From leases lopsided in acquirers’ favor to a bevy of bogus fees, dodgy ISOs, sponsoring banks, processors, and leasing companies are exacting a moral as well as monetary cost on the industry. Here’s what’s going on—and how to clean it up once and for all.
Picture this. You’re at a five-star Australian resort. You’re wading in the gorgeous coastal waters. Amid the pleasant surroundings, you start swimming.
Suddenly, you see a magnificent sea creature, a jellyfish. You can’t help but admire its translucent, pale-blue body and shape. The jellyfish approaches. Entranced, you extend your hands as you would toward any fish. But in less than a second, this undulating, soft fish stings you with its lethal venom. You wish you’d never encountered it.
This was no ordinary jellyfish. It was a box jellyfish, the deadly kind.
Unfortunately, we have a human form of this creature swimming in our midst in the payments industry. Because of these predators, merchants are being cheated and chiseled every day. I should know. I’ve assisted a number of merchants over the years who have been defrauded by registered independent sales organizations.
Stung by Leasing
Let’s look at some of the more common schemes. One favorite tactic relies on terminal leasing. A merchant-level salesperson (MLS) visits a merchant, gains the individual’s trust, and promises $100 to $200 in savings on the spot—without analyzing the prospect’s monthly statement using a spreadsheet.
The MLS offers one or two free terminals, an offer too good to be true, and promises no hidden fees now or in the future. To gain the merchant’s trust, a supervisor comes on the phone and confirms the offer.
The merchant is happy with the deal and signs the merchant agreement. But the rep slips in a non-cancellable lease agreement with a delivery and acknowledgement form, which the unknowing merchant signs.
The retailer never receives a copy of the merchant agreement or the terms-and-conditions document. The merchant doesn’t know the agreement is for three to five years, with a hefty cancellation fee. Nor does he know about the equipment lease or leases involved.
The leasing company receives the faxed documents and funds the MLS or registered ISO immediately. The merchant receives the equipment days later and calls the agent, who provides the ISO’s customer-service number. The ISO doesn’t tell the merchant about the lease but does assist in installation and wishes the merchant well. This merchant doesn’t know it yet, but like tens of thousands of others, he just had an encounter with the box jellyfish of acquiring.
ISOs involved in such deals may or may not send unsuspecting merchants monthly paper or online statements. They intentionally don’t send copies of the signed documents because they are not mandated by their sponsoring banks and processors to do it. That suits them because they know merchants would protest the terms and call the leasing company immediately, which could result in chargebacks to the ISOs.
Merchants don’t know leasing is different from processing. When they call the customer-service number on their merchant statements and question unexpected debits in their bank accounts, they are referred to the very box jellyfish that stung them.
Abuse of EMV
Some of these box jellyfish were using the EMV deadline this month to create a sense of urgency. Some were even leasing non-EMV terminals. Now the deadline is past, but merchants still must be equipped for EMV to avoid fraud liability. So these salespeople cite a high amount, close to $1,000 for a terminal and PIN pad. They create a sense of urgency by fabricating stories of other merchants who are or will be experiencing hardship due to data breaches.
Many merchants sign up, including ethnic merchants who do not speak English well—again with the explicit promise of major savings, no hidden fees, and no future surprise fees, claims confirmed by a supervisor via phone. Surprisingly, all such fees, current and future, are approved by the processor.
One ISO that’s registered through one of the largest banks in the U.S. and that uses one of the largest processors directly as well as through its agent offices in different states persuades merchants that they can add a surcharge or convenience fee to each transaction at the point of sale.
This “fee” can take the form of either 3.75% of each transaction or a small fee of (usually) between 20 and 40 cents for businesses with smaller average tickets, and higher amounts for those with larger average tickets.
But this whole scenario is in direct contravention of Visa Rule 5.6 on surcharging. And, even though some of these unscrupulous agents may not know their claim is against Visa Inc.’s rules, that excuse does not justify their action. The registered ISOs know it is.
As usual, neither they nor the leasing companies they use either leave a copy of any of the signed documents behind or mail one to merchants.
At the request of a local merchant, I recently attended a meeting with one of these agents and his associate. The agent was nervous and did not want to leave any information behind. Their ultimate goal is to sign up merchants on one or more equipment leases.
Abuse of PCI-DSS
Implementation of annual Payment Card Industry data-security standard compliance tests mandated by the PCI Security Standards Council has delivered on a gold platter another (illegitimate) boon to many ISOs and some sponsoring banks, too.
