n Jan. 15, 2004 The Federal Trade Commission (FTC) announced it accepted $23.5 million to settle charges that Certified Merchant Services (CMS) violated the FTC Act while providing merchants with credit-card payment services.

The payment to the FTC came from the forced sale of CMS' assets to First American Payment Systems, L.P. The FTC and CMS agreed that the payment would provide full redress to the CMS merchants. The sale was part of the stipulated final judgment and order and settled the FTC's first-ever complaint against an ISO for practices related to the marketing of credit and debit card merchant accounts to small businesses.

The stipulated final order was filed on Dec. 30, 2002. The court made public a partially sealed version of the order in January 2003. However, the actual judgment amount remained under seal until Jan. 5, 2004, the date the court ordered that the payment made to the FTC to satisfy the judgment could be made public.

In February 2002, the FTC charged CMS and its principals as individual defendants (see The Green Sheet, issue 04:02:01, Feb. 9, 2004) with contacting small business owners throughout the United States to induce them to establish merchant accounts. (The original complaint was later amended in June 2002.)

In the process, CMS violated the FTC Act by unfairly and deceptively: 1) modifying customer contracts; 2) debiting customer accounts without authorization; and 3) making misrepresentations regarding various goods or services offered.

In addition, the defendants were permanently barred from debiting, billing or receiving money, or assisting others in doing the same: 1) before the defendants have provided the merchants with the promised card processing services or goods; 2) for check conversion processing before the merchants have signed up for and activated such services; and 3) for services or goods after the merchants have cancelled. If the defendants could not defer automatic debiting, the order required them to reimburse any debits that fall into the categories above.

The FTC order focused on misrepresentations of material facts and specifically on the following types of false claims that should be lessons for all ISOs and MLSs:

• If merchants buy an ISO's services, they will save money on their business expenses, including their card processing expenses

• If merchants are dissatisfied with any services or misrepresentations made by the ISO, they can cancel or transfer to another card processor at any time without further obligation

• There is no monthly minimum fee or expense associated with merchant accounts or the services

• There are no fees or expenses in addition to the discount rate and per-transaction fee agreed to by the merchants

• If merchants are charged cancellation fees by prior credit card processors, the ISO will reimburse the merchants

• If merchants have an existing equipment lease, the ISO will buy out the remainder of the lease

• Failing to disclose, clearly and conspicuously either orally or in writing, any material fact relating to fees as detailed in the fine print of the merchant agreement.

The order also required the defendants to take "reasonable steps" to monitor the conduct of their "agents, representatives, employees or independent contractors" in complying with the terms of the order.

The FTC alleged that CMS failed to disclose various charges or fees. According to the agency, "in many instances CMS deceptively failed to disclose, clearly and conspicuously, that they would charge merchants certain fees, including a minimum of $25 if the merchants did not reach a certain level of card sales; a semi-annual fee of between $33 and $50; and a cancellation fee of between $300 and $400 for canceling within three years of signing a service contract."

ISOs that charge similar fees, especially if they are "buried" in the fine print of a merchant agreement, should consider revising the agreement and make full disclosure of all fees in bold type near the space for the merchant's signature.

Merchants need to be aware of these provisions. ISOs can use a "checklist" and review all the rates and fees quoted in contracts with merchants, indicating with whom the fees were verified and the date, time and phone number called.

Some ISOs still need to re-do their merchant agreements so that all fees are clearly disclosed-especially the cancellation fee. The cancellation fee may help minimize merchant turnover, but if it is used you may be a target for investigation by the FTC. This issue should be revisited with legal counsel the next time any merchant contract is revised.

Also remember to adequately disclose changes to your merchants, whether they are fees, charges or other terms of the agreement. A recent action in Tennessee, American Golf Schools, L.L.C. v. EFS National Bank, was brought under the state consumer protection acts by a class of merchant plaintiffs.

The complaint alleged the bank engaged in several unfair and deceptive trade practices and originally sought more than $70 million in damages; it was recently settled for $37.5 million.

All of the claims were based upon the failure to properly notify the merchants of changed terms in the business relationship.

The plaintiffs alleged that the defendant violated the state consumer protection acts by:

• 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 any prior notification

• Charging for services in excess of rates stated in the agreement without prior notification

It's not worth the cost to lie to or deceive merchants; by the same token, ISOs should not allow their agents to do this either.

I do not believe that there is any monetary advantage for ISOs and MLSs to lie to merchants to get their business. Long gone are the days of the big upfront commission from equipment leasing.

Today the income comes from maintaining a long-term relationship with merchants.

That's a lesson worth remembering-and worth more than $23.7 million.

David H. Press is Principal and President of Integrity Bankcard Consultants, Inc. Phone him at 630-637-4010, e-mail dhp@integritybankcard.net or visit www.integritybankcard.net