- Key insight: A consulting firm working for BMO Harris flagged the concentration of disputed charges in one of the processor's lines of business in 2015, and the FTC says the shell accounts kept coming for another eight years.
- Supporting data: In the first quarter of 2015, the processor's "Performance Marketing" business made up 25% of its processing volume and 66% of the chargeback volume across its whole portfolio, at a 4.6% chargeback rate.
- Forward look: The $12 million and the processing ban take effect only if Judge Susan K. DeClercq approves the settlement, and Humboldt would then have seven days to pay.
Overview bullets generated by AI with editorial review.
A payment processor, Humboldt Merchant Services, stands accused of pushing through more than $100 million worth of payments for sham merchants.
The Federal Trade Commission, or FTC, says a consulting firm working for BMO Harris Bank found in 2015 that one line of business at Humboldt accounted for a quarter of the processor's sales and two-thirds of its disputed charges.
The processor, which also goes by the name 5967 Ventures, kept opening accounts in that line of business for another eight years, according to the agency.
The agency
Many of the shell companies came from an operation that a federal court shut down in December 2023, according to the complaint. American Banker
The FTC also asked a judge Tuesday to approve
A spokesperson for BMO did not immediately respond to a request for comment. BMO is not a defendant in the case, and the FTC did not accuse the bank of wrongdoing.
Humboldt's relationship with BMO
On paper, Humboldt had a normal relationship with BMO; what was abnormal were the findings BMO learned about Humboldt in 2015 — findings that contributed to the FTC's complaint against Humboldt this week.
Humboldt is an independent sales organization, or ISO. That means it signs up merchants for merchant payment accounts at a sponsor bank.
ISOs such as Humboldt underwrite the accounts they sign up. Those accounts require underwriting because a merchant account works like a line of credit; when a customer disputes a charge, the merchant sometimes refuses to repay, leaving the underwriter to cover the chargeback.
Under an agreement dating to December 2009, Humboldt's sponsor bank was BMO, according to the complaint. That means the accounts sat on the bank's credentials with the card network, so the bank and the processor were responsible for covering disputed charges a merchant could not or would not repay.
The BMO-Humboldt agreement made Humboldt responsible for merchant underwriting and "risk/fraud monitoring," according to the complaint.
Humboldt is no longer a registered ISO of BMO, a Humboldt spokesperson told American Banker on Wednesday.
Years of warnings, starting in 2015
The consulting firm working for BMO Harris reported that in the first quarter of 2015, Humboldt's "Performance Marketing" business represented 25% of the processing volume and 66% of the chargeback volume across Humboldt's entire merchant portfolio, according to the complaint.
In other words, the Performance Marketing business (Humboldt's name for supplements and gadgets sold online) produced a share of chargebacks far out of proportion to its size.
The business operated on so-called negative option billing; it provided free-trial offers that enrolled buyers into recurring charges unless they canceled.
The complaint does not name the consulting firm. It also does not say what the bank did in response to the review.
Humboldt received multiple warnings directly, as well.
Mastercard told Humboldt in reviews between 2017 and 2019 that many of the merchants it signed up appeared to be spreading charges across many merchant accounts to stay below network monitoring thresholds, according to the complaint.
Additionally, a senior Humboldt underwriter warned management in 2019 that the company had been opening shell accounts with straw signers (people who lend their names to accounts someone else controls), according to the complaint.
Management disregarded these warnings, according to the FTC's complaint.
Moving the accounts to a cleaner conduit
By 2020, cardholders' banks were declining too many Performance Marketing transactions for Humboldt's liking, according to the complaint.
Many issuers had labeled Humboldt as having a "bad BIN," according to an internal document its president prepared that September. (That stands for "bank identification number," the credential a card network licenses to a member bank.)
So Humboldt moved the accounts, according to the complaint.
Starting in October 2020, Humboldt re-coded Performance Marketing transactions under a lower-risk merchant category and began placing them on a BIN sponsored to its corporate affiliate NorthAB, formerly North American Bancard, of Troy, Michigan.
NorthAB also held a sponsorship agreement with BMO; its terms were stricter than the agreement Humboldt had with BMO.
NorthAB's credit policy restricted merchant types that Humboldt's own BIN allowed, "including negative-option billing merchants using trial offers," according to the complaint.
In other words, Humboldt moved the Performance Marketing accounts onto credentials whose terms restricted them to keep the line of business alive; moving the accounts circumvented banks declining the transactions.
Those Performance Marketing accounts were charging back at a rate of more than 7% of sales by 2021, according to the complaint. Card networks typically flag individual merchants at 0.9% and 1.5% chargeback rates.
In 2015, the consulting firm working for BMO had calculated the rate across Humboldt's entire Performance Marketing portfolio to be 4.6%.
A spokesperson for North, the brand under which NorthAB does business, did not immediately answer questions about the company's role in the Humboldt case.
What Humboldt does now
The settlement between Humboldt and the FTC would require Humboldt to screen new clients with trained staff and to collect the advertising and website addresses its merchants use.
It would also bar the company from processing for four kinds of merchant. Three are straightforward: straw companies, merchants on Mastercard's shared blacklist of terminated businesses and merchants already named as defendants in a public consumer-protection case.
The fourth is online sellers whose only address is a mailbox at a UPS store or a similar service, if they are newly formed, have no processing history or bill on a negative option.
The order says nothing about BMO, about NorthAB or about the movement of accounts between their credentials.
The matter involved "a limited number of third-party sales agents and merchants, which occurred primarily between 2021 and 2023 under former Humboldt leadership," Humboldt said in
(A Humboldt spokesperson told American Banker that Humboldt's leadership changed in the fourth quarter of 2023.)
The agreement "closes this matter with no admissions of wrongdoing," according to the Tuesday statement.
The complaint describes a longer arc, from the consulting firm's 2015 findings to sales agents who kept supplying the accounts through 2023.
Humboldt has seven days to pay if the judge in the case signs the order. It has stipulated that its lawyers are already holding the $12 million in escrow.
