Merchant Account Underwriting Tools

$2.4 Billion Dollars Is a Lot Of Processing

Especially when the bank already knew of serious cause for concern regarding the ISO’s merchant’s unauthorized return rates with a prior bank. During a so-called Due Diligence, bank employees discussed the unauthorized ACH debit return rate that was substantially higher than industry standards and that the processor took several months to address merchants with really high chargebacks.

So, acting quickly, three years after approving the processor, the bank developed a policy for third-party processors, providing that a return rate of 30% (thirty percent) would require the processor to reduce return rates within 30 days. A Draconian move! The ISO expressed unhappiness about the new 30 percent return warning threshold and a senior bank official told the processor that some leniency in the policy could stretch the ceiling to as much as 40 percent but that the bank’s risk appetite might not stomach return rates above that.

“While some of your merchants . . . have return rates of 15-25%, others are now at 40, 50, and even 60% consistently. I understand that these companies (merchants) can still make good money with such [high insufficient fund returns rates], since they are charging APRs of 1500-1800%, but I don’t think we make enough money to take on the extra risk and monitoring that would come with accepting those extreme ratios.”

The Bank official said that such return rates would make it appear that “we don’t know our customers and we don’t do due diligence and risk grade them properly.” (Really?) In an internal email the official said “You don’t think there’s huge potential liability for ignoring the fact that certain transactions could potentially be illegal, and not doing the due diligence and monitoring to ensure they aren’t? . . . I’m not sure ‘don’t ask/ don’t tell’ is going to be a reasonable defense, if a state comes after one of our originators.”

And sure enough, it wasn’t.

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