Heartland sues Mercury Payment Systems over unfair and deceptive practices

Heartland Payment Systems (NYSE:HPY), has filed a federal lawsuit against Mercury Payment Systems, charging them with false advertising, unfair competition, intentional interference with contractual relations, and intentional interference with prospective economic advantage.  

The suit, filed in United States District Court in the Northern District of California, San Francisco Division, alleges that Mercury is illegally competing against Heartland with deceptive trade practices. Heartland contends that Mercury is effectively misleading merchant customers by deceptively hiding its excess profits in the interchange fees charged by credit card networks and their issuing banks.

The suit seeks to stop what Heartland calls "Mercury's routine deceptive pricing practices to secure new retail customers and maintain their existing merchants." The suit also seeks to recover full value for each merchant and prospect Mercury has wrongfully taken from Heartland by deceptively falsifying pass-through interchange costs and other illegal methods.

"Heartland has consistently advocated for fair, transparent and ethical credit, debit and prepaid card processing and billing procedures for small and mid-size businesses," said Robert Carr, chairman and CEO of Heartland. "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 hundreds, or sometimes even thousands of their hard-earned dollars each year without their awareness. Industry-wide, the cost of deceptive interchange practices runs into tens of millions of dollars, and has caused great harm to the reputation of the entire electronic payments industry."

In the complaint, Heartland explains that the fees charged by credit and debit card issuers – the issuing banks plus card brands such as Visa and MasterCard – are collectively known as network, or interchange, fees. Interchange fees are set by the card brands, and are typically adjusted twice a year.

Electronic payment service companies, such as Heartland and Mercury, provide the link between businesses and the card-issuing banks, enabling rapid approval or rejection of the payment after a card is swiped and subsequent funds settlement. In 2006, Heartland introduced "interchange plus" pricing statements for merchant customers, indicating all fees separately on a line-by-line basis. Most of Heartland's competitors soon followed suit for many of their small and mid-sized merchants. Standard interchange plus merchant contracts for electronic payment services typically require the merchant to pay the bank/card brand interchange fees at cost, plus the fees charged by the processor.  

Today, Heartland alleges that Mercury and other payment companies are getting around interchange plus pricing transparency by illegally building their markup into what they purport to be interchange fees. In the complaint, Heartland states that it has reviewed hundreds of monthly statements from Mercury for different merchants throughout the U.S., which indicate that Mercury repeatedly and regularly engages in a practice of charging its customers inflated interchange fees without disclosure.

The complaint cites an example of Mercury employing deceptive pass-through interchange tactics to take business from Heartland. The customer, a restaurant chain, compared pricing from various payment processing companies, including Heartland and Mercury. Heartland indicated it would charge interchange fees at cost, plus .07 cents per transaction plus 0.02 percent 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 .04 cents per transaction, making their effective per-transaction fee 10.5 cents instead of their contractually agreed rate of 6.5 cents.

The complaint also alleges that Mercury imposes significant costs and barriers for changing providers, falsely informs merchants that they are the only processor that supports their point-of-sale card swiping equipment, and falsely represents their company in commercial advertising and promotions as guaranteeing the best rate, among other charges.

"Aside from putting a stop to Mercury's deceptive, illegal practices, our ultimate objective with this lawsuit is to help ensure a level competitive playing field in the electronic payment processing industry to provide fair, honest services to merchants, regardless of their size or financial sophistication," said Carr. "We believe that when all the facts concerning Mercury's misleading, unlawful practices come to light in open court, we will start to put an end to falsely inflated interchange billing and other deceptive practices that harm our customers as well as the payment processing industry."

Mercury issued the following statement: "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."

For more:
-See this Heartland press release
-See this Mercury statement

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