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.
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.