On February 27, 2018, the Federal Trade Commission (FTC) announced1 that it had reached an agreement with PayPal to settle allegations that its peer-to-peer payment service, Venmo, engaged in deceptive acts and practices and violated the Gramm-Leach-Bliley Act (GLBA)’s Safeguards Rule2 and Privacy Rule.3 Since 2011, Venmo has offered peer-to-peer payment services through an app that consumers can download, link to their external bank accounts, and use to transfer and receive money to and from other users. In its complaint, the FTC alleged that PayPal, through Venmo, failed to adequately disclose that: (1) it could freeze or remove funds credited to a customer’s account; (2) the Default Audience Setting did not ensure that future transactions were visible only to chosen audiences; and (3) the Individual Audience Setting did not ensure that any single transaction was visible only to the chosen audience. The FTC also alleged that PayPal, through Venmo: (1) misrepresented that it protected consumers’ information with “bank-grade security systems;” (2) failed to protect the security, confidentiality, and integrity of customer information in violation of the GLBA’s Safeguards Rule; and (3) failed to send an adequate initial privacy notice to customers detailing its privacy policies and practices in violation of the GLBA’s Privacy Rule.4
Under the resulting proposed settlement agreement, PayPal will be prohibited from misrepresenting any material restrictions on the use of its services, the extent of control provided by its privacy settings, and the extent to which it implements or adheres to a certain level of security.5 In addition, PayPal will be prohibited from violating the GLBA’s Safeguards and Privacy Rules, will be subject to biennial third-party assessments of its compliance with those rules, and will be required to make certain disclosures about its transaction and privacy practices to consumers. But PayPal’s agreement with the FTC is not the first time the company has settled charges over this same conduct. Indeed, less than two years ago, the company entered into an Assurance of Voluntary Compliance agreement with the Texas State Attorney General’s Office for alleged violations of the Texas Deceptive Trade Practices Act.6 Specifically, the Texas attorney general charged PayPal with failing to adequately disclose the availability of Venmo customer funds for withdrawal, the visibility of customers’ transaction information to other users, and the level of security that its services provide. Pursuant to that agreement, PayPal was required to pay $175,000 to the State of Texas, to accurately disclose the Venmo audience setting for customer transactions and any circumstances that may affect a user’s ability to withdraw funds, and to remove its representation that Venmo provides bank-grade security.
The FTC’s action against PayPal offers important privacy and data security lessons for companies both inside and outside the financial services space. First, the FTC’s deception counts reinforce a key principle: the commission can and will come after you for promises made in any public statements, including statements published on websites and in applications. Second, the FTC’s data security allegations serve as a reminder that the agency views customer service capabilities and security notifications as basic data security safeguards. Third, companies that claim they offer “bank-grade security” must, at a minimum, meet the standard set out by the GLBA Safeguards Rule to avoid Section 5 violations. And finally, the FTC sent a clear message to payment companies: even if you offer peer-to-peer, social network services, you still have to comply with the GLBA.
FTC’s Deception Charges and Key Takeaways
The first deception count the FTC levied against PayPal concerned the notifications Venmo sent to customers who received funds through the app. Specifically, the FTC alleged that Venmo’s repeated promises that a customer had been paid and could transfer money to their external bank account, often “overnight,” were deceptive. This is because, according to the complaint, Venmo refused to approve customer transactions until after the recipient initiated a bank transfer. As a result, thousands of customers allegedly suffered substantial delays in receiving their funds or otherwise never received their funds due to transaction reversals. According to the complaint, many of those customers reported significant financial hardship due to the inability to pay rent or other bills with the money they received through Venmo. To make matters worse, the complaint alleges that when customers attempted to contact Venmo to express their frustration about these issues, they were either unable to reach a customer service representative or not given an explanation for or resolution to the problem. In analyzing this deception claim, the FTC focused on Venmo’s awareness of customer complaints, that it had inadequate measures in place to address them, and that it made representations about the availability of funds without qualification despite knowing that those representations were inaccurate. Therefore, a key lesson for any company is the importance of maintaining adequate customer support capabilities for processing and addressing customer complaints. Otherwise, the FTC may hold it against you.
