V Visa Inc

By AnnaMaria Andriotis, Paul J. Davies and Juliet Chung 

Collapsed payments processor Wirecard AG miscoded gambling transactions and had high levels of stolen card purchases and reversed transactions, leading to hefty fines from card networks Visa Inc. and Mastercard Inc., according to people familiar with the matter.

Visa and Mastercard each imposed fines exceeding $10 million more than a decade ago, and the networks remained wary of Wirecard's business. Since at least 2015, Visa executives were concerned that Wirecard was a problem, according to some of the people familiar with the matter.

Visa asked Wirecard to cut off certain merchants and said too much of its business originated from risky areas such as gambling, pornography and unregulated health-care products known as nutraceuticals, those people said. Some of Wirecard's clients changed names to avoid being identified as problem merchants.

Such high-risk clients were highly lucrative to Wirecard. Pornjapan, a pornography purveyor, paid 10% fees for transactions handled by Wirecard in 2017, according to internal Wirecard documents viewed by The Wall Street Journal. Mainstream merchants tend to pay 2% to 3% for U.S. credit-card purchases.

A Visa spokesperson declined to comment. A Wirecard spokesman declined to comment.

A Mastercard spokesman said it actively monitors its network for violations of law and noncompliance with its rules. "Where we see areas of potential concern, we thoroughly investigate and work with our customers to remediate any issues we identify. This may include corrective action, fines or the suspension or termination of a license under certain circumstances."

Wirecard, which crumbled into bankruptcy last month when it admitted a $2 billion hole in its accounts, processed payments on behalf of shops and online merchants. Like other processors, it acted as a feeder of card transaction data into Visa's and Mastercard's vast networks, which connect to banks and handle hundreds of millions of transactions a day.

German prosecutors are investigating whether Wirecard executives used access to the financial system to launder money dating back as far as 2010. It has also charged executives for taking part in a multiyear fraud going back to at least 2015. Wirecard is also under scrutiny in the U.S. by federal prosecutors in connection with an alleged bank-fraud conspiracy that might have relied on Wirecard as a transaction processor and offshore merchant bank.

Visa and Mastercard watch over companies such as Wirecard that help bring payments into their networks. While the Federal Trade Commission has taken a more active role identifying card fraud -- and recently brought a string of cases accusing individuals and companies of processing unsavory purchases -- the industry relies in part on self regulation, especially outside the U.S.

The networks have powers to fine payment processors like Wirecard. Fines, which generally aren't made public, can be imposed for reasons including too many disputed transactions, or for disguising the true nature of transactions. Banks and card processors can also directly terminate relationships with merchants.

Payments processors like Wirecard are supposed to play a front-line role in detecting and reducing fraud by merchants, according to Scott Talbott, vice president of government affairs at the Electronic Transactions Association, an industry body.

"Processors can go rogue and engage in fraudulent activity -- either through willful blindness or by aiding and abetting fraud," he said. "The card networks are a strong link in the chain to defend against that."

As investigators piece together the nature of Wirecard's activities, one focus is on its practice of managing payments for merchants other companies would avoid. Wirecard's business leaned on servicing pornography, gambling and nutraceuticals, according to former employees and the people familiar with the matter.

Wirecard could charge higher fees to handle these types of payments, which are seen as riskier because customers often dispute the charges. Sellers of goods and services pay a merchant discount rate when they accept card payments, which include network and processor fees as well as interchange fees paid to the card issuer.

In the first quarter of 2017, internal Wirecard documents seen by the Journal show merchant discount rates averaged more than 7% for transactions done through one of Wirecard's key business partners. Pornjapan, the pornography merchant, paid a discount rate of 10%. Wirecard used partners to process payments in countries where it didn't have licenses.

Card payments are accompanied by a merchant category code, which describes the type of merchant where a consumer is shopping and occasionally describes specific goods or services.

In 2008, Mastercard fined Wirecard GBP11 million for processing gambling transactions under the wrong codes, according to a person familiar with the fine. In 2010, Mastercard wrote to Wirecard's banking unit about fresh concerns that it was rerouting through miscoded merchants gambling transactions that banks had previously declined. Banks would then approve these payments thinking they weren't gambling related, according to a letter from Mastercard to Wirecard seen by the Journal.

During several periods over the past dozen years, both Visa and Mastercard executives have been concerned about a high number of Wirecard transactions being disputed by cardholders, referred to as chargebacks. These transactions often involved cards being used fraudulently on Wirecard clients' websites, according to the people familiar with the matter.

In 2009, Visa fined Wirecard's banking unit $12 million for high chargebacks that occurred in October and November 2009, according to documents publicly disclosed in an FTC suit not directly related to Wirecard. Wirecard's total revenue for the fourth quarter of 2009, in comparison, was about $79 million.

Visa currently considers chargebacks to be high when they exceed about 1% of purchases made at a merchant.

In October 2009, some of Wirecard's clients had chargeback rates ranging from 2% to 15% including merchants in the nutraceutical sector, according to documents filed in the FTC suit. Chargebacks were even higher in November among the worst-offending merchants. Several were well above 100%, suggesting that disputes were higher than transactions that month. Wirecard didn't appeal the fines, according to the documents.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com, Paul J. Davies at paul.davies@wsj.com and Juliet Chung at juliet.chung@wsj.com

(END) Dow Jones Newswires

July 27, 2020 14:49 ET (18:49 GMT)

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