Practical Ecommerce

Feds Eyeing Credit Card Processing Industry?

Editor’s Note: This is part one of a two-part series.

The U.S. Federal Trade Commission included merchant account providers in two separate lawsuits it filed against telemarketers earlier this year. The FTC alleges the telemarketers were defrauding consumers by selling them credit-card relief plans. According to the FTC, the merchant account providers conducting the processing services for the telemarketers ignored red flags that should have required more scrutiny. The FTC’s action has raised concerns in the processing industry that the government may be watching the industry more closely.

Warning from a CEO

Perhaps the FTC’s action prompted Robert Carr, CEO of Heartland Payment Systems, a large card credit processing company, to reprimand his industry in a card processing association meeting last month. Carr targeted the ISO — independent sales organizations — channel that sells card-processing services, reportedly citing dubious business practices by those organizations. There are some 1,500 ISOs in the U.S. Most represent more than one processor. If you are a smaller merchant that accepts credit cards, your merchant account provider is likely an ISO, not the actual processor.

As an example of the disingenuous activities mentioned by Carr were the falsification of interchange rates on the statement and the failure to pass the Durbin Amendment debit card rate cap to merchants. I have addressed these and many other misleading tactics in past articles.

Recent Examples

For example, I recently audited a merchant’s processing statement that contained misleading interchange information. The statement lists a $512.00 transaction at the EIRF rate of 2.30% + $0.10 for a cost of $14.44.

That interchange rate — i.e., “2.30% + $0.10” — is, in fact, the proper interchange rate published by Visa for this transaction. But calculations show the merchant is actually being charged a higher percentage than the legitimate interchange rate.

  • $14.44 – $0.10 (1 transaction at $0.10) = $14.34.
  • $14.34/$512.00 = 2.80%.

Therefore, an additional fee of 0.50 percent — 2.80 minus 2.30 — is being added to the EIRF interchange rate. This merchant was overpaying by roughly $18,000 per year and the majority of the overpayment was due to improper interchange rates.

In his speech, Carr predicted that federal regulators would continue cracking down on the credit card industry and called upon the participants to do a better job of self-policing. I commend Carr’s speech. The card processing association has taken steps in the last few years to improve the industry. However, it needs to pay close attention to what this and other CEOs are saying, as well as monitor the misleading tactics used against merchants.

My only disagreement with Carr was that he focused on the ISO channel. Over the last two years in my Practical Ecommerce articles, I have described misleading tactics in the card processing industry. All were real examples from merchant statements and other sources. And, they were not just from ISOs but from processors and banks, too.

Here is an example of a misleading fee on the statement from one of the largest banks in the U.S. The statement reads that a “Visa Foreign Handling Fee” of 0.20% was charged on $17,672.89 of processing, for a total cost of $35.35.

My issue is simple. There is no “Visa Foreign Handling Fee.” What is stated as a “Visa Foreign Handling Fee” is not a Visa fee at all. It is an additional fee charged by the bank. However, if you call the bank’s customer service personnel, they will likely call it is a Visa fee because it says “Visa.” Even in large providers, only a handful of people actually understand interchange rates and which fees are really card company fees and which are not.

For the record, there are some very good ISOs in the U.S. with dedicated salespeople who care about their merchants and work hard to service them. For the most part, I find the ISO community to be more creative and diligent in solving merchant issues than processors and banks. I also believe there are some very good processors and banks. However, there are ISOs, processors, and banks I would prefer my clients not use. These are the ones that have hurt merchants, hurt the industry, and deserve more government scrutiny.

Perfect Storm for Misleading Charges

Many ecommerce merchants could face dubious sales tactics in 2014 and 2015. Brick-and-mortar merchants could also face dubious tactics specific to EMV (Europay, MasterCard, and Visa) terminals— see “Credit Card Processing: October 2013 Rate Changes, EMV Terminals,” my article last month. The card companies have created the perfect storm for some of most egregious activity in the card processing industry since the 1980s because of the way they are forcing brick-and-mortar merchants to change terminals by October 2015 or be liable for certain types of fraudulent transactions. In fact, the egregious sales tactics have already begun. Certain ISOs and processors are, I’m told, telling merchants their existing terminals are “illegal” and need to be changed.

