FTC Fines Payment Processor $12 Million Over Sham Merchants

The Federal Trade Commission has taken enforcement action against Humboldt Merchant Services, accusing the payment processing company of knowingly enabling fraudulent merchants to charge consumers. Under a proposed settlement, the company will pay $12 million and accept a permanent ban from processing transactions for certain categories of high-risk merchants.

According to the FTC, Humboldt Merchant Services provided payment processing services to so-called sham merchants despite warning signs that these businesses were engaged in deceptive or fraudulent practices. The agency alleges the company continued to process payments for these clients even after identifying patterns consistent with consumer harm, including unusually high rates of chargebacks and complaints that are typically associated with scam operations.

The proposed order requires Humboldt Merchant Services to pay $12 million, funds the FTC says will be used to compensate consumers who were harmed by the fraudulent merchants the company serviced. In addition to the monetary penalty, the settlement imposes a permanent prohibition on the company processing payments for merchant categories the FTC has identified as carrying a heightened risk of fraud. The order also mandates that Humboldt Merchant Services implement stronger due diligence and monitoring procedures before onboarding new merchant clients going forward.

Payment processors serve as a critical link between merchants and the banking system, giving them a unique vantage point to detect and prevent fraud before consumers are harmed. Regulators have increasingly scrutinized this role in recent years, arguing that processors who look the other way on obvious red flags can become enablers of large-scale consumer fraud schemes, ranging from fake subscription services to bogus debt relief programs and deceptive telemarketing operations.

The action against Humboldt Merchant Services fits into a broader pattern of FTC enforcement targeting the financial intermediaries that support fraudulent businesses rather than pursuing only the fraudulent merchants themselves. This approach, often referred to as targeting “facilitators,” reflects a recognition that shutting down a single scam operation does little to stop fraud if the processors and payment networks that enabled it continue operating without consequence. Previous cases have involved actions against processors, payment gateways, and independent sales organizations accused of turning a blind eye to obvious signs of merchant fraud in exchange for processing fees.

Consumer advocates have long argued that payment processors are positioned to serve as a first line of defense against fraud because they can observe transaction patterns across multiple merchants simultaneously. Industry groups, meanwhile, have pushed back against expansive liability theories, contending that processors should not be held to the same standard as law enforcement agencies when it comes to detecting fraud among their client base. The tension between these positions has shaped several years of regulatory guidance and enforcement actions in the payments industry.

The FTC’s complaint against Humboldt Merchant Services outlines specific instances in which the company allegedly continued servicing merchants despite internal red flags, though the full scope of the allegations was not detailed in the agency’s announcement. The proposed order remains subject to court approval before it can take effect.

The case underscores the FTC’s continued focus on the payments ecosystem as a whole, rather than isolated fraudulent actors, as part of its consumer protection mission.

This report is based on a press release from the Federal Trade Commission.