The Green Sheet Online Edition
June 07, 2007 â€¢ Issue 07:06:01
Keep the FTC off your back
By David H. Press
Integrity Bankcard Consultants Inc.
On April 13, 2007, the Federal Trade Commission announced that the Federal District Court in Oregon had frozen the assets of Beaverton-based Merchant Processing Inc., its owner and affiliated companies. It also appointed a receiver to temporarily take control of the business.
The FTC alleged that the defendants used deceptive tactics to sell credit and debit card processing services to thousands of small businesses. For full details on this case see: www.ftc.gov/opa/2007/04/merchantprocessing.shtm.
The Washington State Attorney General's Office also sued the defendants in Washington. For more information on this action, visit www.atg.wa.gov/pressrelease.aspx?&id=14330.
The FTC accused MPI of falsely promising it would save the small businesses money and saying it would buy out merchants' existing equipment leases. The FTC also charged the defendants with failing to disclose fees and concealing pages of fine print from the merchants until after they had already signed contracts.
In January 2004, the FTC accepted $23.5 million to settle charges that Certified Merchant Services violated the FTC Act. The payment to the FTC came from the forced sale of CMS' assets.
The list of don't's
To prevent FTC scrutiny, you, as ISOs and merchant level salespeople (MLSs), should never lie to a merchant or assist others in misrepresenting material facts. Specifically, do not:
- Tell merchants the services you offer will reduce their business expenses, including current card processing expenses, if this is not absolutely true. Even when doing an initial cost comparison, ISOs and MLSs must disclose to merchants all the fees they would be charged.
- Tell merchants that if they are dissatisfied with any services or misrepresentations made by your ISO, they can cancel or transfer to another card processor at any time without further obligation if that is not true.
- Hide fees in fine print and fail to fully disclose any fees or expenses in addition to the discount rate and per-transaction fee agreed to by the merchants. This includes early cancellation fees.
- Hide and fail to fully disclose all fees, including a monthly minimum fee, annual or semi-annual fee, or any other expense associated with merchant accounts or the services.
- Promise to repay to merchants any cancellation fees charged by prior credit card processors if the ISO will not reimburse them to merchants.
- Promise to buy out the remainder of the merchants' existing equipment lease if this is not true.
- Modify contracts without merchants' knowledge after they were signed.
The list of do's
It is imperative that ISOs do the following:
- Clearly and conspicuously disclose, orally and in writing, any material fact relating to fees, as detailed in the fine print of the merchant agreement. All fees should be prominently listed near where the merchant signs the merchant agreement.
- Provide to the merchant _ at the time the merchant signs the merchant agreement _ a copy of the executed document.
- Take reasonable steps to monitor the conduct of agents, representatives, employees or independent contractors in complying with disclosure requirements. The diligent ISO should have a good indication of its problem MLSs.
- When merchants are contacted during the underwriting process, ask questions to verify that the MLS has properly complied with all requirements. Action should be taken when the ISO discovers an MLS who is not compliant.
- During underwriting, use a checklist to review with merchants all the rates and fees quoted in the merchant agreement, and write down the name of the person with whom the verification was done, the phone number called, time and date, and so forth.
- If merchants have been misled, make things right. Give customer service reps things to look for and a process to inform management so they can make merchants whole.
- Be extra careful in states with active attorneys general offices. Before the action against MPI, Washington State Attorney General Rob McKenna authored a letter from the attorneys general of 44 states to CardSystems Solutions Inc. The letter demanded that the company inform all consumers affected by its security breach. For more information about this, visit www.atg.wa.gov/pressrelease.aspx?&id=5060.
- Re-do merchant agreements, if necessary, to clearly disclose all fees, especially any cancellation fees. A cancellation fee may help minimize merchant turnover, but if it is used, you may be a target for the FTC.
Consumer rights for merchants
Remember, it is imperative to adequately disclose all changes to your merchants, whether they are fees, charges or other terms of the merchant agreement.
A Tennessee class action, American Golf Schools LLC v. EFS National Bank, brought under the state consumer protection acts, was settled for $37.5 million. The suit was based upon the failure to properly notify merchants of changed terms in the business relationship including:
- Charging higher rates for electronic transactions without prior notification
- Charging an increased rate for manual or voice authorizations without prior notification
- Applying new charges to bill statements without prior notification
- Charging rates for services in excess of rates stated in the agreement without prior notification.
Regulators are treating merchants as consumers, and this gives merchants additional power that can put ISOs out of business.
In April, the Arkansas legislature passed a bill that limits fees for merchants who cancel credit card servicing agreements.
They will pay no more than $50 in cancellation fees on agreements signed after July 31, 2007. The law also imposes new disclosure requirements for servicing contracts.
Violations of the law would be considered unfair or deceptive trade practices. For more information about this legislation, see "New Arkansas law caps early termination fees" in this issue of The Green Sheet.
There is no monetary reward in lying to merchants to get their business. Long gone are the days of the big upfront commissions from equipment leasing. Today, income comes from maintaining long-term relationships.
David H. Press is Principal and President of Integrity Bankcard Consultants Inc. Call him at 630-637-4010, or e-mail him at email@example.com or visit www.ibc411.com.
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