Nuvei Case Turns Chargebacks Into an FTC Warning Sign

Two recent Federal Trade Commission (FTC) cases highlight the importance of thorough merchant screening when approving banks to accept card payments. In one case, FTC alleged that Nuvei opened processing accounts for merchants they knew or should have known were engaging in deceptive practices. Days later, the FTC accused Humboldt Merchant Services of processing payments for over 1,000 shell companies used as fronts for unauthorized billing.

The FTC cases reveal the various factors considered when approving merchants, including ownership, prior processing relationships, chargeback histories, and observed behavior during transactions. A PYMNTS Intelligence study found that 57% of executives in payment-heavy industries reported an increase in fraud attempts the previous year, with 65% planning to strengthen identity verification.

For processors like Nuvei, merchant screening should extend beyond merely checking the business name. Nuvei must collect information on the business's operations, principals, and owners, along with five months of chargeback data and, when available, six months of processing statements. Additionally, Nuvei needs to determine if the merchant or related parties have been involved in card network chargeback monitoring or termination due to excessive chargebacks.

The underwriting file can contain more information than just proof of company formation. The FTC also alleged that Humboldt placed sham merchant accounts on lower-risk BINs to increase the likelihood of issuer authorization. Following these cases, Nuvei must pay $4.85 million for consumer redress and Humboldt $12 million. Merchants are now required to calculate chargeback rates monthly and investigate clients exceeding a 1% monthly chargeback rate and 75 chargebacks within six months.

Transaction activity discovered after approval can reveal risks not apparent during onboarding or provide evidence to support existing concerns.