Heartland Payments Sues Mercury

February 7, 2014

According to a story in the payment processing industry periodical Digital Transactions, Heartland Payment Systems Inc. filed a federal lawsuit on Wednesday against Mercury Payment Systems LLC. The suit alleged deceptive pricing by Mercury allowed Mercury to lure scores of merchants — well, 30 — away from Heartland and attract prospects to Mercury that had been weighing the two companies for payment-processing services.

Heartland filed  suit in U.S. District Court for the Northern District of California, San Francisco. The suit charges Durango, Colo.-based Mercury with false advertising, unfair competition, and intentional interference with contractual relations under the Lanham Act and related California law.

Specifically, Heartland alleged Mercury used inflated network fees to more than compensate for acquirer pricing that undercuts pricing from Heartland. This practice, Heartland alleged, made 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, Heartland said in the suit.

Heartland  examined roughly 300 Mercury merchant statements and found what it claims is deceptive pricing in 75% of those statements, the company said in its complaint.

In response to Heartland’s allegations, Mercury issued this statement on its website: “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.”

Mercury chief executive Matt Taylor told Digital Transactions News Mercury does not engage in deceptive practices.

The Heart of the Matter

Here’s one example Heartland used in their complaint: A restaurant chain, compared pricing from various payment processing companies, including Heartland and Mercury.

Heartland indicated it would charge interchange fees at cost, plus seven (7) cents per transaction plus 0.02% of the dollar value of transactions and a $7.50 monthly service fee – all competitive or standard industry rates. Mercury’s bid indicated the same except for a 6.5 cents per transaction fee, half a cent below Heartland’s bid.

As a result, 50 of the chain’s 57 outlets switched from Heartland to Mercury for payment processing. Review of a 2013 merchant invoice from Mercury clearly demonstrates that Mercury was charging a falsely inflated interchange fee of four (4) cents per transaction, making their effective per-transaction fee 10.5 cents instead of their contractually agreed rate of 6.5 cents.

What Are Network Fees?

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.

The Bottom Line

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.

Remember When?

This revelation about Heartland comes at a time when the payment processing industry is still reeling from the news of the Target Data Breach.

The major hack of discount retailer of Target that stole credit and debit card data from 40 million accounts right smack dab in the middle of the holiday shopping season.

The sophisticated hack reportedly took place over several weeks — starting on Black Friday and possibly extending all the way through December 15th — and is said to involve nearly all Target stores in the United States. News of the hack was initially reported by noted security blogger Brian Krebs, who also broke the news in 2012 of the Global Data Breach.

Which is a reminder of Heartland itself, because in 2009, credit card processor Heartland Payment Systems disclosed that thieves had broken into is internal card processing network, and installed malicious software that allowed them to steal track data on more than 130 million cards.

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