Shell game?

“Payment processing” used to involve standing in the checkout line and handing the cashier your pennies.  (Remember checkout lines?  Remember cashiers?  Remember pennies?)  In a lawsuit filed in federal court, the FTC alleges that Ideal Financial Solutions and more than a dozen individual and corporate defendants used an “intricate web of concealment” to game the payment processing system in a way that resulted in more than $25 million in unauthorized credit card charges and bank account debits.

How did the operation work?  According to the complaint, the defendants set up shell companies to establish merchant accounts with third-party payment processors they used to charge people’s credit cards or debit their bank accounts.  The fees, usually around $30, showed up on consumers' statements with nondescript descriptors like Debt2Wealth, Fund Assur, or Avanix.  When people called the phone number listed by the transaction to complain — and the volume was so high, the company had to set up a new call center to handle the deluge — operators claimed the consumers had OKed the charges.

Except that according to the FTC, that was flat-out false.  Consumers had never agreed to pay.

So where did the defendants get people’s financial info?  According to the complaint, the source is unknown.  However, many consumers caught in the web had applied for payday loads online, a process that required them to give their bank account numbers with the understanding that the loan, if approved, would be deposited directly.  Unapproved charges are enough to arouse any consumer’s ire, but by targeting consumers already in financial trouble, the defendants’ unauthorized debits allegedly caused many cash-strapped victims to incur pricey penalties and overdraft fees.

Here’s where the story takes an interesting turn.  As most businesses know, when consumers contact their bank or credit card issuer to complain about an unauthorized debit or charge, those companies often process a reversal — called a chargeback — to refund the consumers.  High reversal rates can be a key sign of financial shenanigans.  According to the FTC, the return rates for the defendants’ transactions were astronomically high, compared to industry averages.  As a result, at least some payment processors terminated their merchant accounts.

But the FTC says the defendants took steps to fidget with the digits, gaming the system to make their chargeback rates look artificially low.  According to the complaint, the defendants manipulated their return rates by making multiple unauthorized debits from consumers’ bank accounts for tiny amount like one cent or three cents.  They immediately refunded those amounts before making the unauthorized $30 debit.  By doing that, they falsely inflated the number of total debits and thereby made their return rates look lower by comparison.  According to the complaint, the defendants engaged in that shell game to forestall fraud investigations and merchant account termination.

A federal judge in Nevada has frozen the defendants’ assets and appointed a receiver to manage the business pending trial.  But even at this preliminary stage, there are tips savvy businesses can take from the FTC’s law enforcement action.

Many (un)happy returns.  Regardless of where your company is in the payment chain, watch for warning signs of consumer dissatisfaction.  High chargeback rates can be a serious signal that something’s amiss.

Charlatan’s web?  According to the FTC, the defendants registered more than 230 domain names, ran 50+ different billing campaigns, and often used identity-hiding services and auto-forward features.  Companies can try to hide what’s going, but there aren’t many tactics federal and state enforcers haven’t seen.  It’s a mistake to think that shell corporations, multi-layered transactions, or clever end-arounds will deter detection.

Leading edge.  Some companies seem to ask more trenchant questions when buying office chairs than business leads.  Given heightened sensitivities about consumer privacy — especially when it comes to confidential financial data — ask the questions that need to be asked before acquiring those “can’t miss” leads.

Visit the BCP Business Center's Payments and Billing page to find out more.