(May 29, 2007) A recent case filed by the Federal Trade Commission against an independent sales organization in Beaverton, Ore., may not be the last such action the federal regulator will bring. In April, the agency sued Merchant Processing Inc. in federal court, alleging the ISO duped merchants by promising to buy out existing terminal contracts and handle transactions at lower rates. In actuality, the FTC says, the company did not buy out the old leases and charged higher rates. Though the agency won’t comment in detail, it apparently has under investigation other ISOs on suspicion of similar allegations. “These practices aren’t unique to MPI, and the FTC is serious about enforcing consumer-protection law in this industry,” a spokesman says in an e-mail message to Digital Transactions News.

The spokesman adds there is no change in the status of the case since shortly after its filing April 11. The federal district court in Oregon has frozen the assets of MPI and two affiliated companies, Vequity Financial Group Inc. and Direct Merchant Processing Inc., as a result of the suit, which was brought by the FTC on grounds the companies violated the FTC Act. The court also appointed a receiver to control the businesses for the time being. The FTC is seeking preliminary and permanent injunctions to stop the alleged practices, as well as refunds for the merchants it says MPI harmed. The state of Washington has also sued the companies. Another defendant in the case, Aaron Lee Rian, whom the FTC named as MPI’s owner, did not return a call from Digital Transactions News seeking comment.

ISOs generally have improved their business practices over the last 10 to 15 years, and even in the 1980s and early 1990s, when sharp dealing seemed to be rampant, the most egregious cases were isolated to a relative handful of companies. The cases, however, included allegations that bear a striking similarity to those in the MPI case, including overcharges for terminal leases. The FTC alleges MPI approached mostly small businesses, promising to buy out their existing terminal contracts and lower their processing costs if they switched to MPI. The agency alleges the company did not buy out the contracts but installed their own terminals, leaving merchants with two leases. Meanwhile, processing costs under MPI, it says, remain the same or go up. The ISO did not leave merchants copies of their contracts, the FTC also says. To get out of the MPI deal, the regulator charges, merchants were confronted with a hefty, previously hidden cancellation fee.

Whether the allegations in the MPI matter prove to be true or not, some industry players aren't surprised to hear of them. “I talk to ISOs seven days a week, and there are cases where you have to step in and say, ‘We don’t want you out there doing business that way and using our name,’” says Max Sinovoi, national sales manager for the Western region for United Bank Card Inc., a Hampton, N.J-based ISO that processes for smaller ISOs and sales agents. A common problem is murky merchant statements, including indecipherable fees. “It’s a Rubik’s cube,” he says.

Sinovoi blames much of the problem on increasing competition for merchant deals. More and more companies and individuals are entering the business, he says, driving up competitive pressure to make deals and increasing overall operational costs. Many of these new entrants, he says, are professionals, like accountants, who already service a base of merchants and see an opportunity to make money by adding transaction processing. “Thirty to forty percent of the calls I get [from people interested in becoming an agent] are from folks not in the industry,” Sinovoi says. “Merchant processing isn’t their ‘A’ business, it’s ‘B’ or ‘C.’”