Credit Card Processing Blog

The Federal Trade Commission has filed charges in relation to the $10 million credit card scam that we first learned about a month and a half ago, we learn from the New York Times. The NYT article tells us that the charges against the bogus companies set up to facilitate the fraudulent transactions were filed back in March, three months before the FTC announced the scam in a press release.

It was a very elaborate scheme, involving more than 16 dummy corporations the scammers had set up in various Eastern European and Central Asian countries, including Lithuania, Estonia, Latvia, Bulgaria, Cyprus and Kyrgyzstan. The criminals then opened up more than 100 merchant accounts in the U.S. to process the payments. In order to do so, however, they had to convince the processing banks that their business was legitimate. Here is how they did that, according to the NYT:

…false storefronts were set up on the Web, pretending to sell electronics or office supplies, in case a bank investigated.

The perpetrators also rented a street address from a company that provided that service and had their mail forwarded to another company that scanned and forwarded it a second time as e-mail, the suit says.

Once the merchant accounts were operational, the criminals started to charge small amounts to credit and debit card accounts whose information they had stolen. Most of the charges were for $9, although the amounts could be as low as $0.20 and as high as $10, according to Steven M. Wernikoff from FTC’s Midwest Region Office.

The criminals succeeded in stealing so much money mostly because the small individual charges either went unnoticed by many of their victims or they simply didn’t bother to dispute them.

Yet, with so many fraudulent transactions, complaints were bound to pile up and eventually the FTC received more than 1,000 of them. Interestingly, there “were more complaints about the 20-cent charges because they looked really odd,” according to Wernikoff.

The FTC’s investigation lasted for nine months, however the identities of the individuals who masterminded the scam are still unknown. No one is defending the companies in this law suit either. Less than $100,000 has been recovered so far from the U.S. assets of the false companies. The FTC hopes to recover some of the money transferred abroad, but it is unlikely that it will meet with much success there.

Apart from its sheer scale, the most striking thing about this scam is the discipline and patience with which it was executed. The criminals had detailed understanding of how the credit card processing system operated, had identified its vulnerabilities and knew how to exploit them. It must have taken them months just to lay down the groundwork of setting up U.S. corporations and opening up e-commerce websites and merchant accounts for them. They must have known that eventually the whole thing would be found out, but that it would take months for it to happen. In the mean time they managed to steal money from 1.3 million people. This must be some kind of a record, but I’m also wondering if we have learned the full extent of the scam. Take a look at your January statement. Maybe you’ll see a $0.20 transaction from Link Services or Site Management.

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Swipely, a social shopping network, is the latest entrant in the increasingly crowded field of social networks who offer users the ability to share their credit card purchases with friends, we learn today from ReadWriteWeb’s Adrianne Jeffries. After several months of private beta testing, today Swipely opened its doors for everyone.

Given the track record of similar services in the recent past, Swipely has its work cut out for them. To say that its competitors have had a hard time both convincing a skeptical public and protecting users’ personal information would be a huge understatement.

You may remember, for example, what happened with Facebook’s ill-fated Beacon project. It was supposed to “help people share information with their friends about things they do on the web,” according to Facebook’s founder Mark Zuckerberg. A month after Beacon’s release, Zuckerberg was already apologizing for making “a lot of mistakes building this feature” and simply doing “a bad job with this release.” Eventually, Beacon was shut down and Facebook had to pay $9.5 million to settle a lawsuit alleging privacy violations.

Earlier this year, Blippy, another start-up that offers users a platform to share credit card purchases with others, accidentally revealed the credit card details of some of its users on Google. As announced on Blippy’s blog:

In early February, due to a technical oversight on our part, some raw transaction data appeared within the HTML code on some Blippy pages for about half a day. Raw transaction data is the messy one-line sentence that appears on a bank or credit card statement.

Half a day of course was all the time needed to cause the trouble:

Google had crawled and indexed a portion of Blippy’s pages. Even though the sensitive information was hidden in the HTML and not visible in plain view, the Google crawler observed it and recorded the information to put into its search index. Google effectively took a snapshot of Blippy during that half day period.

