The Green Sheet Online Edition
September 23, 2013 • Issue 13:09:02
How to keep tabs on reps, merchants â€“ Part 2
This article is the second of a two-part series containing perspectives members of the Green Sheet Advisory Board shared in response to questions about recent Federal Trade Commission actions brought against payment companies. Allegations involved the promulgation and/or facilitation of deceptive sales practices.
Depending on the circumstances, the alleged abuses pertain to the sales schemes of ISOs themselves or the sales practices of the merchants they serve. All appear to incorporate telephone contact with prospects either to set appointments or to close sales.
Based on the related FTC statements, it is clear that some of the defendants' actions, if substantiated, are reprehensible (claiming to be associated with a merchant's current processor, quoting a fixed transaction fee without disclosing all other merchant fees, substituting contracts for applications when merchants apply for accounts, for example). When it comes to merchants' actions, however, the level of ISO and processor involvement and responsibility seems more difficult to discern.
To help shed light on this issue, we asked our Advisory Board the following questions:
- What are you doing to train and monitor your sales force to ensure everyone who represents your business is aboveboard?
- How do you evaluate your merchant customers to ascertain that their sales and marketing practices are indeed legal?
- Could this scrutiny on the part of the FTC lead to federal regulation of business-to-business (B2B) contracts, such as a three-day period in which a merchant can renege on a signed contract? If so, how might that affect our industry?
For additional insights, see the first installment of this series: "How to keep tabs on reps, merchants â€“ Part 2," The Green Sheet
, Sept. 9, 2013, issue 13:09:01. We wish to thank all board members who responded and hope their answers offer insights and expertise that will help you in your business endeavors.
- Monitoring our sales force. When an ISO resells our products, we call the merchant and go over all the details of the service agreement â€“ to verify that the merchant understands our product, our pricing, how claims are submitted and paid, and any other aspect which might cause misunderstanding. When our internal sales force signs a new merchant, our customer service group performs the setup and training function. We strive for total transparency, as well as to make sure that the merchant knows who to call here if they need help.
- Evaluating our merchant customers and their sales and marketing practices. Unlike credit card ISOs, who typically call on every merchant, we know that our product is a "must have" for only about a dozen merchant category codes, which we know very well. Thus, we have a "self-selection" process in place here.
These merchants, car dealers, vets, funeral homes, etc., are already under regulatory scrutiny, and they are not going to jeopardize their valuable franchise by breaking the law or even just being careless. We avoid merchants where we believe there is the potential for problems via a restricted list, for example, 'Buy Here Pay Here' dealers, payday loan companies, etc.
- Possibility of increased federal regulation of B2B contracts. Is increased regulation possible? Yes. Is it a good idea? Not likely. Let's look at the big picture. In 2011, there were 165,000 pages of federal regulations. They impose a big burden on small business. Regulators cannot capture all the problems and complexity of each and every kind of business. Small business will pay a disproportionate cost of this regulation. And remember, it is the merchant that pays the freight for the credit card infrastructure.
If we had to scrutinize and monitor our merchants â€“ mostly car dealers â€“ we would probably have to increase head count here by 25 percent. Who is going to pay for that? What would it accomplish? Are we going to (virtually) sit in at the dealership when the finance and insurance manager closes the deal and sells the car, or when they sell parts to a body shop?
Moreover, small businesses â€“ our clients â€“ rely on their internal expertise and innovative solutions to solve problems â€“ unlike large enterprises, which rely on formal rules. Regulators should focus on constructing fewer, more effective regulations by defining outcomes, not behavior. They should focus on what's important, and this is not.
CPPGroup ISO Merchant Services
- Group ISO â€“ being an ETA-CPP certified company/individual, as well as a wholesale ISO that handles everything to do with our merchants â€“ our team is trained to understand that these deceptive practices bear no benefit for them or our company. We have created our compensation plan to be mainly based on not only acquisition, but also attrition of merchants.
We feel that basing compensation and achievement/promotion opportunity for our employees on solely the performance of their accounts and longevity of their merchant relationships will, and has, completely taken these deceptive practices out of the question with both our inside and outside merchant consultants/representatives. We pride ourselves on the fact that Group ISO still processes for the first merchant we ever boarded.
- We have the latest monitoring system within our organization to monitor our inside merchant consultants/representatives through their phone consultations. The inside representatives are also weekly trained and daily monitored by their direct management to prevent these deceptive practices/habits from evolving.
In addition, we have implemented, within our Customer Service and Deployment departments, training and monitoring programs which help our organization get direct feedback and find out if deceptive practices are happening with any new or old merchant consultants. This team is called the 'A-team.'
- I believe it can lead to a clause being mandated by the FTC, but I don't feel it will negatively affect organizations like ours, as we offer this [the right to change one's mind about doing business with us] to any merchant we bring on board currently. In addition, we offer a month-to-month contract to merchants. This allows merchants the right to leave at any time without financial obligation.
I believe this clause could be a benefit if it's focused on the right morals and laws. Knowing this industry very well, I'm aware there are organizations that are not following the rules and deceptively selling to merchants with false information. If this is what it takes to shut them down permanently, we are all for it.
