The operations of third-party payment processors will be the focus of a new federal task force led by federal prosecutors and bank regulators, a senior Federal Trade Commission (FTC) official announced on October 27, 2011. Since January, prosecutors and regulators had already opened several new investigations into processors and the banks that handle their money. The task force will lead to additional investigations. Karen S. Hobbs, the FTC’s senior counsel in the Division of Marketing Practices, made the announcement in Chicago at The Electronic Transaction Association, the payment processors’ trade group. The task force will be made up of lawyers, investigators, and regulators at the United States Department of Justice, the Federal Trade Commission, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.

Payment processors are companies that supply authorization and settlement services through payment gateways of electronic payments for merchants typically through accounts of an issuing bank to the merchant bank. Banks usually refer to their processing business as “merchant banking.” Banks are paid a fee for each transaction conducted through the accounts as well as for holding substantial deposit balances. Although the announcement came from an official of the FTC, an agency that does not have authority to regulate banks or other financial institutions, the task force will have as much interest in banks as processors. Hobbs said that the task force will be proactive and will “drill down” into the payment processing industry. This means more subpoenas, more regulatory actions, and more federal court actions against processors and banks.

Although the bank regulators believed that processors were vital to banks’ bottom lines and safety and soundness because of the fee income they receive, these regulators have consistently emphasized that banks must be diligent in vetting processors before opening accounts for them. To make a point that compliance is paramount, the FTC has brought several recent high-profile cases, obtaining injunctions against payment processors and seizing their assets. Regulators have simultaneously imposed significant financial penalties – including millions in restitution – against the banks where the processors had accounts. The task force confirms that prosecutors are now getting into the act and will likely seek more and more civil money penalties against banks, and even consider criminal charges against officers and executives.

Until now, the FTC and regulators have focused on processors and community banks with less than $1 billion in assets. Although this will continue to be the focus in the short term, regulators and prosecutors will no doubt begin to look at larger banks who have significant merchant businesses.

Pepper Points

This is an area in which an ounce of prevention is worth a pound of cure. A good compliance program means the difference between the processor and bank being subject to lengthy, costly, and disruptive examinations, criminal and civil enforcement actions, and negative publicity.