Bank Will Repay Merchants Who Dealt With Credit Card Middleman : 2 Laguna Jewelers Are Among Those Owed Thousands

To the relief of two Laguna Beach jewelers, a Detroit bank agreed Friday to cover the credit card charges that went unpaid when a credit card services company collapsed in January.

Comerica Bank said it will start contacting and repaying about 1,000 merchants who dealt with Check Reporting Services Inc., a Lansing, Mich., firm that acted as a middleman between merchants and the bank in clearing Visa and MasterCard purchases. The merchants in 37 states are owed a total of $4.8 million.

“Fantastic,” said a happy Alice Satterfield, owner of B. Hall Estate Jewelry. John Chung, owner of John’s Jewelry and Gems Co., said he was elated over news of the payment.

Chung figures he is owed nearly $13,000, and Satterfield estimates she lost up to $5,000 when CRS stopped processing Visa and MasterCard purchases Jan. 13.

Credit Card Middleman

As a middleman, Check Reporting Services collected credit card charges from merchants--mainly small retailers--and shipped them to Comerica. The bank, which clears the purchases through the Visa and MasterCard interbank networks, sent CRS the funds to cover the purchases. CRS, in turn, sent checks to the individual merchants.

By pooling the credit card charges of a large number of small firms, CRS was able to pass along to merchants the lower rates that banks typically give major retailers for processing credit card transactions.

Over the last year or so, merchants saw growing delays in getting CRS to pay the amounts charged by customers who purchased goods on Visa or MasterCard. For many, the 1-week delay in getting paid extended to more than a month.

Finally, CRS revealed its insolvency to Comerica, and the bank halted payments it was sending to CRS on behalf of the merchants. CRS was forced into bankruptcy on Jan. 24.

Visa International in San Mateo and MasterCard International in New York sued Comerica in separate actions, claiming no bank should be allowed to avoid all responsibility for the actions of third-party firms.

$18 Million in Losses

The failure of CRS was the third involving independent credit card service firms to jolt the financial industry in the past 2 years. Total losses to merchants and consumers in the three cases are estimated at $18 million.

Both Visa and MasterCard are implementing tougher rules to control the outside firms that banks use. MasterCard, for instance, intends to require that banks pay merchants directly, rather than through a third-party firm.

Spokesmen for Visa and MasterCard hailed Comerica’s decision to pay the merchants, and the companies dropped their suits against the bank.

Under the arrangement, Comerica will pay the total amount lost unless the aggregate amount exceeds $5 million. In that case, merchants will receive slightly less. But Randy Boileau, a bank spokesman, said the fund should cover the entire loss.