The Web of Relationships

The various relationships among merchants, processing companies, card issuers and card holders can create a lot of confusion when mistakes are made…or when fraudulent charges occur. This is why credit card companies and processing companies take fraud so seriously.

The September 2002 California state court decision Payment Resources International v. Bankcard Processing shows how badly things can go among the various players.

In May 2000, Payment Resources International (PRI) entered into a contract with Bankcard Processing and its two principals—Kenneth Collis and Gonzalo Ramirez.

Under the agreement, Bankcard was to obtain merchants for PRI to provide credit card processing with Visa and MasterCard. Bankcard also agreed to be responsible for any charges assessed against PRI by Visa/MasterCard or any acquiring banks as a result of fraudulent activity.

Bankcard retained Frank Navarro as one of its representatives in the eastern United States in November 1999. Three merchants (Samer Enterprises, Inc., Safir Electronics and Imma Wedding Transportation) were submitted by Navarro for credit card processing.

PRI relied on the applications of these merchants—which contained false information. PRI insisted that, if it had been given accurate information, it never would have set up the merchants for credit card processing. PRI also contended that, within a three week period, Navarro and these merchants incurred $869,310 in fraudulent charges, all of which were eventually charged back against PRI by Visa/MasterCard and two acquiring banks.

Chargebacks—the term for credit card charges that are denied or declined after the processing company initially approves them—are a big problem in the credit card industry. They are the equivalent of bounced checks, except they’re even worse for banks because money has already been credited…and has to be recovered from a merchant.

PRI then filed a lawsuit against Bankcard seeking reimbursement of funds for the fraudulent activity on Bankcard’s merchant accounts.

PRI further argued that Bankcard and its principals breached the written contract when they failed to pay for the charges that were assessed against PRI. It also claimed that Bankcard was a bogus corporate shell for Collis and Ramirez. According to PRI, neither of the men made any effort to observe corporate procedures properly and both abandoned the company as soon as PRI started to realize the fraud being perpetrated.

In response, Bankcard and Collis and Ramirez argued that the contract with PRI was one of adhesion and that they didn’t understand that they would be responsible for any amounts charged by the acquiring banks against PRI. They also denied any direct relationship with Frank Navarro, claiming he was actually PRI’s agent.

Collis and Ramirez insisted that they observed all proper corporate procedures and that, if any liability should be found against them, it should be found only against Bankcard—and not against them, individually.

Following a four-day bench trial, Judge Michael Naughton found in favor of PRI and awarded $869,310. The court also found, based on the contract and the negotiations between the parties—along with standard practices in the credit card industry—that it was clear that Bankcard and the two individual defendants were responsible for any chargebacks due to fraudulent activities of Navarro and any other agents.

If all of these behind-the-scenes mechanics seem too complex to understand…you’re not alone. Even banking industry insiders marvel that the system works as effectively as it does.

Next: A Complex System