Today's multilevel marketing (MLM) organizations look nothing like the Amway and Herbalife of the past. Cosmetics and nutritional supplements may still dominate the industry, but companies have expanded into product lines of every sort: essential oils, kitchen gadgets, yoga pants, software, consulting, and pretty much anything else you can imagine. This product expansion, combined with contemporary branding and integrated social media, can be a problem for payment service providers because MLM companies are more difficult to differentiate from standard retail. These companies may look like the hottest lifestyle brands, but they are still high-risk industries that face extreme scrutiny by federal regulators.
Legitimate vs. Predatory MLM Programs
While some MLM programs, also called direct selling, are legitimate and non-predatory, others fit the model of pyramid schemes, which are illegal in many jurisdictions. In a pyramid scheme, a distributor's income is based primarily on the number of people they can recruit, and the money those new recruits pay to join the company - not on the distributor's product sales to the public. Businesses offering MLM programs have also been known to scam their distributors by overselling their products and promising high returns, or for offering unfavorable return policies to the buyer. For this reason, MLM programs are frequently the target of action by the Federal Trade Commission (FTC) for unfair and deceptive practices.
The law requires that an MLM program compensate its distributors based on actual sales to real customers, rather than based on wholesale purchases or other payments by its participants. But even these "legitimate" MLM programs may be problematic. According to "The Case (for and) against Multi-level Marketing," a report prepared by the Consumer Awareness Institute and solicited by the FTC, virtually every distributor who participates in a MLM program loses money, regardless of the type of program: "With every MLM, where such data was available, and after debunking the deceptions in their reporting, the loss rate was at least 99%, using liberal assumptions relating to retention and cost of participation … ."
Difficult-to-spot MLM Programs
Because of the deceptive nature of many of these programs, payment service providers often ban MLM companies in their terms and conditions. But today's MLM programs can be difficult to spot because many market themselves as traditional retail. See some of the examples below.
What to Look For
When identifying whether or not a merchant is offering an MLM program, look for key phrases and terminology, including:
- "Become a distributor"
- "Join our affiliate program"
- References to making commission or "financial freedom"
- Uses of words such as "reward," "referral," "level," "opportunity," or "reseller"
Additionally, a business offering an MLM program may depict the business model in videos/infographics, and offer testimonials of people who claim to have made money through the business. Distributors are usually easy to find on social media.
LegitScript's expert analysts proactively track potentially deceptive businesses such as multilevel marketing programs to help our clients reduce risk. Our merchant monitoring services provide best-in-class solutions for identifying high-risk merchants and helping our clients remove problematic vendors from their portfolios. Contact us to learn more.