Court rules for Backpage against Visa and MC

Just a few months earlier, the FDIC went on record this clarifying its "high risk" guidance for banks, and guess what? Sex isn't in them, not even vaguely.

That's thanks to a federal mess called Operation Choke Point, launched in 2013 by the US Financial Fraud Enforcement Task Force (FFETF). It targeted financial institutions working with third party processors (namely Paypal and Square) because they're bottlenecks for the flow of online payments.

Choke Point relied on a vague FDIC guidance document; this year, the House Oversight Committee found collusion between the FDIC and FFETF, stating "The Committee has obtained substantial evidence suggesting that as a result of coordinated actions by the FDIC and the Department of Justice, banks are terminating relationships with entirely legitimate and licensed businesses." This led to leading to hearings by the House Judiciary Committee and the House Financial Services Committee, and lawsuits against the FDIC.

Hence the FDIC's new, detailed guidance document for banks, one in which "reputational risk" is now omitted -- thus officially not enough a to deny or close an account. The FDIC's categories of "high risk" specify fraudulent goods and services, and tactics "such as aggressive telemarketing or enticing and misleading pop-up advertisements on Web sites."

While "unlawful Internet gambling and the illegal sale of tobacco products on the Internet" are singled out as FDIC "high risk" areas, PayPal's "items that are considered obscene ... [or] certain sexually oriented materials or services" are most definitely not.

[S]heriff Dart, his office, and all employees, agents, or others who are acting or have acted for or on behalf of him, shall take no actions, formal or informal, to coerce or threaten credit card companies, processors, financial institutions, or other third parties with sanctions intended to ban credit card or other financial services from being pro- vided to Backpage.com. Sheriff Dart shall immediately upon receipt of this order transmit a copy electronically to Visa and MasterCard and all other recipients of his June 29, 2015, letter (including therefore the directors of and investors in Visa and MasterCard), as well as to the Chief Inspector of the United States Postal Service. Backpage.com shall not be required to post a security bond.

REVERSED AND REMANDED , WITH DIRECTIONS

In the United States Court of Appeals For the Seventh Circuit
____________________
No. 15-3047
BACKPAGE.COM, LLC, Plaintiff-Appellant ,
v.
THOMAS J. DART, Sheriff of Cook County, Illinois, Defendant-Appellee

irreparably harmed by its abandonment by the credit card companies,

You are reading what you want to read into the Appellate court's reasoning. You are speculating I guess.

And when, finally, the judge denied that there was evi-
dence that Backpage had been irreparably harmed by its
abandonment by the credit card companies, he again con-
tradicted himself....

Even if Backpage were correct, and it was not required to show that Dart's alleged threats had any coercive effect, the decision by the companies to terminate their relationships with Backpage because of the illegal and brand-damaging activity taking place in the adult section of Backpage.com is nevertheless relevant to show that injunctive relief is not appropriate here.

You are making an inference based upon an inference. That has speculation written all over it.

The merchant's line of business and/or the products offered as well as its marketing practices are key factors for management to consider when it evaluates the credit quality of a merchant. The Associations segment merchants according to activity because the type of activity often is a good indicator of risk. Thus, it stands to reason that examiners may expect acquiring banks to continually analyze their merchant portfolios along similar guidelines. Acquiring banks typically compile a prohibited or restricted merchant list which includes the types of merchants they are unwilling to sign or are willing to sign only under certain circumstances.

While the extent of product and marketing evaluations varies, considerations normally include review of the merchant's business plans, merchandise, and marketing practices and materials (for example, catalogs, brochures, telemarketing scripts, and advertisements). In addition, shipping, billing, and return policies can be reviewed for unusual or inappropriate practices (for instance, customers being billed long before merchandise is shipped). These considerations can help determine, among other things, if: the business is of a type that typically has high charge-back rates; the merchant is selling a legitimate product; sales methods are legitimate and not deceptive; product quality and price are consistent with projected sales and charge-back rates; and customers will be satisfied with products ordered. Merchants offering low-quality products or services tend to incur more charge-backs, thus dissuading many banks from signing them.

The merchant's sales volume and time frame within which product delivery is completed are other considerations to evaluate risk. Generally, the greater the sales volume and the longer the time between transactions and product delivery, the greater the risk. For example, when a restaurant closes, an acquiring bank typically has less exposure to charge-backs for undelivered goods and services. In contrast, the failure of a travel agency could expose an acquiring bank to substantial charge-backs due to the high volume of reservations common in the travel agency business.

Certain types of merchant businesses can present increased risk. Although there are many reputable merchants whose sales transactions occur without a credit card being present (card-not-hapresent merchants), these merchants generally present higher charge-back risks for acquiring banks. In particular, mail order and telemarketing (MO/TO) merchants and adult entertainment services merchants, in aggregate, tend to display elevated incidents of charge-backs. Merchants without an established storefront (for example, door-to-door salesman and flea market vendors) also typically pose greater risk for charge-backs. The risk of charge-back is also higher if the merchant sells products for future/delayed delivery, such as airline tickets, health club memberships, travel clubs, or internet purchases. The increased risk associated with future delivery of products results, in part, because customer disputes are normally not triggered until the date of delivery. High charge-back rates are also generally associated with certain selling methods, such as sales pitches involving gifts, cash prizes, sweepstakes, installment payments, multi-level marketing, and automatic renewals unless the consumer opts out. Association regulations define certain broad business categories as high-risk merchants. These categories in general present higher risk, but each individual merchant in the category may not necessarily be high risk. Appropriate procedures and risk controls for high-risk merchants generally include:

• Criteria for determining the types of merchants the bank is or is not willing to sign and under what circumstances.
• Increased emphasis on underwriting considerations regarding products and marketing in evaluating the merchants.
• Limitations on the volume of high-risk merchant transactions processed relative to the bank's total merchant portfolio.
• Criteria for determining the appropriate level of holdback or reserve accounts to sufficiently cover the level of credit risk.
• Appropriate pricing of these merchants in relation to the charge-back risk and any costs associated with increased monitoring.
• Heightened monitoring and problem resolution. For example, for charge-back monitoring, banks may set lower charge-back thresholds for required remedial action and/or a shorter timeline for problem resolution for those merchants exceeding acceptable charge-back thresholds.
• Compliance with bankcard regulations regarding registration of certain high-risk merchants and assigning proper Merchant Category Codes (MCC) to merchants.

Reputation risk arising from negative public opinion can affect a bank's ability to establish new relationships or services or to continue servicing existing relationships. This risk can expose the bank to litigation, financial loss, or damage to its public image. The bank's business decisions for marketing and pricing its merchant processing services can affect its reputation in the marketplace. Reputation risk is also associated with the bank's ability to fulfill contractual obligations to merchants and third parties. Most notably, the outsourcing of any part of the merchant processing business easily increases reputation risk. Decisions made by the acquiring bank or its third-parties can directly cause loss of merchant relationships, litigation, fines and penalties as well as charge-back losses. Concerns normally arise when the acquiring bank does not maintain strong processes for performing due diligence on prospective merchants and third-parties or perform ongoing evaluations of existing merchant and third-party relationships.

Hence the FDIC's new, detailed guidance document for banks, one in which "reputational risk" is now omitted -- thus officially not enough to deny or close an account. The FDIC's categories of "high risk" specify fraudulent goods and services, and tactics "such as aggressive telemarketing or enticing and misleading pop-up advertisements on Web sites."

While "unlawful Internet gambling and the illegal sale of tobacco products on the Internet" are singled out as FDIC "high risk" areas, PayPal's "items that are considered obscene ... [or] certain sexually oriented materials or services" are most definitely not.