Apple Faces Scrutiny Over In-App Purchases By Kids

While publishers are grumbling about Apple’s (s AAPL) new enforcement of in-app purchases for content, parents and one lawmaker are also raising questions about the way Apple handles in-app payments in apps aimed at children. According to the Washington Post, Rep. Edward J. Markey (D – MA) on Tuesday urged the Federal Trade Commission to review the way Apple markets its apps because of questions about the ease with which children are buying items in games.

The issue stems from a story in the Washington Post that showed how children were racking up big in-app purchases inside freemium iOS apps to the surprise of parents. My colleague Kevin wrote about this issue earlier after his step-daughter charged up $375 worth of virtual goods buys in a gaming app. There are parents controls that can limit children’s ability to make purchase, but there is still one glaring loophole: if a parent enters their iTunes password for a purchase and hasn’t restricted in-app payments, children using that device can make purchases for the next 15 minutes without having to enter a password.

One woman’s daughter in the original Post story racked up $1,400 in charges on her mother’s iTunes account, through Smurfberries purchases in the Smurfs’ Village app. The woman later received a reimbursement, but the issue paints the in-app purchase boom in a new light. A report by app analytics company Distimo found that in-app purchases rivaled paid downloads as the top revenue source for developers last year.

While many games and apps are utilizing in-app purchase, some of the most successful are titles from social game makers. Of the top five grossing iPhone apps right now, three (Smurfs’ Village, Tap Zoo and Zombie Farm) all use in-app purchases. Smurfs’ Village and Tap Zoo are rated for 4-year-olds and up while Zombie Farm is rated for 9-year-olds. Technically, Apple says iTunes users must be 13 years old. In talking to some developers, they said this is an area they’d like to see Apple address. One said they would like to build in more protections for children and parents to prevent inadvertent purchases within the 15-minute window but they must work within Apple’s current rules. Smurfs’ Village and Tap Zoo have recently added warnings that virtual goods use actual money.

It would be easy for Apple to flip a switch and close the 15-minute window or allow parents to turn it off themselves through the iOS parental settings. Right now there is an option to restrict all in-app purchases, but that also prevents anyone who uses the phone to buy anything inside an app. And as some have noted, it’s deep inside the setting menu where many aren’t aware it’s there. Apple responded to a request for comment by noting that “a password is required to buy any goods in the App Store including using in-app purchases and parents can use our parental controls settings to restrict app downloading and turn off in-app purchasing.”

I imagine Apple will address this either by implementing a new setting option for parents, or they’ll renew their efforts to advertise the existing parental settings. But I doubt Apple will try to close the overall 15-minute window for all transactions because it would stifle purchases and add one more hurdle to impulse buys. The App Store sells because it’s elegant, easy to use and there are few barriers to buying. And changing that would jeopardize Apple’s 30 percent cut of all in-app purchases.

In the end, this won’t be a major issue as long as Apple addresses it soon and parents wise up. As my colleague Colin Gibbs pointed out (subscription required), this is the early days of in-app payments and it’s in Apple’s best interest to establish more safeguards to assure parents. He drew a comparison to ringtones, which got a scammy reputation for going after underage consumers. I don’t think we’ll see in-app purchases decline in the way ringtones have but I do think that it makes sense to step up with more warning labels or spending limits to ensure nothing slows down the overall acceptance of legitimate in-app purchases. This is a big opportunity for both Apple and developers. Now it’s just a matter of making sure the store remains an inviting place to do business for everyone involved.

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