The Federal Trade Commission singled out ISOs in its recent proposal to ban four payment methods employed by telemarketers. Two of said schemes - remotely created checks (RCCs) and payment orders - are facilitated with the help of payment service providers. In its late May 2013 notice of proposed rulemaking (RFP), the FTC said payment processors "play an indispensable role" in telemarketing schemes focused on secretly dipping into consumers' bank accounts via these two methods.
The FTC said merchants who obtain consumers' bank routing and account numbers can print out RCCs with the help of third-party payment providers. Those RCCs can then be used to debit consumers' accounts. "Changes in banking regulations and advances in technology now enable banks to accept and exchange electronic images of paper checks, including substitute checks, instead of sorting and transporting paper checks around the country on a daily basis," the FTC said. "As a result, telemarketers, sellers, and payment processors can deposit scanned images of paper-based checks, including remotely created checks, into the check clearing system."
Similarly, remotely created payment orders, an all-electronic version of the RCC, can be created by merchants and deposited and cleared via the automated clearing house (ACH) system, with the help of payment providers. "As a result, remotely created payment orders are at least as susceptible to fraud as remotely created checks," the FTC noted. The FTC believes that the ACH is more susceptible to fraud schemes because it lacks the type of centralized fraud monitoring employed by payment networks over which credit and debit card transactions flow.
In November 2012, the United States Attorney for the Eastern District of Pennsylvania obtained a $15 million penalty from the First Bank of Delaware for allegedly accepting remotely created checks and payment orders that resulted in the unlawful withdrawal of $142 million from consumers' bank accounts over a 10-month period.
That U.S. Attorney's office in Philadelphia said the bank "established direct relationships with several fraudulent merchants and third-party payment processors working in cahoots with a large number of additional fraudulent merchants." The processors named in the complaint included Automated Electronic Checking Inc., Check Site Inc., Check 21.com LLC and Landmark Clearing Inc.
The FTC also cited the case of Your Money Access LLC and its subsidiary, YMA Company LLC, which allegedly processed over $200 million in unauthorized debits between June 2004 and March 2006 for telemarketers and Internet-based schemes. The defendants reportedly "shifted merchants with excessive return rates from ACH debits to remotely created checks in order to continue assisting merchants in defrauding consumers," the FTC said.
Bill Hoidas, Director at Matrix Payment Systems, said most ISOs do not engage in the two types of account dipping schemes under scrutiny from the FTC. However, he believes the ISO community is guilty of misrepresentation.
"Even though the opportunity now exists to make a marvelous annual residual stream, most ISOs, acquirers and banks have not outgrown their old-fashioned ways," Hoidas said. Those ways include lackluster training of new merchant level salespeople (MLSs), resulting in salespeople who make misleading statements to merchants about the products and services offered by service providers.
Hoidas said MLSs will typically claim merchants are not Payment Card Industry Data Security Standard compliant without knowing the true state of merchants' security procedures. Furthermore, MLSs will promise that merchants qualify for lower rates because they are in "good standing" or have few chargebacks, without knowing the truth of such statements, according to Hoidas.
But, apparently, ISO shortcomings do not stop at poor training. Hoidas said he commonly sees proposals that "use fictitious numbers and the alleged 'savings' are usually higher than the residual income produced by the account which, of course, is impossible even if the new processor would work for free."
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