Calling Out Prepaid Phone Cards

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The company then shone a light on rivals it claimed were still engaging in the same practices it had agreed to change. In March 2007, IDT filed a suit accusing CVT Prepaid Solutions and eight other rivals of providing only about 60% of the minutes they advertised. IDT CEO Jim Courter says IDT brought the suit because, after reaching its own settlement, it couldn't compete against rivals who were promising more than they actually delivered. "Over a period of about 18 months, we noticed that our market share was being dramatically eroded," he says. "We were looking at ourselves. Then an employee said, 'Maybe we're competing against fraud.'"

One of those rivals, New York-based CVT, vigorously contested the IDT lawsuit. In an open letter, CVT said the IDT suit was "an attempt to bully all of us" instead of "competing fairly in our industry." CVT eventually settled, though, because of what it says were mounting attorney fees. CVT CEO Michael Acevedo acknowledges that prepaid-card firms, in some cases, didn't deliver everything they promised to consumers. But he thinks these problems are not isolated to the prepaid-card industry. "Companies in general all have these little catches or trapdoors to increase margin," Acevedo says. "It's just a matter of, 'Which trapdoor did they use?'"

Acevedo says he is disappointed with the terms of the settlement with the Florida Attorney General. "I thought the Attorney General would be a little more compassionate at our efforts to clean up the industry." He says CVT is talking with other companies about creating a trade association that will draw up voluntary guidelines for the industry. "We've incurred a black eye in this whole mess," Acevedo says.

A Threatening Situation

It's a blow that may be felt all the way to the bottom line. IDT is one of the few publicly traded companies in the industry. In the three months ending Apr. 30, IDT suffered an operating loss of $24.5 million for its prepaid products, compared with a loss of $16.9 million a year earlier. "Our $64,000 question is, this huge and very expensive effort…is this going to manifest itself in our returning to profitability?" Courter says. "We gambled a lot of money on the bet that we could compete as long as everybody is honest."

The states may not be the only threat facing the industry. U.S. Representative Eliot Engel (D-N.Y.) has a bill pending that would subject the prepaid phone-card companies to tougher regulation from the Federal Trade Commission. "Consumers need to understand what they're purchasing," Engel says. "You wouldn't buy something from a snake-oil salesman." Even now, the Hispanic Institute's West says he has seen changes in how the companies advertise their cards in the Washington, D.C., area. "[The calling-card posters] say, 'We deliver all the minutes that we promise,'" West notes. He, Engel, and attorneys general across the country will be holding vendors to that promise.

Holden is an intern in BusinessWeek's Atlanta bureau.