I address other misleading sales tactics in “3 Examples of Misleading Credit Card Processing Charges,” which is part two of this series.

Phil Hinke

Phil Hinke

Bio   •   RSS Feed


Sign up for our email newsletter

  1. Bob November 14, 2013 Reply

    Your article is leaving out some facts?

    You say a merchant was actually paying 2.30% plus .50% for a total 0f 2.80%.

    So did you review the merchants contract with the ISO? Do you know if their contract says interchange plus .50%?

    You’re going after the ISO without saying what their contract actually says!

    When you reviewed their statement did you also review their contract?

    Are are saying they should be charged straight up interchange without any profit?

    Why don’t you mention the profit Mr Carr adds to every transaction his company processes?

    Your article was one sided and self serving without covering all the facts!

    • Phil November 18, 2013 Reply

      Bob, my articles are written solely to educate merchants. I neither promote my services nor recommend specific providers. Not only do I continually have merchants thanking me for my articles, but I also continually have salespeople praising my articles because they face the same issues and misleading tactics I mention in my articles from some of their competitors. Of course, I also receive calls and comments from salespeople like yourself who don’t like the information and sales tactics I disclose in my articles.

      In this specific case, the merchant had several accounts. In addition to the provider mark-up, the Interchange was marked-up from 0.10% to 0.90% depending upon the card type and account. The pricing was so convoluted that I set up a conference call with the merchant and the provider. The provider confirmed my findings and apologized for what the provider even thought was egregious pricing. The merchant is current taking the appropriate action.

  2. Gobias November 14, 2013 Reply

    I’m confused. 2.3% of 512 is 11.776. Then +.1 is 11.88.

    So the fee is $11.88. Where is $14.44 coming from?

    • Daniel November 15, 2013 Reply

      How can this be confusing? The article states the rate SHOULD have been 2.3% + .10 but the merchant paid more at a real rate of 2.8% + .10 (=14.44)

    • Phil Hinke November 18, 2013 Reply


      Hopefully Daniel’s comment clarifies the calculations.

  3. Ben November 20, 2013 Reply

    The processor noted in this article is not being misleading; it’s simply incorporating its markup with interchange on statements. This is actually typical reporting practice for a few direct processors, which are not ISOs.

    The first comment by Bob has it correct. In this case, the processor’s markup is 50 basis points (0.50%), which is added to the actual interchange rate. We analyze such statements on a daily basis where this reporting style is utilized. It’s commonly used by TransFirst, and less often by NPC.

    I agree that this method of reporting is confusing and somewhat opaque, but it’s a symptom of a larger issue and not so much an issue with this particular processor’s reporting method.

    The larger issue is that there are no standards or guidelines that outline how processors must present charges. Each processor is free to outline statements however it chooses, which makes decipher charges confusing for merchants and sometime even experts.


    • Phil November 20, 2013 Reply

      I assume you sent in your comment before you had a chance to read my response to Bob’s question. Some providers do add their mark-up to the interchange itself. However, as stated in my response, the mark-up on the interchange was in addition to the provider’s mark-up which was also on the statement.

      I audit hundreds of statements each year. In fact, not only do merchants send me their statements but salespeople sometimes send them to me as well because they don’t always trust the provider they represent. I recently audited a statement sent to me by a salesperson. She quoted the merchant Interchange Plus pricing and was horrified to find out that not only was the merchant being charged the mark-up she quoted but there was an additional mark-up on the interchange.

      Certainly, interchange mark-ups aren’t anyway near as pervasive as mark-ups on pass-through fees. Unfortunately, salespeople can get caught in the middle of these issues as well as merchants.

  4. Ryan D December 11, 2013 Reply

    It is a little unclear what the merchants contract stated. There is always a margin paid over interchange, that is how the iso and the processor make a profit and stay in business. I would like to look into this further.