Undaunted, Swipely is going ahead with its own service and says it has learned from others’ mistakes. Here is how it works, as explained by Jeffries:

Swipely collects purchase information from more than 4,000 banks and credit card companies, using the Localeze database to match transaction codes to physical locations. Users can also forward email receipts to Swipely or install a Gmail plugin that pulls receipt data automatically.

You can broadcast all your purchases, all your purchases from a specific store, or pick individual purchases to show on Swipely, Twitter and Facebook.

…

The data is used to target users for ads and discounts. Users can also search for all the comments for a store or item, similar to user reviews on a site like Yelp or Amazon.

Swipely founder Angus Davis acknowledges the obvious – that convincing people to trust them with their personal information will be hugely challenging. His major selling point seems to be Swipely’s potential to save users money. Whether people will buy into it remains to be seen.

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The store-branded credit card industry is surging ahead, as Americans are beginning to get a firmer grip on their finances and delinquency and charge-off levels are falling, we learn today from the WSJ. This is of course good news for card issuers, but it is even better news for retailers. The WSJ tells us that:

On Wednesday, Target reported second-quarter profit of $149 million for its credit-card segment, up from $63 million a year earlier, as souring loans receded. Accounts at least 60 days behind on credit card payments fell to 5% from 5.8% a year earlier.

Private label cards, also known as store-branded cards, are issued by credit card issuers under the name of a different organization, such as Home Depot credit card offered by Citibank. Typically, they can only be used at the retailer whose name they bear. Cards that display the logo of a credit card company (e.g. Discover or American Express) or association (Visa or MasterCard), can be used anywhere cards are accepted. An example would be a United Airlines card offered by Chase.

Consumers rank store-branded cards lower in their payment priorities than general purpose cards, the WSJ tells us. This is borne out by the data:

Balances on store cards totaled $94 billion in 2009, down 8% from 2008, according to the Nilson Report, a newsletter that tracks the payments industry. General-purpose credit-card balances declined 13% to $1.89 trillion.

To counter this trend, issuers typically charge higher interest rates on their private label offerings. Yet, it turns out that private label cards are still not as lucrative for issuers as general purpose cards:

Issuers of retail credit cards make $16 to $18 of interest and fee income on every $100 loaned out, before subtracting expenses, according to Mr. [Robert] Hammer [head of a credit card consulting firm]. Earnings on general purpose cards typically are $14 to $15 per $100 loaned.

At the peak of the financial crisis some issuers scaled down their private label offerings, while others put up their portfolios for sale. GE, the nation’s biggest store card underwriter, unsuccessfully tried to do just that. Now, however, GE’s portfolio is “performing very well and has proven to be very resilient,” according to Stephen White, a GE spokesman. “It’s no longer up for sale.” Capital One is also expanding its private label offerings, taking over retailer Kohl’s 20 million credit card account portfolio from Chase.

Consumers should welcome these developments, as higher profits and increased competition in the industry should preserve the level of benefits they get from their store cards.

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Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
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New Yorkers have the most credit cards in the nation – 3.77 per resident, on average, according to a new study by Experian, one of the three largest U.S. credit reporting agencies. However, the number of open credit cards is not related to the total outstanding debt, the data show. For example, New Yorkers owe on credit cards $1,040 less than the residents of the most indebted metropolitan U.S. region – Atlanta. The average monthly balance of New Yorkers is $5,713, compared to $6,753 for Atlanta residents, who are ranked 15^th on the number-of-open-cards list.

The data reveal some substantial regional differences in Americans’ credit card debt distribution. Residents of San Francisco and Houston owe the least, with outstanding credit card balances of $5,323 and $5,328, respectively. By comparison, the average Atlantan owes more than 25 percent more than that.

