The FTC’s effort to expand an acquirer’s responsibility changes the basic nature of the acquirer’s role, forcing acquirers to pass judgment on the legality of a merchant and the potential deceptive nature of its business. This effectively mandates that acquirers become the police force for merchant activity, which is not a role acquirers desire or are equipped to handle today.
From a risk manager’s perspective, we need not go much further than the possibility that FTC action opens the door for other legal judgments of processor liability to believe that acquirers would begin modifying their risk practices accordingly. Rightly or wrongly, the risk manager might believe that due to FTC legal actions, its risk exposure has increased significantly. Further, risk mitigation techniques such as cash collateral cannot be relied on since the FTC has the power, and uses it, to require the merchant acquiring bank to forfeit all held reserve funds to the FTC. Despite the fact that acquirers hold merchant reserves for the purpose of repaying consumers that dispute transactions with that merchant, the FTC has mandated that acquirers forfeit reserve funds directly to the FTC.
Depending on how wide one believes the precedent set by this type of action would extend, industry-wide risk exposure could increase by a factor of ten or more. Exposure is calculated by acquirers using a combination of information such as chargeback and credit refund history, dollar volume processed, timing between purchase and delivery, and timing between purchase date and chargeback or return. The overall industry holds nearly $22 billion in credit risk exposure today based on existing Card Network rules, but that could increase to $258 billion if acquirers were held liable for all transactions instead of just those disputed.
Now, instead of simply prohibiting outbound telemarketing merchants in the portfolio, as many acquirers do today, an acquirer might think twice about signing inbound telemarketing merchants as well, or perhaps even certain types of e-commerce businesses. The acquirer will change its operations for underwriting and monitoring. What initially seems to be a relatively modest project to revise risk and monitoring rules associated with outbound telemarketing merchants will quickly become a large scale overhaul of the acquirer’s practices across the entire merchant acquiring value chain including sales,underwriting, pricing, and ongoing risk management for multiple industry verticals.
The FTC’s Potential Impact on the Merchant Acquiring Industry Prepared for the Electronic Transactions Association
First Annapolis Consulting, Inc.
July 15, 2014
