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Heartland Payment Systems Inc. on Wednesday filed a federal lawsuit against Mercury Payment Systems LLC alleging deceptive pricing by Mercury allowed it to lure scores of merchants away from Heartland and attract prospects to Mercury that had been weighing the two companies for payment-processing services.
Heartland’s suit, filed in U.S. District Court for the Northern District of California, San Francisco, charges Mercury with false advertising, unfair competition, and intentional interference with contractual relations under the Lanham Act and related California law.
Specifically, Heartland alleges Durango, Colo.-based Mercury uses inflated network fees to more than compensate for acquirer pricing that undercuts pricing from Heartland. This practice, Heartland alleges, makes Mercury’s overall pricing appear to merchants to be lower than Heartland’s, when in fact it is higher. The practice has caused some 30 merchants to abandon Heartland in favor of Mercury over the past six months alone, Heartland says.
Heartland has examined some 300 Mercury merchant statements and found deceptive pricing in 75% of them, the company says in its complaint. “This goes beyond the pale,” Robert O. Carr, chief executive of Princeton, N.J.-based Heartland, tells Digital Transactions News in an interview Thursday. “Someone’s got to draw the line somewhere, and we’re doing it.”
In response to Heartland’s allegations, Mercury issued this statement late Thursday afternoon: “Mercury will vigorously defend against the lawsuit filed by Heartland. Mercury Payment Systems’ rapid growth in the electronic payments market is directly attributable to the value and flexibility we provide our merchants and partners, and we stand by our business and pricing practices. We are proud of our consistently high satisfaction rates and low merchant attrition rates among merchant acquirers over the past 10 years.”
Speaking to Digital Transactions News, Mercury chief executive Matt Taylor says his company will respond to Heartland’s specific charges with a filing of its own. However, he denies Mercury engages in deceptive practices. “We don’t deceive merchants, systematically or otherwise, or hide fees from them,” he says. “We have a growing business based on ethical business practices.”
Without commenting on its merits, one expert observer say Heartland’s suit could have broader implications, depending on its outcome. “This practice is very common. It is the kind of practice that is giving merchant acquiring a bad reputation,” says Adil Moussa, principal at Adil Consulting, an Omaha, Neb.-based consultancy that focuses on acquiring, in an email message. As a result, Moussa says, Heartland’s suit could trigger more such private actions, and ultimately bring on government intervention.
Carr says that with this suit he is following up on a speech he delivered in October in which he alleged the acquiring business is rife with unethical business practices and called on Visa Inc., MasterCard Inc., and the Electronic Transactions Association, an acquiring trade group, to help stamp them out. “We’ll see how this [suit against Mercury] plays out,” Carr says. “If the industry cleans itself up, we’ll have accomplished our purpose.”
As an example of how Mercury’s alleged pricing tactic works, Heartland says in its complaint that in 2008 it submitted a bid to a California-based restaurant chain that called for passing on interchange and network fees “at cost,” along with acquirer pricing of 7 cents per transaction plus 0.02% of the sale and a $7.50 monthly service fee. Heartland, which was the incumbent processor for the chain, says its bid reflected “competitive or standard industry rates” at the time.
Mercury undercut Heartland’s bid, the complaint claims, by assessing the same acquirer fees except for a 6.5-cent fee per transaction. As a result, Heartland says, 50 of the 57 outlets in the chain switched to Mercury.
But Mercury more than compensated for the half-cent difference by levying network fees that were not pass-through fees but instead included a 4-cent markup, Heartland says it learned only in November when one of its representatives spoke to the manager of one of the outlets. This made Mercury’s actual fee to the merchants 10.5 cents compared to Heartland’s proposed 7 cents, according to the complaint.
For a single merchant in the chain, the markup resulted in $54 per month in “additional and improper charges,” the complaint alleges.
Network fees are assessed by Visa, MasterCard, and other card networks. Unlike interchange, which is set by the networks but flows from acquirers to card issuers, network fees flow to the networks themselves. In so-called interchange-plus pricing, both interchange and network fees are commonly understood to be pass-throughs to merchants.
When markups on network fees occur, merchants are often unaware of them because of the complexity of merchant statements, which discourages close analysis, Carr says. “It takes literally three hours for an experienced person in our interchange department to validate that a [competitor’s] statement is accurate,” he says.
Heartland’s suit asks for relief in the form of three times damages as determined by the court as well as three times lost profits. It also asks for an injunction to stop Mercury’s alleged pricing tactics.
