FTC Subscription Case Puts Payment Processor Risk in Focus

FTC allegations involving merchant accounts and fraud monitoring, combined with a recent payment processor case, highlight an emerging concern for subscription operators.

A recent FTC subscription case contains a detail that should catch the attention of subscription operators: the agency alleges that merchants repeatedly opened new payment accounts to avoid fraud monitoring.

The allegation is part of the FTC's case against the operators behind Wisey, MadMuscles, Unimeal, PDF Guru and other subscription products.

The FTC alleges that the defendants obscured auto-renewal terms and pricing, charged consumers without authorization and created unreasonable barriers to cancellation. It also alleges that the companies repeatedly created new corporate identities and opened new merchant accounts to avoid fraud-monitoring programs.

Problems with recurring billing and cancellation can eventually show up in payment data. Consumers dispute charges. Chargebacks can rise. Payment providers can see that activity.

A separate FTC case shows what can happen when a payment processor fails to respond to merchant risk.

A Separate Case Puts Processors in the Spotlight

In May, a federal judge found payment processor Cliq Inc., formerly CardFlex Inc., and two executives in civil contempt for violating a 2015 court order governing the company's payment-processing practices. The court imposed $6.5 million in sanctions.

The court found that Cliq processed transactions for merchants on Mastercard's MATCH list and failed to conduct underwriting required by the earlier order. It also continued processing for some merchants that exceeded chargeback thresholds without completing required investigations.

The court also found that Cliq helped some merchants avoid fraud and risk-monitoring programs.

"It is a Commission priority to root out fraud in the payments system," Christopher Mufarrige, director of the FTC's Bureau of Consumer Protection, said following the ruling.

There is an important distinction between the cases. Cliq isn't a subscription case, and the decision doesn't create new requirements for payment processors across the industry. The sanctions resulted from violations of a court order that had applied to Cliq since 2015.

The GrowthMind/Wisey case is still being litigated. The FTC filed its complaint on June 2 and announced on June 17 that it had obtained a temporary restraining order. On July 20, the court entered preliminary injunctions covering the defendants. The FTC's underlying allegations haven't been finally decided by the court.

INSIDER TAKE

For subscription operators, the connection between these cases is worth watching.

The FTC's GrowthMind/Wisey complaint goes beyond what consumers saw when they subscribed or tried to cancel. It also addresses what happened with the merchant accounts used to collect those recurring payments.

Chargebacks and payment disputes can reveal problems further upstream in the subscriber experience. If customers don't understand a recurring charge, believe they canceled or don't recognize what appears on their statement, those problems don't necessarily stay inside customer service.

They can reach the processor.

There is no new FTC rule requiring payment processors to police subscription businesses. We also haven't seen evidence that major processors are changing their requirements for subscription merchants because of these cases.

The next question is whether processors and card networks begin paying closer attention to the subscription practices behind the payment data they already monitor.

For subscription operators, that could bring payments and compliance much closer together.

Sources:

• FTC Sues to Stop Sprawling Enterprise Operating Unlawful Subscription Schemes 
• FTC: Complaint for Permanent Injunction, Monetary Relief, and Other Relief, GrowthMind/Wisey 
• FTC: GrowthMind/Wisey Case and Proceedings 
• Federal Court Holds Payment Processor Cliq in Contempt for Violating FTC Order 
• Order Granting FTC's Motion for Civil Contempt Against Cliq Inc. and Individual Defendants