LOMBARD, Ill. — The Justice Department's Operation Choke Point isn't really about combatting fraud, says Jason Oxman, CEO of the Electronic Transactions Association. Federal regulators simply don't like high-risk merchants, such as payday lenders and guns dealers, he says.

To crack down on that type of retailer, the DOJ and other federal agencies are increasing their regulatory scrutiny of the payment companies that handle their electronic transactions, Oxman said during a "Sound Off" session at the Midwest Acquirers Association annual trade show.

"We want to be a partner—not a target," he said.

Some 50 members of the industry have received subpoenas to appear before federal officials to testify on fraud, noted Deana Rich, president of the Los Angeles-based Rich Consulting.

"We are being looked at closer than ever before," Rich maintained.

The results of Choke Point and the efforts of ETA members support the contention that fraud isn't the real target of the federal campaign, Oxman said.

With Operation Chokepoint, the DOJ has ferreted out two retailers now accused of bilking customers, he said.

Meanwhile, ETA members terminated the accounts of 10,000 questionable merchants last year, according to an association survey, Oxman said. The study did not take into account the other merchants that were denied accounts in the first place through association members' due diligence. 

Even without federal regulatory supervision, the independent sales organizations and transaction processors that belong to the association want to limit their liability for fraud by discontinuing their relationships with merchants guilty of wrong-doing, Oxman told session attendees.

As Oxman spoke, the ETA's lobbyist, Scott Talbott, was attempting to drive home those points during testimony before Congress.

The industry is hoping to prevent federal regulation by communicating with the government and working on self-regulation, Rich said. She led the ETA's effort to produce a 100-page set of guidelines to help small and medium-sized ISOs detect wrongdoing by merchants. Large organizations often employ risk specialists to monitor merchants.

Typical indictors of merchant fraud include excessive chargebacks or returns, Rich noted. If acquirers terminate the merchant contracts in those situations—without raising rates or increasing reserves—then they can present a good case for self-regulation, she suggested.

Still, the subtleties of discovering fraud among merchants can challenge the experts. Some of the 50 people from 44 ETA member-companies who worked on the guidelines said they were learning as they proceeded, she said.

She called upon ISOs, banks and processors to make sure the other companies they work with are properly monitoring merchants. Processors, for example, could help ISOs fix risk problems.

Another aid to self-policing could take the form of a database of miscreant merchants and sales agents, suggested John C. Mayleben, senior vice president of technology and new product development for the Michigan Retailers Association.

He said that perhaps 500 merchants accounted for many of the 10,000 terminations reported by ETA members.

One of the goals of self-regulation is to free ISOs to accept accounts from merchants that fall into categories the federal government regards as high-risk. Many have been denying contracts to such merchants in recent months and have suffered a "very significant" financial setback, according to several people at the event.

The attention to payment security is coming at an opportune time. Public awareness of data breaches has increased after incidents at Target and other major retailers during the 2013 holiday season.

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