In the second and third counts of the complaint, the FTC attacked Venmo for misleading customers into believing that their privacy settings ensured their transactions would only be visible to restricted audiences. By default, all peer-to-peer transactions on Venmo are displayed on a social news feed that contains the names of the payer and recipient, the date of the transaction, and an accompanying (not to mention mandatory) message. Also by default, each Venmo user’s past five transactions are visible to anyone who visits the user’s profile page, including those who do not even have a Venmo account.
Consumers who prefer to keep their Venmo transactions private can change their privacy settings to restrict the visibility of future transactions to “Friends” (sender, recipient, and their friends) or “Participants” only (sender and recipient only)—or so they thought. According to the FTC, Venmo labeled its “Default Audience Setting” in a way that led reasonable users to believe that, so long as they changed that setting to “Friends” or “Participants Only,” all of their future transactions would be visible only to their chosen audience. In reality, however, users had to change a second setting—the “Transaction Sharing Setting”—in order for this to be the case.
Even though the Transaction Sharing Setting was on the same page as the Default Audience Setting, the FTC took issue with these settings for two key reasons. First, the settings did not affect the privacy of a user’s transactions when the user was on the receiving end of a transaction. In other words, if a user who restricted their privacy settings received money from a user who had not restricted their privacy settings, Venmo did not inform the recipient user that the transaction would be visible to the public. Second, even if the user who restricted their privacy settings initiated a transaction, Venmo did not inform them that the recipient was permitted to retroactively make that transaction publicly viewable at any time, without notice to the initiator. In the FTC’s view, Venmo’s failure to inform its customers that the Transaction Sharing Setting permitted retroactive changes to the visibility of a transaction—even where one participant specifically intended for a transaction to be private—was deceptive.
While it is no surprise that the FTC takes issue with companies that do not honor their customers’ privacy settings, this case highlights the difficulty of properly disclosing privacy settings where two parties’ choices are involved. It is safe to say that, based on this case, the FTC frowns upon privacy settings that enable one party to a transaction to override the privacy preferences of another party. Further, the FTC made clear that, even though these two settings were viewable on the same settings page, this was not enough to clearly disclose the limitations of, and interactions between, the settings. The takeaway here is that the FTC does not just care about whether you honor customers’ privacy settings; it also cares about how you label and describe those settings, and what those labels and descriptions lead reasonable customers to believe.
FTC’s View of “Bank-Grade Security” Promises
The fourth count of the FTC’s complaint is perhaps the most interesting and significant for companies that promise a certain level of security, in particular, “bank-grade security.” Here, the FTC alleged that Venmo, in public statements on its website and mobile app, deceptively represented that it used “bank-grade security systems and data encryption to protect [customers’] financial information…and guard against unauthorized transactions and access to personal or financial information.” In reality, the FTC explained, Venmo did not even meet the minimum standard of security required by the GLBA Safeguards Rule.
The Safeguards Rule requires financial institutions to protect the security, confidentiality, and integrity of customer information by developing a comprehensive written information security program that contains reasonable administrative, technical, and physical safeguards.7 As alleged in the complaint, Venmo fell short of complying with the Safeguards Rule in three key ways, namely it: (1) did not have a written information security program; (2) failed to assess reasonably foreseeable internal and external risks to customer information; and (3) failed to implement basic data security safeguards to protect customer information, including by (i) neglecting to provide security notifications to consumers when their account password or email changed or a new device was added to their account, and (ii) failing to maintain adequate customer support to timely investigate and respond to users’ reports of account compromise or unauthorized transactions. As a result of Venmo’s conduct, the complaint alleged that unauthorized users were able to successfully take over customer accounts, change their email addresses and passwords, and withdraw their funds—all without any notice to the affected customer.
