FTC moves to stop US-first payment processor from trapping small businesses with surprise exit fees and zombie fees

The Federal Trade Commission today took action against payment processing company First American Payment Systems and two of its sales affiliates for catching small businesses with hidden terms, surprise exit fees and zombie fees. The FTC alleged that the defendants made false claims about fees and cost savings to attract traders, many of whom had limited English proficiency. After merchants were enrolled, the defendants withdrew funds from their accounts without their consent and made it difficult and expensive to cancel service. Under the federal court’s proposed order, the defendants would have to return $4.9 million to the damaged businesses, stop their fraud and make it easier for merchants to cancel their services.

“American First lured small businesses with false promises of low costs and an easy exit and hit them with surprise fees and illegal fees when they tried to get away,” shelp Samuel Levine, director of the FTC’s Bureau of Consumer Protection. “Today’s order returns millions to merchants, bans unauthorized payments and makes it easier for customers to cancel.”

Texas-based First American Payment Systems provides payment processing services nationwide, which it sells through its affiliates Eliot Management Group and Think Point Financial. They offer their services to small and medium-sized businesses that rely on credit cards, debit cards and checks as a way to accept payments from their customers. Payment processors typically act as an intermediary between the companies that accept credit and debit cards and the banks that issue the cards or checks.

The Federal Trade Commission’s investigation found that First American relied on deceptive offers to businesses to convince them to use the company’s services, and when businesses tried to cancel, the company often hit them with cancellation fees based on contractual terms that are hidden in fine print in their registration system, as well as debiting their accounts without authorization.

First American has been accused of engaging in a number of harmful practices against merchants:

  • Misleading businesses about prices and savings with hidden terms: The defendants lure businesses with promises of small monthly fees, sometimes even zero, but the FTC’s complaint alleges that these claims are often false. The defendants also claimed that the businesses would save a lot of money over the course of a year by switching to the defendants’ services, but failed to consider the fact that First American periodically raised its prices for existing customers.
  • Charge surprise fees when small businesses try to cancel: The complaint alleges that the defendants’ salespeople routinely promised businesses that they would be able to cancel services at any time or within a free trial period, when the company’s standard written agreement required businesses to sign a three-year term with a $495 cancellation fee. In many cases, business owners have limited English and although sales are conducted in their native language, documentation is only available in English.
  • Using an online booking system that hides key contract terms: The defendants’ online new customer sign-up system hid a three-year commitment, cancellation requirements and fees, the fact that agreements would automatically renew and other important information from business owners, the complaint alleges. These important facts were often in densely packed documents that required business owners to click on individual links to find them.
  • Small businesses hit with zombie fees after they pull consent accounts: The complaint alleges that First American continued to make withdrawals from the businesses’ bank accounts even after the businesses withdrew their consent. For example, the complaint alleges that at times when a business acted to stop payments to the company from its bank, First American would attempt additional withdrawals under different business names to avoid stopping payment orders.

Coercive action

The defendants in this case have agreed to a proposed federal court order that would require them to:

  • Stop misleading users: The order would prohibit the defendants from misleading consumers about important contract terms such as cancellation fees, while prohibiting them from making unsubstantiated claims about their products or services, including specific promises about pricing.
  • Stop unauthorized bank withdrawals: Defendants will be prohibited from making withdrawals from any of their customers’ bank accounts without authorization, or after the customer has stopped all attempts to debit money from their account or has notified the defendants that they are refusing payment.
  • Make it easy to cancel: Defendants will be required to put in place a cancellation procedure that businesses can easily find and use.
  • Stop charging early termination fees to existing customers: For consumers who signed electronic agreements with First American before April 6, 2020, the defendants will be prohibited from collecting early termination fees or telling those customers that they will owe such fees if they opt out.
  • Provide refund money to users: The defendants will have to turn over $4.9 million to the Federal Trade Commission, which will be used to reimburse the affected companies.

Today’s action builds on the Commission’s ongoing work to protect small businesses from unfair, deceptive and anti-competitive practices. In the last year, the Commission has demanded the largest small business credit reporting agency to clean up its reporting practices received industrial injunctions against creditors which target small businesses with convictions, imposed new ban on fraud with Made in USA labelstook action for protection of fast food franchiseesand new defenses proposed for businesses against telemarketing tricks and traps.

The Commission’s vote authorizing the staff to file an appeal and the final order entered was 5-0. The FTC filed the complaint and final order/injunction in the US District Court for the Eastern District of Texas.

NOTE: The Commission files a complaint when it has “reason to believe” that the named defendants are violating or are about to violate the law and the Commission believes that a proceeding is in the public interest. Anticipated final orders/orders have the force of law when approved and signed by the district court judge.

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