Opinion ID: 181032
Heading Depth: 4
Heading Rank: 3

Heading: The Merchant Banks

Text: In order for Berkeley's business to operate, it was essential that the company be able to accept credit cards as a form of payment. [9] To process credit-card transactions, Berkeley obtained lines of credit from several merchant banks. The relationships between Berkeley and the merchant banks involved intermediaries known as credit-card processors. Often, the processors had contractual agreements with the merchant banks, and the processors were the ones who set up the credit-card processing arrangements with Berkeley. Nonetheless, when Berkeley applied for a merchant account with a given processor, the applications were passed along to the banks. Furthermore, either the banks or the processors could terminate Berkeley's merchant accounts. In early 2002, Warshak's merchant account at the Bank of Kentucky was terminated for excessive chargebacks. A chargeback occurs when a customer calls the credit card company directly and contests or disputes a charge. Merchant banksand credit-card processorswill generally not do business with merchants that experience high volumes of chargebacks, as those merchants present a greater financial risk. In determining whether a merchant is experiencing excessive chargebacks, the banks refer to a figure known as the chargeback ratio, which is simply the percentage of transactions in a given 30-day period that result in a chargeback. For example, if a company conducts 100 credit-card transactions and one chargeback results, the company will have a chargeback ratio of 1%. Typically, if a merchant experiences more than one chargeback per hundred transactions, its chargeback ratio is deemed too high, resulting in fines and, eventually, termination of its accounts, either by the merchant bank or the credit-card processor. Following the termination of the merchant account at the Bank of Kentucky, the company applied for merchant accounts with a number of other banks. In some instances, the applications, which often bore Harriet's signature, falsely listed her as the CEO and 100% owner of the company. In other instances, Warshak would complete the applications in his own name but falsely claim that he had never had a merchant account terminated. These prevarications were included in the applications because the prior termination would likely diminish Berkeley's chances of securing the services of other processors. Despite its history with the Bank of Kentucky, Berkeley was able to land (or retain) merchant accounts with several processors. However, due to the auto-ship program and an extremely onerous refund policy, [10] Berkeley was repeatedly at risk of crossing the critical 1% chargeback threshold. [11] At company meetings, the chargeback ratio was a frequent topic of discussion, as was the possibility that Berkeley's accounts would be terminated. To prevent that from happening, a number of strategies were devised to artificially inflate the number of sales transactions and thus the denominator of the chargeback ratio, reducing that crucial ratio. One strategy was called double-dinging. That practice involved splitting a single transaction into two, thereby driving up the number of transactions and diminishing the chargeback ratio. A double-ding might entail carving a $59.95 charge into a $54.95 charge for the product itself and a $5.00 charge for shipping. Warshak directed that virtually all sales be double-dinged, and by 2003, triple-dinging was initiated. Another way the company depressed the chargeback ratio was to make numerous charges to Warshak's personal credit cards. At Warshak's behest, Berkeley employees would ring up $1.00 charges on each of his credit cards until their limits were reached. Apparently, the thinking was that this torrent of additional transactions would dilute the number of chargebacks and keep the ratio under 1%. The same thinking led the company to charge and then refund the credit cards of randomly selected customers. The charges were made without authorization, and if anyone complained about the odd activity on his card, he was told that it was the result of a computer glitch. Through the use of these techniques and others, the company was able to stave off termination of its merchant-bank accounts.