By Ken Musante
Eureka Payments LLC
Recently, the federal government has taken more interest in the payments industry. Specifically, the Federal Trade Commission named three ISOs in actions because of the ISOs' activities or those of their merchants. The FTC has been warning ISOs it will take action when acquirers' actions harm consumers; the lawsuits illustrate the agency's commitment and follow through.
Either in response to the recent regulatory environment or because of the blurring definition of "merchant," MasterCard Worldwide revised its standards, requiring acquirers to more clearly disclose their fees and fee changes. These new standards apply to traditional merchant acquirers and to payment facilitators like Square Inc. and Stripe.
Beginning in June 2014, acquirers and payment facilitators must provide a separate fee disclosure section of the application or agreement clearly detailing the pricing and methodology by which each fee is calculated. Fees include, but are not limited to, any pass-through fee as well as any fee discount, settlement or third-party fee billed by the acquirer. Fee changes require 30-days' advance notice to merchants alerting them of any fee increase. Plus, this disclosure must be provided in a separate document, not on the merchant statement. Acquirers must manage their full-service ISOs and sub-merchants accordingly.
This makes sense; however, some changes from the card networks do not provide time for acquirers to receive the information, understand how the changes will interface with their processing systems, and then properly convey how those changes will impact merchant pricing. This means acquirers may have to absorb an expense increase for a period before being able to pass that fee along to merchants.
MasterCard also outlines best practices that include truthful, clear and simple disclosures. This, too, seems obvious; however, certain practices may make conforming difficult. For example, one best practice is that the agreement and merchant statement use the same terms. This could be problematic if an ISO calls a fee a "statement fee" in its merchant agreement, and its processor calls it a "maintenance fee." To avoid this type of mismatch, where that fee is coded on the pricing grids is now much more important.
Another best practice is to ensure the merchant receives a complete copy of the merchant agreement. Many acquirers reference their agreements through links on their applications, and the agreements can be up to 50 pages. Must these now be printed and handed to merchants? The sheer weight of these documents could intimidate merchants.
Perhaps the biggest impact of the newly published best practices pertains to termination fees. I have little regard for such fees, believing that any fee in excess of the hard cost or risk to set up and establish the merchant relationship is questionable. Merchant relationships should be earned daily, monthly, quarterly and continually. Nevertheless, expensive, onerous cancellation fees are commonplace.
MasterCard's best practices suggest merchants and sub-merchants be allowed to terminate contracts without penalty within 90 days of receiving notice of a fee increase or introduction of a new fee. While it is unclear if this practice holds in the face of an increase from the card networks, if that is the case, it is the antithesis of how many acquirers operate. Further, if a hard cost or risk is undertaken to sign the merchant and a card network change is introduced, how must the acquirer operate so as to not lose its investment in signing the merchant?
Another recommendation is that merchants receive a breakdown on their statements of how their fees are calculated. I whole-heartedly support this and am frustrated when I view statements in which merchants are given only their volume and fee and not presented with the information they need to calculate their fees. No one would stand for this on a utility bill.
It is unfortunate that MasterCard needed to publish these new standards and best practices. It tells us that either acquirers or payment facilitators are not properly conveying their fees and contractual terms. It also indicates MasterCard believes our industry needs further guiding principles to stave off increased government scrutiny. My hope is that this action will help ensure merchants see acquirers and ISOs as trusted advisers. Time will tell. I remain hopeful.
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