Overall, Americans are now opening 26 percent fewer credit cards than they were three years ago, before the financial crisis hit, according to the study. There is no regional breakdown available for this data segment, but it is well known that, in the aftermath of the financial meltdown, issuers tightened their credit standards across the nation. Credit card offers mailed in 2009 plunged 66 percent from their 2008 level, according to data from Mintel Comperemedia, which specializes in tracking direct mail and print advertising in the U.S. and Canada. Moreover, the available offers were much less attractive. For example, more than a third of credit card offers sent in 2009 (36 percent) featured an annual fee, compared to just one in five (20 percent) in 2008, according to the Mintel study. Moreover, new offers were only available to consumers with excellent credit history. Even when offers began to increase in number in the first quarter of 2010, their quality did not improve. Almost two-thirds (65 percent) of the total mailed offers for the first quarter of 2010 carried an introductory purchase APR versus 58 percent in Q4 2009, according to data from Synovate, a market research company.

The worsening quality of credit card offers and the decreased number of their recipients coincided with a steady consumer drive to cut back on debt. Since September 2008, U.S. consumers have reduced their outstanding credit card balances by $144.9 billion, or 14.85 percent, according to data from the Federal Reserve. The drop in the overall U.S. credit card debt since September 2008 translates into eliminating $2,683 of the average household’s outstanding credit card balance during that period, either through paying down the debt or charging it off as uncollectible by the lender.

Unfortunately, the Fed’s report doesn’t provide regional data, so we don’t know which metro area is the debt-cutting leader. Still, it is good news that Americans are making a conscious effort to pay down their debt. Hopefully, the trend doesn’t reverse itself, once the economy starts improving and the unemployment goes down.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

The WSJ reports that the prepaid card business is booming and is expected to reach $200 billion in revenue by 2013. The biggest prepaid card company, Green Dot Corp., raised $160 million in its IPO last month and has seen its stock rise by 30 percent since then. The second-biggest company in the industry, NetSpend Holdings Inc., hopes to raise $200 million in its own coming IPO. This is good news.

Prepaid cards are used as debit cards, with the difference that they are not linked to a checking account, but are drawing funds from an account with the issuing bank. Yet, they are not credit cards either, because the issuer is not extending a credit line to the cardholder, who is actually purchasing his or her card’s spending limit. Once the balance is used up, the card can be re-loaded.

Prepaid cards limit the cardholder’s spending to the amount that is pre-loaded on the card. Unlike with bank cards, prepaid card issuers do not offer overdraft protection, which, if activated, enables cardholders to go over their limit, for a charge.

So paying with prepaid cards is much like paying with cash. They offer the convenience of bank cards, while eliminating the possibility of running up debt. Moreover, most fees associated with prepaid cards are fairly predictable, such as activation or reloading fees.

Prepaid cards’ biggest drawback is that they don’t help consumers build credit history. The reason is fairly obvious: with prepaid cards you are spending your own money, not someone else’s. Some issuers now offer prepaid cards with credit building features, but these are expensive and offer uncertain results. Additionally, some cards come with fees that may surprise you. For example, you can see a $2.50 ATM fee, or a fee to reload money into the account, or a fee for using a PIN, rather than a signature at the checkout, etc.

Now, some prepaid cards promise credit lines, according to Consumers Union, the non-profit publisher of Consumer Reports, and these are the ones you should stay away from. These credit lines are similar to payday loans, with very high interest rates and must be paid within a short period of time. The Consumers Union report offers as an example the AccountNow Prepaid card:

The loan operates like a payday loan. The loans are small and provide short term credit with a flat fee ($25 per $200); require that borrowing consumers have recurring direct deposits such as of paychecks or government benefits and lead to frequent rollovers and triple digit Annual Percentage Interest Rates (APRs). The disclosed APR is 150%, but this assumes that the loan is outstanding for 30 days. This is highly unlikely, as the loans are most likely taken out at the end of the pay cycle. The APR is 650% if the loan is taken out a week before payday, and even higher if the loan is taken out only for a few days.

Yet, on balance, prepaid cards are probably the least costly card you can have and the best evidence to support that claim is the fact that the big banks are staying away from them. After all, Green Dot and NetSpend are not exactly household names. J.P. Morgan Chase, Bank of America Corp and Citigroup don’t sell prepaid debit cards directly to consumers, according to the WSJ’s report.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).