FDIC Backs Down on “High-Risk” Merchant List
Tuesday, June 04, 2019 12:00 AM

The FDIC has fully reversed its position on a list of merchant categories thought to present a high risk for payment fraud. In a May 29 article, the Wall Street Journal reports that a suit brought by payday lenders against the Federal Deposit Insurance Corporation has been settled, and that banks must no longer rely on the FDIC’s “high-risk” list, which included coin dealers.

ICTA alerted our members in June 2014 that the Department of Justice had launched Operation Choke Point to crack down on fraud in the payments system by investigating banks and payment processors. The FDIC’s article “Managing Risks in Third-Party Payment Processor Relationships” presented a list of “high-risk” industries (including coin dealers), which was used in the DOJ operation.

In July 2014 American Banker reported that the FDIC had withdrawn its list of merchant categories that had been misinterpreted, resulting in banks’ severing ties with legitimate businesses. Despite this withdrawal, however, banks may have still been using it to assess their risk from third-party payment processors. As predicted by Jimmy Hayes (who was ICTA’s legislative consultant at the time), our members experienced little if any effect from this overreaching initiative by the DOJ.

Payday lenders, meanwhile, sued the FDIC for closing their bank accounts or denying them service. The Wall Street Journal’s May 29 article states:

The parties finally settled last week, and the FDIC's letter says its policies have since been overhauled. The ‘high risk’ merchant list is no more. If the FDIC wants a bank to kill an account, the recommendation cannot come ‘through informal suggestions.’ It must be written in an official report that includes ‘any specific laws or regulations the examiner believes are being violated.’

In other words, simply being in a category on the (now-defunct) list is not sufficient cause to close a merchant’s bank account.

We recommend that our members save this information for future reference, if needed.