Tuesday, February 4, 2014
Heartland Payment Systems Inc. filed suit against Mercury Payment Systems in federal court, alleging false advertising and unfair competition, among other charges. Heartland, a leading merchant acquirer based in Princeton, N.J., is seeking a laundry list of remedies from the court, including monetary damages and letters to tens of thousands of merchants from Mercury informing them that they've been overcharged and lied to.
Mercury, based in Durango, Colo., balked at the lawsuit, which was filed in San Francisco Jan. 29, 2014, in U.S. District Court for the Northern District of California. "Mercury will vigorously defend against the lawsuit filed by Heartland," the company said in a statement, adding that it would stand by its "business and pricing practices."
The lawsuit against Mercury follows months of jawboning by Heartland's Chairman and Chief Executive Officer Robert O. Carr over what he described as competitors' deceptive advertising and pricing practices. In a 2013 open letter to the payments industry, Carr complained that some ISOs and acquirers are playing fast and loose with the truth as it relates to merchant pricing. He also claimed that merchants are being strong-armed by some acquirers and ISOs to keep them from breaking contracts and leaving for other service providers.
In that letter, Carr urged the Electronic Transactions Association to work with the Federal Trade Commission to help root out corrupt practices among merchant acquirers and ISOs. But the ETA's CEO, Jason Oxman, didn't embrace that tactic. "[T]he payments industry is doing what is necessary to ensure best practices and professionalism are the hallmarks of the services our companies provide to their merchant customers," Oxman stated in a public response to Carr's letter.
In its lawsuit, Heartland alleges Mercury has been poaching Heartland merchants by misrepresenting the true cost of service. Heartland said it obtained and analyzed "hundreds of statements" and other documents from Mercury clients that support Heartland's allegations that Mercury inflates network charges included in the interchange component of its "interchange-plus" pricing structure. "Mercury's deceptive pricing practices can add up to hundreds or even thousands of dollars in annual fees per merchant, even if they're small," Carr said in a statement.
The interchange-plus pricing model – employed by both Heartland and Mercury – has become increasingly popular in recent years. Under interchange-plus pricing, the acquirer and ISO pass through to merchants all interchange and network fees (collectively dubbed "interchange") at cost, and add a separate mark-up (typically a combination of basis points and cents-per-transaction) for their services. Heartland alleges Mercury has been "inflating the network fees charged by card brands, deceptively passing those inflated fees on to their merchants by falsely characterizing them as part of Mercury's uncontrollable (i.e., controlled by the card networks) costs and retaining the inflated amount as pure profit." Based on a review of about 300 merchant contracts, Heartland concluded Mercury regularly inflates the interchange component of its fees by as much as four cents per transaction.
Heartland also said it has been able to identify nearly 30 merchants that left Heartland for Mercury after being convinced that Mercury would undercut Heartland's pricing, only to end up paying more. When merchants learn otherwise, "Mercury imposes significant costs and barriers to changing providers," Heartland stated.
Industry consultant Paul Martaus suggested in an interview with The Green Sheet that the lawsuit could have far reaching implications but warned the dispute won't be settled overnight. "It's going to be an uphill battle," he said. "It's a fight for public opinion at the moment."
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