Warning Sent to Credit Card Firms

THE Federal Trade Commission (FTC) is sending a message to credit card companies: They had better be careful when they sign merchants up.

The message was delivered on Nov. 10 when the federal agency announced that Citicorp Credit Services Inc., a subsidiary of New York's Citicorp bank, agreed to settle FTC charges that it "aided and abetted a deceptive national travel club by continuing to process the club's credit card sales even when it knew, or should have known, about the club's deceptive sales practices."

This is the first case the FTC has brought against a card processor.

"This is the most significant case brought in the telemarketing or mail area," says Barry Cutler, the FTC's director of the Bureau of Consumer Protection in Washington. "We are going after not only the operators themselves but also after the suppliers, the people who help create the network, the aiders and abetters."

The FTC's action came as a surprise to the credit card industry. "I've never seen anything like this before. I've never known the FTC to get involved in this kind of thing," says Edward Hogan, a senior vice president at MasterCard International in New York. Crackdown on fraud

Mr. Cutler says the case is part of the FTC's efforts to crack down on con artists and deceptive business practices. In order to perpetuate a fraud, a con artist has to be able to make a pitch to the consumer and then get paid. Since so many people use credit cards for payment, the FTC began looking into ways to cut abuse of the system. "The FTC is saying if you are a credit card company you can't profit from it by closing your eyes," Cutler says.

The issue came to the FTC's attention in 1987 when it brought a case against the BankCard Travel Club, which billed consumers after they had canceled their "free trial" travel-club memberships and failed to issue refunds. As a result of the investigation, BankCard, with offices in Chicago and New York, agreed to refund $2 million to consumers.

Federal investigators found that the company had been using Citicorp Credit Services, based in Long Island City, N.Y. to process its credit card accounts. Twenty-five percent of BankCard's bills were "chargebacks," in which the sale is removed from the consumer's account and charged back to the merchant. A high chargeback rate is a signal of potential fraud.

In its investigation, the FTC found that Citicorp knew the company had a high chargeback rate, a high consumer complaint level, did not meet Better Business Bureau standards, and was being investigated by various government agencies.

Hogan says banks tend to terminate business with a merchant with a high amount of chargebacks. "It tends to take care of itself," he says, because it becomes costly for the bank to process the transactions. MasterCard users' chargeback rate is about 1 out of 1,000 transactions.

For its part, Citicorp says it agreed to the settlement but is not admitting or denying the charges. "We are no longer in that business anymore and we agreed to make some procedural changes to make sure that would not happen in the future," says Maria Rullo, a spokeswoman for Citicorp's credit card services. In June Citicorp sold the division involved to an investor group. Terms of settlement

Under the settlement Citicorp, which still markets both Visa and MasterCard credit cards, agreed to determine each month if the chargeback rate for each of its merchants exceeds 6 percent of all credit card transactions for two of the preceding three months. If so, Citicorp is required to stop processing all credit card sales and launch an investigation.

Citicorp is required to make a good-faith effort to obtain within 30 days the relevant information, such as a merchant's advertising and promotional materials. It will have to determine the truthfulness of the company's claims to consumers. If a merchant fails to provide Citicorp with information, Citicorp is required to presume that the merchant was involved in deceptive practices.

The FTC settlement must still be approved by the commission after 60 days of public comment.