Article's Authored by Mr. Rianda

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Processors Beware

Recently I have been hearing more stories about how hard it is to place high risk merchants. My clients are informing me that processors and banks are re-underwriting their existing merchant portfolios and terminating large numbers of merchants the processor finds to be too risky. In addition, there seem to be much fewer processors that are willing to take on high-risk merchants. I asked myself why is this trend continuing in our industry?

I was able to find a possible answer by going back and taking a fresh look at some court decisions. It became apparent to me that payment processors are being held to a much higher standard in recent years regarding their knowledge of what their merchants are actually selling. As a result processors can potentially be held liable for the actions of their merchants.

The Global Marketing Group Case:

The first case that came to mind was the action by the Federal Trade Commissions (“FTC”) against the ACH processor Global Marketing Group (“GMG”) and various related entities and owners. GMG provided ACH transaction processing to various telemarketing companies in Canada. The FTC alleged that the telemarketing companies were calling consumers and offering to provide them with unsecured credit cards. The telemarketer would obtain information about the consumers’ bank account and then an ACH charge would be initiated to the account for a few hundred dollars for the credit card. But, instead of getting a credit card, the FTC alleged that the consumers were provided either nothing or a worthless “benefits package.”

The complaint by the FTC against GMG contained a number of alleged actions by GMG that imposed liability on it for the actions of the telemarketers. The FTC cited the fact that GMG processed “ACH transactions on behalf of clients without first obtaining adequate information about the clients and their business practices.” It also found fault with the “extraordinarily high return rates” for the ACH transactions that generated spectacular profits for GMG.

Gucci America Case

The next case I thought about was the Gucci America case wherein Gucci sued some payment processors for civil liability because the companies obtained payment processing services for companies selling counterfeit Gucci products online. Gucci was trying to utilize the federal Lanham Act, which has very potent civil penalties, including allowing prevailing plaintiffs to recover 3 times their proven damages under certain circumstances. Usually these claims against payment processers have been easy to defend so the defendants filed a motion to dismiss that case, which the court subsequently denied.

In denying the motion to dismiss the court used some ominous language that could again open up payment processors to civil liability for processing payments for high risk merchants. The court noted that one defendant knew the merchant had been having trouble finding payment processing because it was a “replica” merchant. Gucci argued that the word “replica” was synonymous with counterfeit on the internet. The court came to the conclusion as to the defendants, that there were substantial factual allegations providing that “at the very least a very strong inference that each knew that [the merchant] traded in counterfeit products or were willfully blind to that fact. “

Again, the court had expanded the previous defenses payment processors had used over the years to avoid liability for the actions of their merchants. This was only a ruling denying a motion to dismiss so Gucci still has to prove its case to win. But it illustrates the expanding potential liability for payment processor.


So where does this leave us? It is apparent that both governmental entitles and private plaintiffs are continuing to try and hold payment processors liable for the actions of their merchants. This is leading to a situation where certain segments of merchant are just not going to be able to find payment processing services, and consequently will be driven offshore or out of business.

For payment processors, it means that they must be much more diligent in their underwriting efforts. The cases point out that the payment processors must make a genuine attempt to determine exactly what a merchant is selling. That means more documentation from the merchant and more historical information about payment processing.

In addition, payment processors will have to monitor the merchants on an ongoing basis for complaints from such places as the state attorneys general and even the Better Business Bureau. If a merchant has too many complaints, the payment processor is best protected by shutting the merchant down. All this additional underwriting and continuing monitoring of merchants will undoubtedly cost payment processors for the additional staff and resources to undertake these efforts.

It also brings into question if the high-risk processing business in the United States is being forced out of business. By definition, if a merchant is high-risk then they must have some reason to be called high-risk and to be willing to pay double or even more what normal merchants pay for payment processing. Based on the court decisions above, those facts constitute at least part of the evidence to prove the payment processor should have known better than to process for high-risk merchants. So, the act of accepting a high-risk merchant goes a long way in proving that the payment processor should be held liable for the actions of the merchant.

The payment processing arena continues to evolve and high-risk merchants are no different. It will be interesting to continue to monitor this situation to see if the current trend of a dwindling number of high-risk processors and merchants continues.

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