Citing Shady ISO Practices, Heartland’s Carr Predicts Further Crackdowns by the FTC

Merchant processors can expect federal regulators to continue cracking down on their industry, Robert O. Carr, chief executive of Heartland Payment Systems Inc., predicted in a speech Wednesday at an acquiring-industry conference.

The reason for stepped-up federal oversight, Carr said, is that independent sales organizations haven’t policed themselves effectively. He referred to a number of shady ISO practices that have come to his attention, including falsifying interchange on merchant statements, pocketing merchant savings from Durbin-mandated debit rates,  and changing a merchant’s category to qualify for a lower rate.

The practices, he said, reminded him of a time in the late 1980s when the industry confronted activities such as overpriced terminal leases and, in some cases, outright fraud committed against unwary merchants. Twenty-five years later, the veteran processing executive said, things haven’t changed as much as they should. “There are some egregious practices in the industry that are still going on,” he told the audience of top-level ISO executives at the Electronic Transactions Association’s Strategic Leadership Forum in Scottsdale, Ariz. “Who polices that?”

The answer, at least for now, is the Federal Trade Commission, Carr said. He lamented that the industry itself has created an opening for the regulatory agency by its failure to take action on its own. In particular, he pointed to the ETA as the logical entity to formulate rules and hold members to them. “There are things that need to be cleaned up, and I wish the ETA would do something about it,” he said. “But I recognize it’s difficult.”

In a subsequent question-and-answer session, Carr also called upon Visa Inc. and MasterCard Inc. to do more to police the business, referring to the brand value the two big card networks have cultivated over the years. “Why wouldn’t you do everything to protect that brand?” he asked.

Jason Oxman, chief executive of the ETA, said after Carr’s speech that the association is aware of the problem and has formed a “working group” made up of 38 member companies to work with the FTC and other federal agencies. “That’s an initiative we have under way,” he told the audience.

Earlier this year, the FTC added ISOs as defendants in two separate suits it filed against telemarketers it alleged were defrauding consumers by selling them so-called rate-reduction plans for credit cards. The ISOs, which were processing for the telemarketers, ignored soaring chargeback rates and other indicators that should have brought on closer oversight, the agency alleged. The actions raised an alarm in the industry, as they represented the first time the FTC has targeted ISOs.

But it won’t be the last, Carr warned. “The FTC is going to be cracking down on bad practices in this business,” he said.

ISOs acquired considerable notoriety in the late 1980s with tactics such as withholding merchant funds and selling terminals on wildly expensive leasing plans. These tactics, along with the adverse publicity they generated, led a group of ISO executives, including Carr, to found a predecessor organization to the ETA.

Among other predictions, Carr also said decoupled debit “will become the fastest-growing alternative payment type.” He cited successes such as Princeton, N.J.-based Heartland’s own closed-loop campus debit card programs, which rely on decoupled debit. In decoupled-debit systems, debit cards tap accounts not held by the issuer, typically using the automated clearing house network. The ACH, he added, will achieve “instant settlement” sooner than many might think. An effort to introduce same-day settlement in the ACH foundered last year when the network’s biggest bank users voted the initiative down.