Online Billing: Operation Choke Point

Melody L

The phrase “Operation Choke Point” conjures up many images and is representative of the spirit in which the authorities are using their power to target the providers within the payment industry.

Operation Choke Point is, in fact, the name that the authorities have given their combined efforts in stopping bad merchants by removing the payment processors that these merchants are using. I think that we can all agree that stopping bad merchants is a worthy endeavor, but the way in which it is being executed is causing unnecessary and unfair collateral damage to other merchants, consumers and payment processors.

In this environment, you need to ensure that your business will not be collateral damage and that you have redundancies in place to protect your business in the event that your payment processing chain gets altered.

Their “choke point” focus is akin to stopping illegal marijuana grow houses by turning off the power to the neighborhood. Or to stopping deceptive telemarketers by eliminating the telecommunications company that service them. Or by catching would be criminals before they commit the crime by mass surveillance … oh wait, they do that too.

Banks in the U.S. are responsible for adhering to the regulations of the Bank Secrecy Act, the anti-money laundering regulations and many other laws in the U.S. To adhere to these regulations, a bank is charged with knowing their customers and if they see or believe that there is anything suspicious regarding their client’s transactional activity then they are to file a suspicious activity report (SAR). Filing of this SAR protects the bank from being guilty of being a participant in the consumer or merchant activities and gives the authorities a heads-up on possible financial crimes that are potentially being committed.

Although, every transaction that gets initiated into the payment networks in the U.S. is the direct responsibility of a bank, many banks rely on third-party payment processors to handle merchant related accounts. Through this relationship, the bank sees transaction processing revenue, which can be a significant contributor to the banks bottom-line.

The latent consequence of this initiative is that the banks are enjoying the resultant revenues while ignoring or rationalizing the risks associated with this processing. This greed has led to the targeting of third-party payment processors as the root of all evil by the authorities.

Why is this Operation Choke Point important to you? In this environment, you need to ensure that your business will not be collateral damage and that you have redundancies in place to protect your business in the event that your payment processing chain gets altered.

Here are six suggestions to consider for your business and its’ payment processing health:

• Know with whom you are doing business. If your payment-processing partner is supporting businesses that are operating illegally, then your business is at risk. Ensure that your partners share your long-term commitment to processing.

• Keep informed of what the authorities consider worthy of their attention. The best advice is being sure that you are not being deceptive with your consumers. Your pricing, terms and conditions and products should be as advertised and evident to your consumers.

• Ensure your business is no more than one relationship removed from the bank. When setting up your merchant account, be sure you are signing a merchant agreement with the third-party processor who has the direct relationship with the bank. If you are more than one step away, this is considered nested third-parties and automatically puts your business at risk of termination.

• Lower and monitor your transaction return percentage. If your transactions are resulting in more than 15 percent returns or greater than 1 percent in chargebacks, talk to your payment specialists to learn of ways through which you can reduce these returns.

• Have a back-up account. Even though it is a very sound business practice to have more than one account and banking partners, it is regarded by the regulators as an early indicator that your business is deceptive if it requires more than one banking relationship. The risk of appearing deceptive in this instance is less than the risk of being without an account at a moments notice.

• Monitor your consumer complaints and address them. People love to complain and they will only ever tell the story in the light most favorable for themselves. Today, consumers/competitors/scammers/angry employees/etc. are able to go online and create a complaint at will. There is no fact checking; there are no real repercussions for the complainer and this, unfortunately, is also looked at by the authorities as a warning sign that your business practices are deceptive or unfair. You can choose to ignore them and hope they don’t affect you long term or you can stay on top of what you are seeing and when asked about them, you can present your company in a defensible position.

Melody L is chief operating officer for L3 Payments.