Formed in Wake of Credit Card Settlement, Recovery Firm Uses ISOs to Sell Claims Service

With a federal judge’s crucial decision only weeks away, a company formed to help merchants collect their share of the massive credit card interchange settlement is recruiting independent sales organizations to reach eligible businesses.

Baltimore-based Brownstone Recovery Group has signed up more than 10 ISOs so far, according to Scott Gallagher, senior vice president, and wants to sign more. The firm has also signed a number of merchants directly, though Gallagher won’t say how many. Brownstone’s fee amounts to anywhere from 10% to 30% of whatever a merchant collects from the settlement, Gallagher says. If an ISO is involved, the firm shares an undisclosed portion of that fee with it.

ISOs can be involved as referral sources or can sell the service directly to clients, using Brownstone as a processing back-end.

Brownstone is looking to register as many merchants as possible in advance of a fairness hearing set for Sept. 12 in which Judge John Gleeson of U.S. District Court in Brooklyn will hear arguments about the settlement, which was reached 13 months ago. If Gleeson approves the terms, merchants will stand to collect $6.05 billion in cash as well as an eight-month reduction in interchange fees valued at $1.2 billion. The eight-month period was set to start July 29.

The settlement, which also would allow merchant surcharging for card transactions and change certain other network rules, stems from seven years of litigation that gave rise to an enormous class-action case brought by merchants against Visa Inc., MasterCard Inc., and a handful of major banks.

The settlement has proven deeply unpopular with big-box chains, which argue it leaves in place a fundamentally flawed credit card interchange system and deprives merchants of their right to sue the card networks in the future. Of 19 original named plaintiffs, 10 have opted out of the deal.

But small merchants, to the extent they know about the case, remain eligible to claim shares of the settlement dollars if they processed Visa or MasterCard transactions between Jan. 1, 2004 and Nov. 28, 2012. Merchants must file a claim to recover any portion of the settlement. They are also encouraged, but not required, to file a pre-registration with either the claims administrator or a recovery firm of their intent to file a claim.

That’s where Brownstone comes in, says Gallagher. The more merchants it can register, the more it stands to earn in fees. “We’re looking to educate merchants about the court case and about what their options are,” he notes.

While other recovery firms are starting to get involved, Brownstone was founded a year ago specifically to file interchange-settlement claims, Gallagher says. The firm combines “class-action claims-filing and interchange expertise,” he adds.

Merchants, of course, could very well file claims on their own, though the process could prove forbidding because of the transaction data required. The claims administrator will make estimates based on data from Visa, MasterCard, and third parties, but claimants will have to submit their own data if they want to ensure accuracy or challenge the court's estimate. Brownstone’s value consists in working with merchant processors to develop historical data to support the claim and then taking care of the filing, says Gallagher. Merchants will barely have to lift a finger, he says.

The dividends for Brownstone—and, by extension, to ISOs—could be quite lucrative. If the firm can claim a 10% share of the approximately $7 billion at stake, it will rake in $700 million for its clients, with as much as $210 million going to the firm and cooperating ISOs.

“If Brownstone is able to convince enough small merchants to join, Brownstone will collect a nice sum at the end,” says Adil Moussa, principal of Adil Consulting, an acquiring consultancy, by e-mail. “There is no risk for Brownstone. It\'s all upside and no downside fallback for them.” Moussa estimates small merchants account for about one-third of the credit card volume processed annually in the U.S.

The trick is to contain costs, particularly the expense involved in reaching tens of thousands of mom-and-pop merchants. Many small businesses have not heard of the settlement, let alone given any thought to filing a claim. That’s where ISOs and their small-business contacts can prove useful, says Moussa. “The investment in recruiting merchants can be daunting because the real challenge is merchant awareness and merchant\'s apathy,” he notes. “But if they can go through ISOs and acquirers, they will reach merchants at a smaller cost instead of spending money on TV advertisements.”

Another risk is that, after the September hearing, Gleeson could scuttle the settlement or change the terms in significant ways. But, while admitting this is a possibility, Gallagher doubts the judge will go that far. “It depends on what he rejects and to what extent he rejects it,” he says. “It’s possible he’ll throw[the settlement] out and we’ll have wasted time, money, and effort. But I don’t think that will happen.”