Examples of Deceptive Trade Practices in The Payment Industry
This piece comes to us courtesy of Heartland, and was handed out at a seminar given by Robert O. Carr, Chairman and CEO of Heartland,at the RSPA RetailNOW ’15 event in Orlando.
A deceptive trade practice is the act of misleading merchants by knowingly collecting more fees by deliberately hiding them in confusing contracts and statements. There are three particularly egregrious deceptive trade practices.
Inflating the interchange, dues and assessments without notifying merchants.
A true story: A car dealer was comparing options and pricing from various payment processing companies. He chose a processor who presented an apparently lower-cost option. The contract was signed and business commenced.
After processing with this company for six months or so, the car dealer took a closer look at what he was actually paying. He had been quoted 25 basis points plus 20 cents a transaction plus about $50 in junk fees. He ultimately discovered, however, that the interchange fees were being falsely inflated and he was paying more the three times what the contract stated – 250% mark-up.
The merchant rate of 25 basis points + 20 cents + the $50 totaled $492 but the deceptive interchange was costing him an additional $1,240. The processor was collecting $492 plus $1,240 from this merchant for a total of $1,732.
Offering “free” programs.
One processor offers “free gift cards”. But they are only free until the merchant tries to change processors, and finds out that a huge fee is charged to simply report the balances of the gift cards to the merchant upon departure. This blatantly deceptive fee can be up to tens of thousands of dollars for one simple report that lists the gift card number and balance for each card – a report that is provided by honest gift card programs at no extra cost every month.
“Free POS” is another deceptive offering. While the software might be presented as “free”, the processor will likely expect the merchant to pay for installation, training, customer support, and future updates. By the time everything is billed, the merchant may pay up to $1,000 per month for his “free POS”.
Misrepresenting liquidated damages by including pass-through items such as interchange as “lost profits”.
Continuing the car dealer’s story of deception: He’s told he is paying $492 a month to the processor but is acutally paying $1,732 and another $3,233 in interchange and fees. The deceptive practice is discovered six months into the contract.
The contract has a “liquidated damages” clause somewhere in the terms and conditions section that states the processor can collect liquidated damages for early termination.
Ignoring the fact that there are major legal problems with the contract in this example, it could be argued that the liquidated damages should be $492 * 30 months = $14,765. Yet the charge could also be ($1,732) * 30 months = $51,955.
However, the shock is when ($1,732 + $3,233) * 30 = $148,950 has been debited from the merchant’s bank account. Even more surprising is the fact that this is routine practice for some processors.
The deceptive pricing practice of falsely inflating pass-through interchange fees not only constitutes unfair and illegal competition, it also costs even the smallest of merchants hundred, or sometimes even thousands of their hard-earned dollars each year, without their awareness.
-Rober O. Carr, Heartland Chair and CEO
Reprinted with permission from Heartland
Editor’s note: These examples are reminiscent of the deceptive practices of marketing companies getting businesses to switch telephone carriers in the 1990s. At a former business, a telemarketer once got my bookkeeper confused and recorded her agreeing to switch our telephone carrier. Of course, the issue did not show up for 35 days, until the new billing came in the mail – and we got hit with thousands of dollars of bogus fees. Before choosing a payment company, business owners should carefully read the reviews on third party websites about the vendor and investigate the processor thoroughly. Remember, that you’ll be giving them control over a large part of your payment stream. Additionally, when making changes like that, it behooves the business owner and bookkeeper to be exceptionally diligent and monitor all financial transactions related to that processor for the first few months at a minimum. Any offers that sound too good to be true, probably aren’t worth the risk.
The image above is in the public domain and was sourced from WikiMedia Commons. https://commons.wikimedia.org/wiki/File%3AFalschspieler.jpg