Countering Operation Choke Point, Acquirers Canceled 10,000 Fraudulent Merchants

July 14, 2014

By Jim Daly

Seeking to contrast the merchant-acquiring industry’s actual practices with the impression created by the government’s Operation Choke Point that acquirers turn a blind eye to shady merchants, the industry’s leading trade group on Monday said its members last year discharged more than 10,000 merchants for fraud.

That statistic comes from the Washington, D.C.-based Electronic Transactions Association and is based on a recent member survey. An ETA spokesperson says the association can’t release the number of survey respondents “because of the confidential nature of the questions.” The ETA did not have comparable earlier figures because it hasn’t done a similar survey in recent years.

The survey results and recent ETA guidelines for underwriting and managing so-called high-risk merchants are meant to counter pressure from the U.S. Department of Justice’s Operation Choke Point, which seeks to prevent high-risk merchants from fleecing consumers by cutting off their access to electronic payment networks. But the acquiring industry says the campaign threatens access to the payment system by legal merchants that sometimes draw fire on moral or reputational grounds, and in effect turns acquirers into police.

“Although well intentioned, the federal agencies supporting Operation Choke Point are aiming in the wrong direction,” ETA chief executive Jason Oxman said in a statement. “By targeting payments companies instead of fraudulent merchants, the Financial Fraud Enforcement Task Force [a group that includes the DoJ, federal banking regulators, and state law-enforcement agencies] is ignoring the payments industry’s massive efforts to identify and eliminate fraud. Federal law-enforcement officials should understand that we make a better partner than a target in the effort to choke off fraud—but unfortunately Operation Choke Point continues unabated.”

The Justice Department’s press office did not return a Digital Transactions News call for comment.

Anecdotal evidence indicates that in response to Operation Choke Point, merchant acquirers are now terminating more merchants than they otherwise would. Erring on the side of caution to avoid regulatory scrutiny, sponsor banks are asking their independent sales organizations to take a closer look at some merchants and “de-market”—cancel their merchant accounts—if there are any potential problems, according to Greg Cohen, chief revenue and strategy officer at Merchant Warehouse, a Boston-based ISO and payment and customer-loyalty technology provider for merchants.

“What we have noticed is that our sponsors … have added to the merchant types that they have asked us to de-market,” says Cohen, who is a member of the ETA’s board of directors. “It probably has increased over what we’ve de-marketed over the past year.”

Cohen would not identify any specific merchants or categories, other than to note that public targets of Operation Choke Point have included payday lenders and check-cashing operations.

Other industries traditionally considered high-risk by acquirers include firearms dealers, online pharmacies and vitamin sellers, and adult entertainment. But the ETA and others, including bank associations and members of Congress, have decried Operation Choke Point for trying to deny payment access to merchants that operate legally but may be unpopular.

The ETA on July 10 launched a petition on urging signers to tell Congress that “Operation Choke Point is choking off legitimate commerce.” The petition had 176 signers as of Monday morning, the ETA spokesperson says.

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