The Federal Deposit Insurance Corporation (FDIC) has issued guidance for banks and other financial services institutions, warning that certain third-party payment processors could prove to be security liabilities.

Attached is revised guidance describing potential risks associated with relationships with third-party entities that process payments for telemarketers, online businesses, and other merchants (collectively “merchants”). These relationships can pose increased risk to institutions and require careful due diligence and monitoring. This guidance outlines certain risk mitigation principles for this type of activity.

Statement of Applicability to Institutions with Total Assets under $1 Billion:

This guidance applies to all FDIC-supervised financial institutions that have relationships with third-party payment processors.

Highlights:

• Account relationships with third-party entities that process payments for merchants require careful due diligence, close monitoring, and prudent underwriting.
• Account relationships with high-risk entities pose increased risks, including potentially unfair or deceptive acts or practices under Section 5 of the Federal Trade Commission Act.
• Certain types of payment processors may pose heightened money laundering and fraud risks if merchant client identities are not verified and business practices are not reviewed.
• Financial institutions should assess risk tolerance in their overall risk assessment program and develop policies and procedures addressing due diligence, underwriting, and ongoing monitoring of high-risk payment processor relationships.
• Financial institutions should be alert to consumer complaints or unusual return rates that suggest the inappropriate use of personal account information and possible deception or unfair treatment of consumers.
• Financial institutions should act promptly when fraudulent or improper activities occur relating to a payment processor, including possibly terminating the relationship.
• Improperly managing these risks may result in the imposition of enforcement actions, such as civil money penalties or restitution orders.

ADDITIONAL READING:     Revised Guidance on Payment Processor Relationships

Original notification posted by the Federal Deposit Insurance Corporation (FDIC), which is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system by:

• insuring deposits,
• examining and supervising financial institutions for safety and soundness and consumer protection, and
• managing receiverships.