The Green Sheet :: GS Archives

I often have written reviews of ETA meetings in The Green Sheet through the years. Some reviews have been good and some have been critical. What all of my reviews have had in common, however, is that I have tended to talk about the programs and speakers at each given event, and often about the politics of decisions.

This review will spend little time on these items, with the exception of my noting that the April 10-12, 2002 Annual Meeting in Orlando, Fla., was an excellent event that enjoyed record (more than 2,000) attendance. What I hope to address instead in this year's review is both the apparent risk facing the industry and my sincere hope that the ETA can be the catalyst to meet this risk head on.

If you have been around the industry for a while, you might have noticed the slow morphing of the old Bankcard Services Association (BSA), an association of Independent Sales and Service organizations built to unite for a common purpose of improving the image of ISOs, into the Electronic Transaction Association (ETA). I, for one, have been watching and yet have missed some of the more subtle changes.

It is a bit like seeing your kids grow every day. Sometimes the change is so slow that you just get up one morning and - SURPRISE - they are looking you in the eye. Well, in my mind, watching the ETA is just like finally recognizing that growth spurt, and for my money, the organization's maturity couldn't come at a better time.

While the BSA was built by ISOs for ISOs, the ETA now belongs to everyone in the payments services business, with the most control in the hands of the largest organizations. While it's true that the ETA is no longer just about ISOs, what has happened is that all of the organizations, from leasing to the bankcard associations and beyond, have come to see the benefits that ISOs bring and want to nurture that success.

This is reflected in the increase in money and support that is flowing into the ETA from its membership. One of things that you first notice about the new and improving ETA is that it is papered in advertising. Just about anything you can imagine at an ETA event can be sponsored. Organizations can sponsor speakers, water bottles, hall banners, welcome banners, Internet kiosks, Exhibit Hall aisle signs, pens, hotel key chains, program covers, golf, lunches, dinners, desserts and even the Relaxation Center, just to name a few.

While this "commercialization" might make some unhappy, the reality is that it makes having such an organization, its events and even its programs a financial reality for ISOs. It also signals that the association has arrived and has some significant clout.

Now to the risk facing the industry:

While the number of educational programs was limited on April 11 and 12, a special session was created on the afternoon of April 10 to discuss various aspects of the recent Federal Trade Commission action against a large ISO organization.

The speakers for this three-hour session were: Holli Targan, Attorney, Jaffe, Raitt, Heuer & Weiss. Paul Katz, Attorney, Greenberg Taurig. Garrett Vogel, CPA, Receiver, Certified Merchant Services. Fred Gumbel, Consultant, CMS Receivership Team.

While many attendees may have expected that the session would talk specifically about the pending FTC complaint against CMS, the CMS Receiver was quick to note that neither he nor the other panelists could talk about what everyone was expecting because the FTC and a federal judge said they could not because of pending litigation.

Nonetheless, this session was very informative and should have been on every ISO's priority list. The session should have scared every ISO organization or bank acquirer in the room.

As Gumbel, who often works for the FDIC as an industry expert, explained, "The FTC isn't going to let this industry just be a sales process anymore." He added, "State and federal governments think that the CMS case is the tip of the iceberg," and "Visa is concerned that this FTC action may damage the Visa brand."

Even though this presentation should have made every ISO in the room uncomfortable, just contemplating the thought of being next on the FTC's list, many in the room expressed concern that ISOs have not been given the ETA's operating rules and that various somewhat mysterious processes of the association may be a contributing factor. Others expressed the view that flagrant violators of reasonable business practices should be in trouble with the FTC, and the matter is of little concern to their business.

While both views are naive, in my mind, I was heartened to see, just by the ETA planning this event, that the association is taking the matter very seriously. One of the scheduled speakers was Mary Dees, who is President-elect of the ETA, is part of the ETA Government Relations Committee and also is on the CMS Receivership Team, but she could not participate because she lost her voice. When asked if the panel was telling the room that the current FTC investigation likely would have an impact on the industry, Dees said, "Yes, there must be some level of shakeout."

With many of the aspects in the FTC's complaint against CMS centering on contractual issues, Gumbel said he has reviewed 35 separate acquiring agreements from as many organizations that all, in his opinion, "violate FTC rules in the area of 'if-then' language."

Targan further detailed specific contractual concerns, noting that the likely "best practices" approach to future acquirers contracts should be to break the process into three parts: (1) a short, clear application, in the language and type size sufficient to be understood by an average person, and that the application language will need to have clear and conspicuous language about every fee a merchant might pay, and it needs to be reflected on page 1 of the application; (2) a contract with clear and conspicuous language that explains in non-legal terms what each party to the agreement is contracting to do, with defined cancellation procedures and any cost implications; and (3) an operating guide that is incorporated into the agreement by reference.

Targan explained that all collateral material, including Web site information, should make only true statements and claims about the process and the ISO and should be consistent with the application, contract and operating guide. Targan also noted that the application must be signed by a person eligible to execute such an agreement, and all three pieces should be given to the merchant by the salesperson.

Targan said that even if the sponsoring financial institution may have approved the agreement or application, it does not relieve the ISO of FTC compliance. Following her suggested guidelines in the future, she said, MAY protect acquirers from FTC actions resulting from rogue sales reps but is not a guarantee to do so. ISO attendees asked why the FTC was expecting these changes in the application process and when such changes must take place. Gumbel explained that these requirements always have existed at the FTC for consumer transactions and are now being applied to business-to-business transactions.

He further noted that "the FTC is wanting acquiring to look more like consumer credit from a disclosure point of view," and that "ISOs are at financial and survival risk."

It often is difficult for an association to lead because, by nature, such organizations are more adopters and followers of industry trends. But the ETA has a large voice and is uniquely qualified to lead the way to a voluntary compliance program.

Historically, the FTC likes industry-led, voluntary-compliance programs that permit the FTC to look at self-imposed rules and tinker and suggest, leaving litigation for a later and hopefully unnecessary last step.

I, for one, think that if the ETA can take a leadership position to co-develop and draft the first round of possible solutions, the FTC will listen and the industry will adopt these guidelines. Some of the steps are obvious.

No matter how much care is taken in getting the language in merchant applications and contracts to look more like consumer-based documents (although this also must be done), as an industry we know that we cannot rely on the sales rep to give the documents to the merchant 100% of the time.

So, as an example, the ETA might as part of a voluntary compliance program acknowledge this challenge and require phone contact with every new customer before the application process continues, either by confirming the previous receipt of the application, contract and other required documents, or by requiring the acquirer/ISO to immediately provide a copy.

Given the FTC's dislike for the commonly accepted practice of combining, in a single document, multiple agreements with various service and product providers, the ETA might establish a standard that requires separate signatures and separate documents for each service and/or contracting party.

While I don't suggest here that these are necessarily good examples of standards, they do help to explain the kinds of elements that must exist. The FTC will not likely be kind to CMS, and I don't like to think about what its next step in our industry is likely to be. I really think that the NEW ETA can have a positive influence on the future of ISOs and is in position to lead the industry out of what will surely be difficult challenges ahead in mitigating this risk.

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