Message of the Qualpay case: Heed possible signs of fraud

Ostriches get a bad rap. The popular perception is that the species Struthio camelus bury their heads in the sand. But, in fact, they flee from perceived danger at speeds that top 60 miles per hour. An FTC proposed settlement with a payment processor that ignored signs that certain clients were engaged in fraud suggests that more companies should follow the real-life example of the ostrich and hightail it away from any association with illegal conduct.

California-based Qualpay is a payment processor that acts as an intermediary between merchant clients and the acquiring banks that can give those clients access to credit card networks. Qualpay processed payments for MOBE, an outfit the FTC sued for telling whoppers to sell consumers coaching services it touted as a “master plan to massive paydays.” The FTC alleges Qualpay turned a blind eye to evidence that MOBE was engaged in misleading practices, leading to tens of millions of dollars in losses for deceived consumers. You’ll want to read the complaint for details, but here are some examples of illuminated billboards Qualpay ignored.

Qualpay ignored MOBE’s suspicious history.  MOBE had a high chargeback rate, negative online reviews, a multilevel marketing structure, an F rating from the Better Business Bureau, and a business method that used get-rich-quick claims to pitch its products. But according to the FTC, Qualpay didn’t heed those iffy indicators.

Qualpay wasn’t fazed by the fact that MOBE’s business model raised concerns for its acquiring bank.  Synovus, Qualpay’s acquiring bank, categorized MOBE as a “high risk” and “restricted” merchant because it ticked lots of the tell-tale boxes suggesting the potential for deception. It sold business opportunities and work-at-home programs, offered upsells, operated under an MLM system, and sold memberships – categories that raise underwriting eyebrows.

Qualpay looked the other way at obvious inconsistencies in MOBE’s applications.  According to the FTC, even a simple inquiry into whether MOBE was located in the U.S. led to dubious double talk from MOBE. That should have flashed a warning signal for Qualpay because under credit card rules, foreign companies can’t open domestic payment processing accounts to charge domestic consumers. Then there were inconsistencies in separate MOBE applications for merchant accounts. For example, one application requested a single account that would process a projected $56 million in annual sales. Another application asked for multiple accounts that would process a total of $5 million.

Qualpay broke its own rules in opening accounts for MOBE.  The FTC says that when it came to MOBE, Qualpay didn’t follow its own policy of reviewing marketing materials and telemarketing scripts. Qualpay also didn’t require MOBE to submit its most recent processing statements. Instead it allowed MOBE to turn over statements from several years earlier. But even those statements showed chargeback rates high enough to get MOBE fined by the credit card networks. Nonetheless Qualpay took MOBE on as a client, but required it to enroll with a company that provides “chargeback prevention services.” (More about that in a moment.)

Qualpay knew MOBE’s accounts were in trouble from the get-go and yet continued to process its payments.  Qualpay opened accounts for MOBE in January 2017, but by February 2017, Discover notified Qualpay’s acquiring bank that Discover had “identified fraudulent activity” with 30 of the 155 transactions run through one of MOBE’s accounts. By March 2017, the head of Qualpay’s own underwriting department recommended that it stop processing MOBE accounts until Qualpay could “figure out everything that was going on.” That same month, Mastercard and Visa raised concerns about MOBE’s chargebacks. By June, Qualpay had closed two MOBE accounts, but continued to process payments for other MOBE accounts. The complaint alleges Qualpay also flouted Mastercard’s requirements about reporting merchant relationships terminated for high chargebacks.

Ultimately Qualpay processed nearly $80 million in payments for MOBE, its largest volume customer. The lawsuit also cites other get-rich-quick business coaching operations sued by the FTC. And who processed their payments? Qualpay.

The complaint alleges that Qualpay processed payments for MOBE while ignoring signs MOBE was likely engaged in deception, an unfair practice under the FTC Act. Among other things, the proposed settlement bans Qualpay from processing payments for business coaching companies and other high-risk merchants. The company also will have to implement a more careful screening and monitoring program for certain merchants. The stipulated order imposes a $46 million judgment, which is suspended due to Qualpay’s financial condition, but Qualpay must surrender any claims to MOBE assets held by the receiver in that case.

What can members of the payment ecosystem take from the case against Qualpay? Obviously, it’s another law enforcement action that illustrates how averting your eyes from obvious red flags can land you in legal hot water. But it also offers some insights into the use of chargeback prevention services, as Qualpay required of MOBE.

A closer look at the work of chargeback prevention services demonstrates why payment processors still need to keep a careful eye on merchants. When a consumer files a chargeback, it sets off a chain reaction. The issuing bank tells the credit card network, the credit card network warns the merchant’s bank, and the merchant’s bank alerts the merchant. Under some agreements between issuing banks and chargeback prevention services, the bank will wait several days before notifying the credit card networks of the chargeback. If the merchant refunds the consumer’s money during that time, the issuing bank will consider it done and dusted and won’t report the chargeback. Therefore, the use of chargeback prevention services can serve the legitimate interest of resolving disputes and getting consumers their money back quickly.

But the other consideration is that chargeback prevention services can mask questionable conduct by artificially deflating chargeback rates. Thus, when a chargeback prevention service is in the picture, prudent payment processors don’t just look at the “prettier” post-refund numbers. They investigate what’s causing the chargebacks in the first place, knowing that putting on blinders won’t be a defense to an FTC action.