Signature Card Services
- At Signature we take great efforts to make sure everyone who represents our business is aboveboard. Most of the FTC cases to date have centered on merchants violating newly established telemarketing laws, and their card processors are named in the lawsuit for, what essentially boils down to, knowingly aiding and abetting the illegal activity of the merchants.
We protect ourselves from these types of merchants through our rigorous underwriting process and our hourly review of merchant account activity to detect fraud or chargeback issues to immediately address them before they become larger issues.
The first and most important piece to keeping everyone who represents our business aboveboard is our internal corporate culture. We have a people-first environment where we prioritize acting in an ethical and professional manner. We make it very clear to all of our internal and external sales agents and employees that our reputation comes before our bottom line.
As the saying goes, it takes 20 years to build a reputation and five minutes to ruin it. We are almost at 20 years, and our consistently ethical behavior has built our strong reputation. We certainly don't want to do anything which would jeopardize it.
We emphasize this tone from the top of our company, and internally we use the phrase "all roads lead back to Signature." The idea is if everyone in our company acts ethically and treats others with respect â€“ whether those others are agents, merchants, potential merchants, previous merchants or even vendors â€“ they will think highly of our company and either stay with us or come back after they have had to deal with the less ethical payment processing companies out there.
With regard to making sure our sales agents stay aboveboard, we have three key drivers which promote this behavior. The first is our previously discussed reputation as trustworthy, fair and ethical. We get a lot of sales agents that have been burned by unethical companies in this industry, and these agents come to us specifically because they know that we treat people fairly.
If we commit the resources, turnaround time and support our sales agents need, those agents are significantly less likely to engage in questionable behavior.
The second, and unfortunately necessary, driver to keep our sales agents aboveboard is each of our agent's contractual obligations. Many of our older sales agents signed a code of ethics that we sent out in addition to their standard agent agreements. We have since incorporated the code of ethics and agent agreement into one document which outlines appropriate behavior, although we have recently been considering separating them out into two documents again.
In the event of any below-board issues, if our agents were complicit or should have known, we make it clear to them in their agreements that they will be on the hook for such behavior.
The third driver which keeps our sales agents aboveboard is closely monitoring their business practices. Our executive management team works closely with the relationship managers to look for patterns of 'bad behavior' and immediately addresses any such issues with our sales partners.
After merchants are approved and boarded, we are proactive about keeping an open relationship with them â€“ scheduling calls to follow up about their service and to make sure the plan that merchant selected is working for their business.
By doing this, we are able to glean information about the sales process from the merchant to make sure everything was aboveboard. When, and if, any risk issues arise, we communicate these issues clearly and early on, which allows us to mitigate risk for all parties involved.
Our process also establishes a strong relationship and an open line of communication between us and our merchants, and in the event something is not aboveboard, they are more likely to notify us.
- Merchants that engage in illegal business practices have been the cornerstone of the FTC's lawsuits against payment processing companies. The FTC has alleged that those payment processing companies knew of the illegal activities their merchants were engaged in, and suggested and offered services to aid in these illegal practices. To date, these cases have not been publicly resolved; they have either been settled or are still ongoing.
At Signature, we organize our review to ascertain the legality of sales and marketing practices on both the front end and the back end. On the front end, we are lucky to have a stellar underwriting team. Each incoming merchant application goes through three levels of review and approval.
First, each merchant is reviewed in great detail by the junior underwriting analyst. This includes everything from obtaining and reviewing the relevant information at the corporate level, to carefully looking at their sales and marketing practices and engaging in mock transactions through their website.
After the junior underwriting analyst has signed off, a senior underwriting analyst reviews the application material, checks on any notes or issues highlighted by the junior analyst, and signs off.
The application is then submitted to our underwriting manager for sign-off. Since we handle everything internally and have automated a lot of these processes through our own internal underwriting department and risk portal, we are able to effectively, yet quickly, evaluate the practices of each merchant.
If necessary, we also coordinate with the merchant and/or sales partner during this process to gain an understanding of what their sales and marketing practices are, and to evaluate the risk associated with those processes. This process, coupled with the strength and combined experience of our underwriting team, catches the vast majority of illegal operations.
After a merchant has been approved, we, along with our banks, carefully monitor chargebacks. If a merchant is engaging in an illegal activity, chargebacks are going to be high. Additionally, there are warning signs, such as spikes in credits in a particular month, that our risk management team would likely catch and investigate to determine if there is fraud.
In the event that chargebacks are above average, we do additional investigation of those merchants to determine where the chargebacks are coming from. From the data we gather, we evaluate the likelihood of fraud, or illegal sales or marketing activity.
- This scrutiny by the FTC is unlikely to lead to federal regulation of B2B contracts. The reason being that any contract to perform an illegal act is already considered null and void under existing contract law. To the extent that card processing companies contracted with merchants to support and engage in illegal activity, those contracts would not hold up in court.
If the card processing companies did not enter into a contract, any regulation of contracts would not have made a difference. Lastly, there is too much at stake in contract law to allow these types of regulations to be put in place; the burden placed on companies and on our court systems would be enormous.
Even if additional federal regulation of B2B contracts is implemented, such regulation is unlikely to affect our industry. If a merchant could renege on a signed contract for three days, and this right could not be waived, every single company would just contractually provide for effective dates and performance dates beginning just after three days have elapsed. If anything, any such regulation would only serve to delay the time it takes to have someone up and running by three days.
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