United States: A Tightening Chokehold: The FTC And CFPB Continue To Take Aim At The Payments Industry

Last Updated: January 14 2016
Article by Edward A. Marshall and Theresa Y. Kananen

Beginning in earnest in 2013, the Federal Trade Commission ("FTC") began to exert pressure on the payments industry—including payment card processors and independent sales organizations ("ISOs")—to stamp out businesses engaged in consumer fraud. More recently, it has been joined in its effort, dubbed by some as "Operation Choke Point," by the Consumer Financial Protection Bureau ("CFPB"). Together, these government agencies have pursued businesses perceived as serving as merchant "on-ramps" to the payments grid for allegedly facilitating the acceptance of credit and debit cards by businesses that inflict harm on consumers.

Initially, enforcement actions against players in the payments ecosystem were designed principally to capture "reserve funds" they might be holding to satisfy consumer-initiated chargebacks or to force a disgorgement of fees received from processing the transactions of "bad actors." That is, the government leaned on processors and ISOs principally to contribute to a pool of funds designed to redress consumer harm. To the extent businesses providing payment card services had actually received revenue or profits associated with those transactions, they were called upon to release them (to varying degrees) to help alleviate the injury caused by the merchants with which they did business.

Within the past year, however, the FTC and the CFPB have become more aggressive. They have attempted to put payment processors and ISOs on what amounts to the same plane of culpability as the merchants deceiving consumers themselves, seeking not merely reserve funds or disgorgement, but joint and several liability for the entirety of the consumer injury allegedly perpetrated by third parties. See, e.g., CFPB v. Universal Debt & Payment Solutions, LLC, Civil Action No. 1:15-CV-00859-RWS (N.D. Ga. filed 2015); FTC v. CardFlex, Inc., Civil Action No. 3:14-cv-00397 (D. Nev. filed 2014). And following a recent decision by the United States District Court for the Northern District of Georgia, it appears that such liability is at least theoretically possible—at least in instances in which a payments defendant engaged in "severe recklessness" by engaging in "an extreme departure from the standards of ordinary care." See CFPB v. Universal Debt & Payment Solutions, LLC, Civil Action No. 1:15-CV-00859-RWS (N.D. Ga. Sep. 1, 2015) (denying a motion to dismiss).

Critics have argued that pursuing such extreme relief against the payments industry is unwarranted and, at a minimum, disproportionate to the limited role the industry plays in authorizing and settling payment card transactions (without any direct consumer contact). And, at least in part, that criticism stems from a lack of clear guidance about the standards by which culpability is to be measured. Forcing the rapid or reflexive exclusion of certain businesses from the payments ecosystem based on amorphous standards presents a very real risk that even legitimate companies will be put out of business (without due process safeguards). And it also has the potential to involuntarily offload regulatory responsibility from the public to the private sector—forcing payment processors and ISOs to determine whether and when to exclude a business from the ecosystem under threat of being a complete insurer against consumer injury if they make the wrong call.

Clearer standards alone will not eliminate those concerns. But they may ameliorate them. And to that end, there are two emerging sources from which to draw.

First, the payments industry itself is working to provide detailed guidance regarding "best practices" for the industry in underwriting and monitoring risk. The Electronic Transactions Association, for example, has published Guidelines on Merchant and ISO Underwriting and Risk Monitoring, which is continuing to evolve as a source of normative standards to protect against potential consumer injury.

Second, there are the enforcement actions initiated by the FTC and the CFPB. Surveying the allegations of these cases begins to paint a somewhat clearer picture of particular practices that regulators perceive as taking a payments company across the line from unwitting facilitator of consumer fraud to deserving (whether justifiably or not) equally harsh treatment as the perpetrators of fraud themselves. These include:

  • Ignoring dramatically high chargeback ratios, including double-digit ratios (as high as 30%) between transactions made and transactions charged back by disappointed consumers;
  • Failing to follow up on or investigate disturbing chargeback narratives (e.g., consumer allegations that a merchant coerced payments of fictional debts by making unlawful threats), such as through calls to consumers who initiated the same;
  • Activity assisting merchants in avoiding card brand detection by purposeful lack of transparency and load balancing—i.e., cycling through different merchant identification numbers so that no one merchant id is identified as problematic by the card brands;
  • Relying on personal guaranties of merchant principals to bypass or disregard internal credit risk policies;
  • Accepting merchants that had previously been terminated or rejected by the processor or ISO based on unseemly business practices; and
  • Failing to follow up on obvious errors or discrepancies in merchant applications (including, e.g., merchant location, type of business, or principal identities).

Again, clearer standards alone will not address all the valid concerns being raised by critics of "Operation Choke Point." But, so long as the government's initiative continues, better understanding what perceived "red flags" exist in the mind of regulators can help industry players avoid the fallout of being made unwilling guarantors against merchant fraud.

Edward A. Marshall is a partner at Arnall Golden Gregory LLP, in Atlanta, Georgia, where he co-chairs the firm's payment systems team. He also chairs the payment systems litigation subcommittee of the ABA Section of Litigation's Business and Commercial Litigation Committee.

Theresa Y. Kananen is an associate at Arnall Golden Gregory LLP, in Atlanta, Georgia, and a member of the firm's payment systems team.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions