Humboldt Merchant Services, a payment processor also known as 5967 Ventures, is facing allegations from the Federal Trade Commission that it processed more than $100 million for sham merchants. The FTC filed a lawsuit on Tuesday, claiming the Tempe, Arizona-based company opened merchant accounts for over 1,000 shell companies that fronted online billing scams between 2021 and 2023.
Many of these shell companies originated from an operation that a federal court shut down in December 2023, according to the complaint. The FTC also asked a judge to approve a settlement that includes $12 million for consumer refunds and a permanent ban on processing for four categories of risky merchants. Under the proposed settlement, Humboldt neither admits nor denies the allegations.
Background on Humboldt and BMO Harris Bank
Humboldt operates as an independent sales organization, or ISO, which means it signs up merchants for payment accounts at a sponsor bank. As an ISO, Humboldt underwrites the accounts it enrolls, similar to extending a line of credit. When a customer disputes a charge, the merchant may refuse to repay, leaving the underwriter to cover the chargeback.
Since December 2009, Humboldt’s sponsor bank was BMO Harris Bank, according to the complaint. This arrangement placed the accounts on the bank’s credentials with card networks, making both the bank and the processor responsible for covering disputed charges. The agreement made Humboldt responsible for merchant underwriting and risk monitoring. A Humboldt spokesperson told American Banker on Wednesday that the company is no longer a registered ISO of BMO. BMO is not a defendant in the case, and the FTC did not accuse the bank of wrongdoing.
Years of Warnings Starting in 2015
A consulting firm working for BMO Harris flagged issues with Humboldt’s “Performance Marketing” business in the first quarter of 2015. According to the complaint, this line of business accounted for 25% of Humboldt’s processing volume but 66% of its chargeback volume, with a 4.6% chargeback rate. The Performance Marketing business, which sold supplements and gadgets online, used negative option billing—offering free trials that enrolled buyers into recurring charges unless they canceled.
The complaint does not name the consulting firm or detail what BMO did in response to the review. However, Humboldt received direct warnings as well. Mastercard told Humboldt in reviews between 2017 and 2019 that many merchants appeared to be spreading charges across multiple accounts to stay below monitoring thresholds. Additionally, a senior underwriter warned management in 2019 about opening shell accounts with straw signers, but management disregarded these warnings, according to the FTC.
Moving Accounts to a Cleaner Conduit
By 2020, cardholders’ banks were declining too many Performance Marketing transactions, and many issuers had labeled Humboldt as having a “bad BIN” (bank identification number), according to an internal document. In response, Humboldt moved the accounts. Starting in October 2020, it re-coded Performance Marketing transactions under a lower-risk merchant category and placed them on a BIN sponsored by its corporate affiliate NorthAB, formerly North American Bancard.
NorthAB also had a sponsorship agreement with BMO, but with stricter terms that restricted merchant types, including negative-option billing merchants using trial offers. By moving the accounts, Humboldt circumvented banks declining the transactions. By 2021, these accounts were charging back at a rate of over 7% of sales, far above the typical 0.9% to 1.5% thresholds that card networks use to flag merchants.
What the Settlement Requires
The proposed settlement between Humboldt and the FTC would require the company to screen new clients with trained staff and collect advertising and website addresses from merchants. It would also bar Humboldt from processing for four types of merchants:
- Straw companies
- Merchants on Mastercard’s shared blacklist of terminated businesses
- Merchants already named as defendants in a public consumer-protection case
- Online sellers whose only address is a mailbox at a UPS store or similar service, if they are newly formed, have no processing history, or bill on a negative option
The order does not mention BMO, NorthAB, or the movement of accounts between their credentials. In a statement posted to its website on Tuesday, Humboldt said the matter involved “a limited number of third-party sales agents and merchants, which occurred primarily between 2021 and 2023 under former Humboldt leadership.” A spokesperson noted that Humboldt’s leadership changed in the fourth quarter of 2023. The agreement “closes this matter with no admissions of wrongdoing,” according to the statement.
The complaint describes a longer arc, from the consulting firm’s 2015 findings to sales agents who kept supplying accounts through 2023. If the judge approves the settlement, Humboldt has seven days to pay the $12 million, which its lawyers are already holding in escrow.