Nuvei Case Turns Chargebacks Into an FTC Warning Sign

Before a merchant can accept card payments, a processor or acquiring bank must decide whether to take on the business and its payment risk.

Two September Federal Trade Commission (FTC) cases show how much can ride on that approval.

The FTC alleged that Nuvei opened or maintained processing accounts for merchants it knew or should have known were engaged in deception. Days later, the agency accused Humboldt Merchant Services of processing payments for more than 1,000 shell merchants allegedly used as fronts or pass-throughs for companies engaged in unauthorized billing.

The cases illuminate the range of information that can bear on merchant approval, from ownership and prior processing relationships to chargeback histories and the behavior that emerges once transactions begin.

PYMNTS Intelligence research released last month in collaboration with Plaid found that 57% of executives at firms in payment-heavy industries said fraud attempts had increased during the previous year. Nearly two-thirds, 65%, planned to strengthen identity verification during the following 12 months.

For processors, one place to apply that scrutiny is before a merchant starts accepting cards.

Approval Goes Beyond Checking a Business Name

The Nuvei court order shows how far merchant screening can reach when additional risk is present.

For prospective merchants covered by its enhanced screening requirements, Nuvei must collect information about what the business sells and how it sells it, as well as its principals, controlling persons and majority owners. Business names, trade names, websites and physical locations are also part of the review. The order calls for five months of chargeback data and, when available, six months of processing statements. Nuvei must also determine whether a merchant or related party was recently placed in a card network chargeback monitoring program or terminated by a processor, acquirer, financial institution or payment system because of excessive chargebacks.

The underwriting file can therefore contain considerably more than proof that a company was formed. A processor can compare who controls the merchant and where it operates with its history elsewhere in the payments system.

The Humboldt news shows what can happen when the business holding the merchant account allegedly isn’t the business generating the transactions.

The FTC said shell companies obtained merchant accounts and then processed payments for undisclosed third parties. According to the agency, those sham merchants typically generated chargebacks at rates almost 10 times the levels card brands consider excessive.

The FTC also alleged that Humboldt placed sham merchant accounts on a lower-risk bank identification number, or BIN, in an effort to increase the likelihood that issuers would authorize their transactions.

PYMNTS reported that Humboldt said the conduct at issue involved a limited number of third-party sales agents and merchants, occurred primarily from 2021 through 2023 under former leadership, and that it had since strengthened its compliance and risk management. The company made no admission of wrongdoing.

As for the monetary impact of the cases discussed above: The two settlements with the FTC require a combined $16.85 million in payments. Nuvei must pay $4.85 million for consumer redress, while Humboldt must pay $12 million for consumer redress.

Payment Activity Tests the Approval

Merchant screening doesn’t end once an account starts processing.

Recent PYMNTS Intelligence research with Trulioo found companies use digital identity verification across 4.4 workflows on average. Among 350 companies surveyed, 67.7% used it for account opening, 74.6% for online transactions and 70.6% for fraud tracking.

The numbers point to verification becoming a continuing control rather than a single check performed when a relationship begins. Transaction activity supplies additional information that can be tested against what was established at onboarding.

The Nuvei order puts that feedback loop directly into payment processing.

Nuvei must calculate chargeback rates at least monthly for every client. A client that exceeds both a 1% monthly chargeback rate and 75 chargebacks in any two of the preceding six months must be investigated. For merchants covered by enhanced monitoring provisions, Nuvei must also review complaints, unusual transaction patterns, websites and other information.

Activity after approval can reveal risks that weren’t apparent at onboarding or add evidence to concerns already identified.

PYMNTS Intelligence has also found a sizable gap in when businesses catch payment problems. In a May study of middle-market companies, 57% typically detected fraud or payment nonclearance only after settlement.

Companies that caught problems before settlement were much heavier users of verification. Eighty-one percent used instant bank account verification, compared with 47% among companies typically finding problems afterward. Open banking-based ownership verification was used by 76% of early detectors versus 35% of later detectors.

The figures reinforce the importance of where controls sit in the payment process. Information available before money moves can prevent exposure; information discovered afterward is more likely to become an investigation, dispute or loss.

For merchant processors, the FTC cases move that question to the beginning of the relationship. Ownership, physical location, processing history and previous chargebacks can inform the original approval. Complaints, transaction patterns and new chargebacks can test it afterward.