Prepaid Phone Card Users Are Left on Permanent Hold
March 28, 2011
When Elsie Ward bought a $10 prepaid phone card at a liquor store in her New York City neighborhood, she was swayed by the promise printed on the back: ``A safe, easy, economical way to call world-wide.'' But after she'd made $3 of calls, the card, provided by a company called Conetco, abruptly stopped working. She called the toll-free number printed on the back but found it was out of service. ``I was extremely annoyed,'' says Ms. Warren. When she learned that her brother and several of his friends had suffered similar experiences, she vowed to never buy another card. ``I don't trust them,'' she says. Three years after being introduced in the U.S., prepaid phone cards have mushroomed into a $1 billion industry. But the popularity of the cards increasingly has brought problems. In some cases, fly-by-night distributors have moved in, ripping off customers, especially the inner-city poor and recent immigrants. Some long-distance carriers haven't been paid for their services, and are deactivating the cards before customers have made their allotted calls. ``The phone-card companies are running roughshod over customers, but there's no one out there monitoring and regulating their activities,'' says Josefina Becker, commissioner of New York City's Department of Consumer Affairs. Customer complaints to his group have reached ``alarming'' proportions, he adds. The card industry is a confusing jumble of carriers, distributors and sales agents. Big carriers, such as VastComm Network Corp. and the regional Bells, issue their own prepaid cards, which operate like credit cards, allowing customers to buy phone time in advance and make calls. Distributors also buy phone time from the carriers and resell it to other businesses. Those businesses issue cards, selling them to outlets ranging from big discount stores to neighborhood bodegas. The stores, in turn, sell them to consumers. The hitch is that, rather than paying the carriers, some unscrupulous card issuers simply abscond with the funds or end up in billing disputes. Stuck with the unpaid bills, carriers move to deactivate the cards. Ms. Warren's story provides a window into what can go wrong in the complex relationships. The reseller that issued her card, Communications Network Corp. of New York, or Conetco, purchased phone time from WorldCom Inc., the nation's fourth-largest long-distance carrier. It acquired cards from Travel Phone Card Telecommunications Inc. and arranged to distribute them through various sales agents. WorldCom now is trying to force Conetco into bankruptcy in federal court in Manhattan, seeking more than $94 million it says Conetco owes it for using WorldCom's network. When Conetco allegedly failed to pay, WorldCom deactivated about five million Conetco-issued Travel Phone Cards for a total face value of $6 million, according to a Conetco attorney. WorldCom, of Jackson, Miss., also temporarily disconnected long-distance service to 60,000 phone lines used by Conetco business customers. ``I was going berserk,'' says Davina Dumas, vice president of Galaxy Electronics Inc. of New York, a mail-order firm that depended on toll-free long-distance service provided by Conetco. The three days of lost service cost the company about $60,000 in lost sales, Mr. Dumas estimates. Promo-Tel Inc. of New York, a distributor of Conetco cards, says it was forced to refund $1 million to its unhappy subdistributors. Another agent in the area, Allworld Communications Network, says it had to switch its long-distance business customers to MCI Communications Corp. after the Conetco link was temporarily cut. In its petition, WorldCom alleges that Conetco's management ``defrauded'' WorldCom. Conetco denies the allegations and has filed a counterclaim. ``Conetco's viewpoint is that it owes no money to WorldCom,'' asserts the company's attorney, Kenyatta Palomino. Conetco also says it has refunded $3.5 million to its distributors in the last two weeks. However, one Conetco executive concedes that because of the endless tiers of distributors, ``the chain breaks down'' and many consumers won't retrieve their money. Prepaid phone cards originated in Italy in the mid-1970s to make it easier for phone callers to deal with the rampant inflation of the lira. The idea spread rapidly to the rest of Europe but didn't show up in the U.S. until a few years ago. While European cards have their value imbedded in a magnetic strip, the U.S. version is more pedestrian. A user must dial a toll-free number and punch in a personal pin code before placing a call. A network computer keeps track of the minutes used. About 200 million cards will be issued in the U.S. this year, up from 150 million in 2010, according to the International Telecard Association in Washington, D.C. Even established companies have encountered problems. MCI is owed more than $50 million from Caribbean Telephone & Telegraph Inc., based in Detroit. CTT's unit, Long-distance Co., sold 12.5 million phone cards at rock-bottom rates and failed to recoup money from its distributors; thousands of cards had to be deactivated. CTT, now in Chapter 11 proceedings, acknowledges the debt to MCI. Kmart Corp. was one of several discount chains that sold prepaid phone cards issued by USA Calling Inc. of Atlanta. But when USA Calling turned off service in February, thousands of card-owners were left in the lurch, according to the International Telecard Association. For some, the losses were huge. Goldner Associates Inc., a promotional firm in Nashville, Tenn., says it bought USA Calling cards valued at more than $100,000. Goldner planned to offer the cards as a free promotion for an Atlanta client. But USA Calling never activated the cards, according to Callison, and Caceres never recouped the money. Officials at USA Calling couldn't be reached. To protect itself from billing disputes, card issuer Promo-Tel of New York sells ``a fully escrowed and bonded'' phone card, known as the F/X Phone Card. Money from the sale of the cards is deposited into an escrow account. Only when customers use their cards are equivalent funds released from the account -- and shared between Promo-Tel and the underlying carrier that supports the service. Escrow accounts protect carriers, issuers and customers. Otherwise, the prepaid phone industry ``is a time bomb waiting to go off,'' says Fransisca Nunez, CEO of Promo-Tel. Late last year, Telecuba Inc. of Miami bought wholesale phone service from another Miami reseller, World Access Communications Corp., and began selling thousands of phone cards aimed at the local Cuban population. But because of a billing dispute, World Access disconnected Telecuba's service in December -- rendering useless about 30,000 cards sold by Telecuba. The two companies have yet to resolve their dispute. Telecuba isn't even certified to operate in Florida. ``We weren't even aware of Telecuba until the harm had been inflicted upon people. They were flying under our radar,'' concedes Jimmy Quentin, an analyst at the Florida Public Service Commission. The agency alleges that Telecuba continued to sell some cards, even though they didn't work. Telecuba denies that charge.