There are a couple of key lessons to learn here, particularly for companies that represent, or seek to represent, that they offer “bank-grade security.” First, and most importantly: if you claim that you have bank-grade security, the FTC will expect that you—at a minimum—meet the standard set out in the Safeguards Rule. Second, the FTC views customer security notifications and support services to be “basic data security safeguards” necessary to protect customer information. As a result, companies should review their data security practices to ensure they have systems in place to notify customers when changes are made to their internal account settings, and address customer concerns when they are brought to their attention.
Venmo’s GLBA Violations and Key Takeaways
In the final two counts of the complaint, the FTC charged PayPal with violating two GLBA rules: the Safeguards Rule and the Privacy Rule, which apply to “financial institutions,” including companies like PayPal and Venmo that offer peer-to-peer payment services.
In the complaint, the FTC alleged Venmo violated the Safeguards Rule by: (1) failing to have a comprehensive written information security program; (2) failing to assess reasonably foreseeable internal and external risks to customer information; and (3) failing to implement basic safeguards to protect the security, confidentiality, and integrity of customer information (for the reasons explained in count four, above). Based on these allegations, a key lesson becomes clear: it is not only important to send customers security notifications and maintain adequate customer support services to avoid FTC Act liability, but also to ensure full compliance with all aspects of the GLBA Safeguards Rule if you offer financial services in any way, shape or form.
Finally, the FTC alleged that Venmo violated the GLBA Privacy Rule, which requires financial institutions to provide customers with a clear and conspicuous initial and annual privacy notice detailing the company’s privacy policies and practices. Specifically, the FTC claimed that Venmo violated this Rule in three ways. First, its initial privacy notice was not “clear and conspicuous”—i.e., reasonably understandable and designed to inform customers of the nature and significance of the information included—because it merely provided a link to a privacy policy that was printed in grey text on a light grey background at the bottom of the account registration page. Second, its privacy policy was not accurate because it misrepresented the level of privacy offered by its settings, as described in detail above. Third, it did not require customers to acknowledge receipt of the initial privacy notice so that “each customer could reasonably be expected to receive actual notice” as required by the Rule. This allegation is particularly interesting, as it sheds light on what the FTC believes is enough to constitute actual notice: at least with respect to the GLBA, providing customers a link to your privacy policy is not enough. In order to avoid FTC scrutiny for violating the Privacy Rule, financial services companies must require customers to acknowledge receipt of an initial privacy notice as a necessary step to obtaining their product or service.
Conclusion
The FTC’s settlement with Venmo offers important privacy and data security lessons, particularly for companies in the peer-to-peer transaction space. The FTC’s deception claims against Venmo reinforce the FTC’s approach to enforcing promises made in any public statements. Additionally, the FTC’s data security allegations show that companies claiming they offer “bank-grade security” must meet the requirements of the GLBA Safeguards Rule to avoid deception claims. And finally, the FTC sent a clear message to payment companies: even if you offer peer-to-peer, social network services, you still have to comply with the GLBA.
1 Press Release, FTC, “PayPal Settles FTC Charges that Venmo Failed to Disclose Information to Consumers About the Ability to Transfer Funds and Privacy Settings; Violated Gramm-Leach-Bliley Act,” February 27, 2018, https://www.ftc.gov/news-events/press-releases/2018/02/paypal-settles-ftc-charges-venmo-failed-disclose-information?utm_source=govdelivery.
2 16 C.F.R. § 314.
3 16 C.F.R. § 313.
4 FTC Complaint, In the Matter of PayPal, Inc., https://www.ftc.gov/system/files/documents/cases/venmo_complaint.pdf.
5 FTC Settlement, In the Matter of PayPal, Inc., February 27, 2018, https://www.ftc.gov/system/files/documents/cases/venmo_agreement_with_decision.pdf.
6 Press Release, Texas State Office of the Attorney General, “Attorney General Ken Paxton Announces Agreement to Protect Consumers; Reform Privacy and Security Practices with PayPal,” May 20, 2016, https://texasattorneygeneral.gov/news/releases/attorney-general-ken-paxton-announces-agreement-to-protect-consumers.
7 See 16 C.F.R. § 314.3.
