OVERLAND PARK, KS — Electronic funds transfer (EFT), for all intents and purposes, is the lifeblood of the club industry. Every month, clubs receive their members' payments almost seamlessly through their bank accounts or credit card companies, a process that produces instant monthly revenue. As one operator put it, “Without EFT, we all would have been out of business a long time ago.”
Allow Rick Caro, president of Management Vision Inc., New York, to further explain the importance of EFT.
“I believe EFT may have been the single most important advance for the development of the club industry,” Caro says. “It allowed the industry to move away from only selling prepaid memberships to more pay-as-you-go and more flexible arrangements. This allowed it to reach out to many more segments of the population.”
Some people credit Mark Mastrov with spearheading the introduction of EFT into the industry and capitalizing on its effectiveness. Mastrov began billing members through EFT just a few months after he founded 24 Hour Fitness in 1983.
“EFT took our business from collecting cash up front [for long-term contracts] to creating a predictable monthly reoccurring revenue model that took pressure off from giving the club away via those old tactics of price selling,” says Mastrov, the co-founder of New Evolution Ventures, Lafayette, CA, which operates Crunch and UFC Gym. “In my opinion, it was the No. 1 reason our industry went from its difficult growth years of the 1980s and early 1990s to the successful and well-recognized industry it is today.”
At times, however, members have questioned the way clubs collect their monthly payments. Those questions grow louder when members have difficulties stopping payments when they want to cancel their memberships, leading to a few class-action lawsuits.
In Friedman vs. 24 Hour Fitness USA Inc., the plaintiffs claimed the San Ramon, CA-based company took monthly payments out of their accounts after they canceled their memberships. The case, which closed in July, resulted in a settlement in which 24 Hour had to offer affected members either a $20 payment or a three-month club access certificate. LA Fitness, Irvine, CA, faced a similar lawsuit in May on behalf of former and current members in Pennsylvania who claim LA Fitness charged them at least one additional month's payment after cancellation. That case is still active.
Some people may blame billing and software companies for the cancellation issues, but executives at these companies say that they only follow the instructions of each club company as to when and how to draw charges from member accounts. Andy Wigderson, vice president of sales and marketing for CSI Software, Houston, says lawsuits such as the one LA Fitness faces relate more to a business function than a software function.
Paul Sage, marketing director for ABC Financial, Little Rock, AR, says a court ruling on how membership agreements must be handled with respect to the cancellation process will create reduced revenue for the club and reduced billing fees for the billing or software company that manages the transaction processing.
“We understand it is the club's responsibility to ensure their membership agreement is approved and certified with their [state's] department of consumer affairs or attorney general's office,” Sage says. “ABC believes there is a difference between cancelling a membership and stopping an electronic payment, which is managed by the EFT Act [passed by Congress in 1978].”
ABC has an EFT terms and conditions page on its website that encourages customers to contact their state's attorney general or the Federal Reserve Board if they believe any provision of the EFT Act has been violated.
Sean Kirby, national sales director for ASF International, a billing and processing company in Highlands Ranch, CO, says clubs can handle the processing of member billing three ways: a club company could handle all the billing and processing itself, a billing/software company could handle the processing of member payments but a club would handle any follow-ups and cancellation attempts, or a billing/software company could handle all processing, follow-up and cancellation for a club's members.
The key for clubs and billing companies to operate smoothly is clear communication, direction and documentation, Kirby says.
“Clubs need to make sure from an administrative standpoint when a membership needs to be cancelled,” he says. “Or, if they allow us to handle it, based on the guidelines of their agreement, we make sure it takes place properly. If we're handling the cancellations for a club, we get a copy of their agreement.”
Membership agreements vary from club to club, but typically, members pay the first and last months of their membership agreement when they join. In most cases, members must give 30 days' notice of their intention to cancel their membership. The gray area arises when clubs change the number of days required for their notice of cancellation (from 30 days to 45 days, for example). Or, the cancellation request may not be properly submitted.
Caro, who has served as an expert witness in class-action lawsuits involving clubs and membership agreements, says a club may not honor a cancellation if the club was notified by a voicemail and not by a written notice.
“In many cases, clubs are not necessarily at fault,” Caro says. “Having said that, some clubs don't handle back office [procedures] ideally, and it leads to mistakes.”
Mastrov says attorneys who represent members in cases similar to the two involving 24 Hour and LA Fitness are trying to look for areas of consumer laws that have yet to be written or are not clear.
“What we are seeing now is consumers and lawyers saying you can't collect a month's dues up front or in advance of service,” Mastrov says. “I think the consumer will lose [those cases] as almost all businesses collect up front, as one does not want to be in the collections business.”