“Operation Choke Point,” the federal government’s campaign against online payday lenders and collections agencies, is unjustly attacking third-party payment processors, an association official says.

Some federal agencies have gone so far as to discourage banks from doing business with such processors, says Marsha Jones, director of the recently formed Third Party Payment Processors Association (TPPPA).

Third-party processors often use their own accounts to process transactions for high-risk businesses that can’t open their own merchant accounts because of bad loans or lack of a credit history. Some are judged high-risk simply because of the type of business they conduct, as in the case of payday lenders or collections agencies. Other merchants could open their own accounts but are attracted by the technology and services third-party processors offer.

Although the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) admits in an advisory that many third-party processors are legitimate, it also says they “present a risk to the payment system by making it vulnerable to money laundering, identity theft, fraud schemes and illicit transactions.”

FinCEN is offering guidance on the campaign against payday lenders and collections agencies. It's part of an interagency task force that includes the Department of Justice, the Federal Deposit Insurance Corp., the Consumer Financial Protection Board and other agencies, Jones says.

Banks and third-party processors have been subpoenaed for information in connection with merchants’ transgressions, but none have been required to appear in court.

Such actions helped spawn TPPPA. It came together in August partly as a response to the federal offensive, Jones says.

To that end, Jones, a 20-year veteran of the payments industry, has spent the last four months on Capitol Hill telling legislators that stifling third-party processors could have unintended consequences.

Small businesses often transact through the accounts of third-party processors, and interrupting their payments would damage the economy, Jones maintains. Many banks won’t take on such merchants, Jones says.

Curbing third-party processors would also harm community banks that are too small to maintain the staffing to take on high-risk loans that third-party processors handle, she maintains.

Payroll companies are third-party processors, and interfering with their work would deny workers their paychecks, she says.

ISOs often operate as third-party processors, depending upon their contractual obligations, and could sustain harm from the federal campaign, Jones says.

Besides, third-party processors can represent the very soul of respectability, she tells legislators.

Homeowners associations, for example, use third-party processors, Jones notes.

Moreover, a number of third-party processors have made themselves household names—including PayPal, Intuit, MoneyGram and Western Union—illustrating the industry’s solid credentials, she contends.

Besides making its case with lawmakers, the TPPPA is confronting regulators’ criticism head-on. Federal agencies accuse the banks of failing to monitor third-party processors adequately, so the association has retained a law firm to assemble guidelines for third-party processors and for the banks that oversee them.

The guidelines, called a “compliance management system,” are expected by the end of January.

Meanwhile, the association is also urging the industry to express its concern over two rules changes contemplated by NACHA, the rule-making body for automated clearinghouse payments.

NACHA is seeking comments on a proposal to restrict the number of returns a merchant can have, which TPPPA argues would push struggling businesses out of the network.

At the same time NACHA is is seeking comment on a proposal to charge banks for returns, which TPPPA says would raise the cost of ACH.

After her initial round of lobbying, Jones is now devoting time to a membership drive for the association. Ten third-party processors have joined, and potential members from that category number in the thousands, Jones says.

Besides the processors, banks are also invited to sign up. Affiliate memberships are available to merchants, ISOs and others with an interest in the segment.

So far, Jones is the only employee, but she claims to enjoy the challenges.

“It’s been fun to be out there and help educate them on payments,” she says.

And it’s important in her eyes. The new association, Jones argues, fills what she views as a void in transactions advocacy.

The acquiring industry's established trade group, the Electronic Transactions Association, advocates for companies involved in card transactions but does not “holistically” represent firms offering automated clearinghouse payments and remote check capture, according to Jones.

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