We’ll put our cards on the table: Protecting small businesses from deceptive and unfair practices is a key priority for the FTC. This includes taking action when payment processing companies that offer small business owners access to the credit and debit card system allegedly use illegal tactics to market their services. According to the Federal Trade Commission, Texas-based First American Payment Systems made misleading statements about fees and savings, used hidden automatic renewal provisions, failed to honor promises of easy cancellation and made unauthorized withdrawals from customers’ bank accounts. The settlement will return $4.9 million to small businesses harmed by their practices.
Access to the credit card system is the lifeblood of most companies, and many smaller businesses turn to payment processors to act as an intermediary with card-issuing banks. First American Payment Systems offers its services to small and medium-sized businesses nationwide through subsidiary Eliot Management Group, affiliate Think Point Financial and other sales agents.
The complaint alleges that the defendants’ marketers used deceptive tactics to market their services to small businesses, some of which were sole traders such as restaurants and nail salons. You’ll want to read the complaint for details, but the gist of the allegations is that the defendants lured businesses with misleading promises of significant savings, low monthly fees, or sometimes no fees at all. Additionally, the FTC says the defendants assuaged business owners’ concerns by telling them they could cancel at any time without penalty, that they could cancel without penalty during the introductory period, or that they were only agreeing to a short-term contract.
That’s what the defendants’ sales agents allegedly told the small businesses, but the FTC says the truth was much more expensive. In fact, the company’s written agreement contradicts a number of defendants’ key selling points. For example, despite claiming that businesses could cancel without penalty, the documents locked them into a three-year term with a $495 cancellation fee and imposed an automatic renewal provision. The FTC also says the defendants played hardball with the businesses’ bank accounts, continuing to hit them with electronic withdrawals even after the businesses told them they didn’t owe or wouldn’t pay the fees. According to the complaint, when the businesses contacted their banks to stop unauthorized payments, the defendants evaded those orders by making withdrawals under different corporate names.
The FTC says the harm to small businesses was compounded by the defendants’ business practices. For example, the complaint alleges that the defendants discouraged their sales representatives from understanding their own agreements by using the catchphrase “stay hungry, stay stupid.” In addition, respondents’ online enrollment process hid key terms in dense blocks of text or behind obscure hyperlinks. Additionally, many of the small business owners the defendants named had limited English proficiency. Although the defendants’ oral commercial presentations were often in the business owner’s native language, the written agreements were in English without accompanying translation.
The complaint accuses the defendants of making numerous false statements and improperly withdrawing money from customers’ bank accounts without their express authorization, including after the customer had withdrawn authorization. The complaint also alleged that the defendants’ auto-renewal practices violated the Online Consumer Confidence Restoration Act (CARVING). To settle the case, the defendants agreed—among other things—to stop making misleading claims, stop making unauthorized bank withdrawals, stop assessing early termination fees to customers who signed electronic agreements before April 6, 2020, and to pay $4.9 million in refunds.
What can other companies take from the settlement in this case?
Pay attention to ROSCA. ROSCA protects consumers and businesses from fraudulent online auto-renewal practices. The law prohibits online negative options unless the seller: 1) clearly discloses all material terms of the transaction before receiving the consumer’s billing information; 2) obtains the explicit informed consent of the user before charging; and 3) provides a simple mechanism to stop recurring charges. The FTC’s Policy Implementation Statement on Negative Option Marketing offers specific guidance on how existing laws apply to negative option practices and demonstrates the agency’s commitment to protecting consumers and businesses from illegal auto-renewal practices.
Monitor your sales agents. Payment processing companies have a duty to monitor what sales agents are doing on their behalf. Train your agents to avoid practices that cross the legal line. Make sure their representations in the commercial proposals match what is in the agreement. And investigate immediately if consumer complaints raise red flags that sales agents aren’t following your rules.
Don’t hide cancellation requirements. Business owners have the right to know exactly what their obligations are under their agreements with you, including if they want to cancel them. Don’t bury terms and cancellation fees in blocks of legalese or hide them behind obscure hyperlinks. Transparency is the best policy.
Do not pursue consumers or small business owners with limited English proficiency. For many hard-working families, owning a small business is a key to the American dream. When entrepreneurs for whom English is a second language go all-in on an enterprise that provides products, services and jobs, they should not be fooled by fast-paced sales people.