PROTECTING SMALL BUSINESS WITH CONSUMER PROTECTION LAWS

A credit card looks deceptively simple. Each charge triggers transactions which seemingly occur in an instant by and among several different entities, generally happening in a few seconds.

The first transaction occurs when a business swipes the customer’s card. This immediately initiates a second transaction where the merchant makes an inquiry with the merchant processor to confirm whether the customer has credit available from their network (such as MasterCard, Visa, Discover and American Express). This initiates a third transaction, where the network confirms payment will be made from the issuing bank (such as Bank of America.) Once the issuing bank (Bank of America) approves the transaction, the rodeo is then reversed: the issuing bank sends approval to the card network and the card network in turn sends approval to the merchant processor and the merchant processor ultimately sends approval to the merchant.

While all these transactions occur in one blur to the customer and merchant, they cost the merchant, and ultimately the customer, money. These costs vary with the characteristics of the merchant and customer.

Whatever pricing structure is used, processing companies base their pricing on four primary fees. These include interchange fees, assessment fees, processor markup fees and monthly account or statement fees.

Interchange fees are charged by the credit card network. They range from 1% to 2% of the transaction and are collected during the transaction process. The fee is paid to the issuing bank as part of the transaction.

Assessment fees are also charged by the credit card network, but these fees are paid to the issuing bank as part of the transaction.

Processor markup fees are charged by the credit card processing company. These costs vary from merchant to merchant and processor to processor based on numerous variables, such as tiered rates, flat rates, or interchange fees.

Monthly account fees vary considerably. Some processing companies charge fees to issue monthly statements. The statements may include a plethora of extra charges, including:

Chargeback fees for reversing transactions
Set up and termination fees
Monthly minimum fees
Same day funding fees
Fees for checkout registration equipment or point of service software.

The numerous fees charged during each credit card transaction can be quite expensive for the merchant, who ultimately pays for the fees charged along the route of the rodeo. Merchant processing contracts are quite cumbersome. Some salespeople for merchant processors can engage in high pressure sales tactics. The credit card processing industry is crammed with companies that deceive business owners with long term-expensive contracts offering outdated equipment and poor customer support.

Faced with high credit card processing fees, the merchant is eager to find ways to cut the costs, and this creates a target rich environment for high pressure sales. In 2014, Apex Merchant Services of Plano, Texas had over hundreds of Minnesota merchants under contract. In October 2014, Swanson sued Apex, alleging that its salespeople had altered service contracts for credit card transactions, reinstated cancellation penalties that had been removed from the original contract, and raised fees without approval. The owner of a Brooklyn Center pizzeria reported signing a contract to pay 10 cents per swipe but noticed that the company was instead charging 20 cents per transaction. Two other merchants complained that they had to close their bank accounts to stop the company from making disputed withdrawals. A Lino Lakes auto repair shop and a St. Paul convenience store noticed that the processing fees periodically changed, and that the original contract with the company had terms crossed out and additional fees written in.

Six months after the lawsuit was filed, the company settled with Swanson. In March 2015, the Court ordered that the salespeople for Apex be enjoined from participating in the sale of credit or debit processing services to Minnesota merchants. In addition, the Court found that Swanson’s office should notify the merchants who did business with Apex and tell them that they were eligible to cancel their Apex or Express processing contracts. Further, the court ordered that Apex pay Swanson’s office the sum of $550,000 to be distributed to the merchants. Finally, the court ordered that Apex be fined the sum of $500,000 if it did not comply with the terms of the judgement.

References:

Bjorhus, Jennifer, “State sues Texas firm in alleged bait and switch,” Star Tribune, October 14, 2014, page B1.
Swanson v. Apex Merchant Group, LLC d/b/a Express Processing, Hennepin County District Court, File #27-CV-14-17277 (2014).
https://www.startribune.com/payment-card-processor-accused-of-ripping-off-minn-small-businesses/279295082/?c=n&clmob=y
https://www.twincities.com/2014/10/14/minnesota-ag-sues-texas-credit-card-firm/