Integrity Bankcard Consultants, Inc.

FTC Audit Prevention Analysis

In February 2002 the FTC took over, in receivership, a major ISO because it allegedly misrepresented that: (1) if merchants purchased their services they would save money each month on their card processing expenses; (2) if merchants were dissatisfied with any services or representations made by the company they could cancel or transfer the service to another card processor at any time with no further obligation; (3) there was no minimum monthly fee for the services offered; and (4) if merchants were charged cancellation fees by prior card processors, the company would reimburse them. Finally, the Commission said that in many instances the ISO 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.

This is a general outline of Integrity Bankcard Consultants, Inc.'s FTC Audit Prevention Analysis. This outline concentrates on minimizing the regulatory risk for the acquirer, while complying with all VISA

/MasterCard

and FDIC/OCC rules and regulations and by practicing prudent risk avoidance management of being targeted by FTC or other regulators’ review guidelines. Expect the FTC to continue to follow up on reports of unfair and deceptive sales and billing practices by acquirers and to “stop perpetrators cold." Expect them to be looking in the areas of: Unfair Trade Practices, Failure to Disclose Substantive Terms & Conditions and Deceptive Trade Practices.

The FTC will look to the steps that a company is taking to comply with its guidelines and the presence of this type of “Third Party Audit” and follow up goes a long way in preventing an isolated instance from turning into an enforcement action. During this Audit risks or other shortcomings in the acquiring program may be observed and recommendations will be included in the Final Client Report.

Contracts

Review merchant processing agreements and ISO agreements to:

See if there is the proper balance between the terms of the agreement for fairness to the merchant v. the prevention of loss to the acquirer.
See that the regulators cannot allege: Failure to Disclose Substantive Terms & Conditions.
See that the overall format of the merchant contract documents and collateral materials provide full and adequate disclosure as to all specific terms and fees.
Ensure there is adequate disclosure of all fees and that the debit authorization is properly incorporated into agreement. That the terms of the agreement are not just inserted into fine print allowing regulators to charge that the acquirer for fraudulently debiting previously “undisclosed fees” from the merchants' bank accounts.
Make sure that the regulators cannot charge that the acquirer inserted pages of fine print, including fee and expense information, then allege the acquirer used these pages to justify debits of fees or expenses from the merchants' deposit accounts with no notification.
Determine if the agreement contains terms or circumstances that are not necessary to minimize loss to the acquirer in regard to holdbacks, reserve accounts, termination and collection.

Process

Review underwriting and customer service processes for:

Full disclose of various charges and fees and that the back room operation is not making misrepresentations regarding various goods or services offered as well as adequately disclosing all fees and charges.
Proper identification of all ACH debits and clearly labeled merchant statements so that the regulators cannot allege that fees and charges are disguised, and that all ACH debits are properly and clearly labeled as the company withdrawing the fees and for what purpose.
Ability to identify, track and weed out sales representatives that are misleading and misrepresenting products, services, pricing, charges and fees.
Safeguards in place to ensure that no fees are debited from the merchants' accounts before providing the merchants with promised card-processing equipment or supplies.
Safeguards and adequate processes in place to prevent merchants that cancel services from being charged for service.