The Excited States of America

By Melody Lashmar - The above title is extremely fitting today in banking.  The endless closing down of banks, the continued shutting down of business checking accounts for 5967-type merchants and the unrelenting pressure for banks not to process for 5967-type merchants demonstrates the applicability of this statement.

Further, there are three recent developments of which we should all be cognizant:

1. a new USA Government Task force
2. a new surge of UDAP activity
3. a focus on merchants with multiple accounts at multiple banks

1) New USA Government Task Force

On October 27, 2011 at the ETA’s Compliance Day in Chicago, a Federal Trade Commission (FTC) official told attendees that the government has formed a task force to monitor third-party payment-services providers. The stated goal is to prevent fraudulent merchants from obtaining merchant accounts and to shut down such merchants as quickly as possible if they defraud consumers.

The group has some very heavy hitters and includes the FTC, the Justice Department, the Federal Bureau of Investigation, the U.S. Treasury Department’s FinCen anti-money-laundering unit, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp.

For those not familiar with the groups mentioned above, below is a synopsis of each:

2) New Surge in UDAP Activity

Bank regulators have embraced UDAP, the acronym that stands for Unfair[i] or Deceptive Acts[ii] or Practices, which is in actuality Section 5 of the FTC Act, to justify their investigation into certain merchant activity and thus be able to impose penalties on merchants who otherwise were compliant in their respective payment channels.  It seems, nowadays, that there is so much attention on consumer protection that if a merchant has just one chargeback or one unauthorized transaction, then it is the belief of the regulators that a consumer was harmed and thus, there is enough evidence to warrant an investigation into the merchant’s practices.

The strength of this law is that it is very general, providing authorities with the ability to apply it to many different situations that arise.  Currently, it is being used to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law.

For an informative overview of UDAP, take a quick read through the Federal Reserve Guidance[iii] published on their website.

3) Merchants with Multiple Merchant Accounts

It has come to the attention of the FTC specifically, but no doubt also to the payment associations, that merchants that have many merchant accounts across many banks may not be doing this for a business reason other than to keep their merchant account compliant under the card association rules.

A news article from Digital Transactions[iv] reported that the representative from the FTC stated:

“We have found blatant misrepresentations on applications,” FTC representative said. Regarding one person trying to get multiple merchant accounts, she added, “We pay attention to little things that add up to the same person.” She noted that the FTC has seen cases of 20 to 50 descriptors tied to one account. The purpose of so many accounts ultimately held by a single entity is to keep chargebacks in any one account below Visa Inc. and MasterCard Inc. thresholds that would draw scrutiny and even account closure.”

Conclusions

This new task force, in theory, will speed up the communication and the ‘knowledge-bank’ between these various entities to uncover questionable merchants.  The fact that they are stating that they will be focusing on the ISO or Third Party Provider (TPP) means that you will now have to answer more questions about your business so that the ISO/TPP can protect themselves.  Further, as we have seen fewer banks in the marketplace, there will be fewer ISOs and TPP that will be willing to take on ecommerce business, let alone registered high-risk ecommerce merchants.

Regulators are specifically targeting merchants with chargebacks wielding the FTC Act without regard to whether you are compliant or not with the payment rules.  It behooves merchants to ensure that they are providing clear terms and conditions for the consumer and that the consumer is not being deceived by the site or with what they are purchasing.

Authorities are hunting for merchants that have multiple merchant accounts across multiple banks.  Unless you have a reasonable business reason to obtain multiple accounts, anything beyond reasonable poses a risk.  I would also suggest that if the only reason your merchant accounts are compliant is that they are under the number of chargeback threshold rule, then you need to discover the source of your fraud and better mitigate it.  Speak with L3 Payments to analyze your transactions and system to help you stay out of harm’s way.

Even with all the focus as detailed above, there is one thing that remains constant throughout the efforts: no authority is willing to investigate the other half of the transaction, that is, the consumer.