchases that parents believe were made in error by their minor children. We intend to release additional documents as instructed by the court. Facebook works with parents and experts to offer tools for families navigating Facebook and the web. As part of that work, we 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.”

Nathan Halverson / Reveal

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