Although I recognize that ISOs should be compensated for the extra little work, the reality is that in most cases this task is outsourced to third-party service providers. The PCI annual fee costs ISOs between $1 and $3 per merchant per month. Most ISOs mark it up to $50 to $100 per year.
Worse yet, they charge between $10 and $20 per month for being non-compliant. There is one well-known ISO that charges merchants $50 per month for being PCI non-compliant, resulting in a huge windfall and a major cash cow.
I met one merchant locally who was charged eight months of the $50.00 fee by the same ISO in 2014, yet the ISO refused to return any of it to him when the merchant became compliant. Multiply that by thousands or even hundreds of thousands of merchants for one ISO, and you see the free and easy money running like a river downstream. The sponsoring bank of this ISO stopped returning my calls as soon as it found out I wanted to report their practices.
The ISOs’ excuse is that these monthly penalty fees will encourage merchants to take action and become compliant. That is a sorry excuse that also enriches the very ISOs who engage in this practice.
I believe this is tantamount to (shamelessly) robbing merchants just because ISOs can. There is no regulation and no collective action by merchants. And any party that can do something about it and does not becomes accessory to it. This abuse should stop and the monies should be returned to the affected merchants when they become compliant.
No Help at Hand
Hardly any processors and major ISOs have a mechanism established to address merchants’ grievances related to these practices. The leasing companies that don’t immediately send copies of documents to merchants allow ISOs to dispense with verbal verification and submit a “delivery and acknowledgement” form. This form is signed on the day of the sales rep’s visit instead of installation day, thereby making it a slam dunk for these ISOs to defraud.
Even with verbal verification, the leasing company will not provide the audio tape when the merchant requests it. No one in their right mind would knowingly sign a five-year lease for $100 per month for an inexpensive non-EMV terminal, no matter how much their processing volume is. In particular, merchants with lower volume cannot realize the kind of savings that would justify any equipment lease.
The commission of over $3,000 on a lease for $100 per month is a windfall for our industry’s con artists. When merchants call to report the fraud, the leasing company tells them it has nothing to do with what the ISO did, does not take their report initially or at all, and gives them the number for the very ISO that defrauded these merchants.
I know because I have sat through calls like this. These leasing companies, too, are using the system to their advantage by creating a closed-loop system that merchants cannot escape from.
ISOs block merchants’ efforts to address grievances and terminate leases they never meant to sign. A majority of MLSs in these deals will not be working for the same ISO, or even in the industry, after a short time.
So merchants are robbed month after month and year after year, with no recourse except to change bank accounts, an action that won’t stop collection activity and could ruin their credit.
Even worse, if certain processors and sponsoring banks find out about these practices, they rarely terminate their relationships with the agents and ISOs involved. And if they do, these stingers are allowed to stay on and operate as third-party providers (TPPs), a designation that allows these predators to continue their brutal assault on merchants.
Sponsoring banks, too, play a central role by allowing ISOs to solicit and board merchant accounts. Yet it is nearly impossible to find the person at an acquiring bank who is in charge of this elusive relationship. Some major banks purchase these equipment lease portfolios, so they have a vested interest in seeing these portfolios grow. These portfolios make money for those entities that purchase them, but at a heavy cost to merchants.
As a rule, Visa communicates only with processors. Upon complaints by merchants, Visa contacts only the acquirer, the very box jellyfish at the center of it all. In any case, callers would find it nearly impossible to navigate through the maze of Visa’s and MasterCard Inc.’s phone systems to talk to a live operator for assistance.
Other Ways To Defraud
Perform an online search for reviews of “merchant processing” and you’ll find variations on defrauding merchants. Certain ISOs, some of which are well-established, act like criminal syndicates that operate with impunity while enjoying the protection the processors and sponsoring banks offer them, albeit unintentionally.
They smooth-talk merchants and abuse their legal relationships with sponsoring banks, processors, and, in particular, a few leasing companies to carry out their unscrupulous acts.
Why don’t the leasing companies involved mail merchants copies of their leasing agreements within the first week to ensure the merchants are aware of the agreements and to give them the opportunity to contest and request revocation? Their argument is that they aren’t part of the transaction-processing presentation and their role is only to lease equipment. But that’s untenable. They have become part of this industry and have found their niche.
A leasing company starts making its money in the fourth year of the lease. With thousands of leases generated every month, there is a financial windfall to satisfy their greed.
One equipment-leasing company executive many of us know has sent three emails since late 2014 to MLSs and ISOs urging them not to mark up on interchange and, instead, write up leases for $100 or more per equipment placement. This industry thrives on residual income, not on equipment leases. Why would a leasing company be even remotely interested in funding leases for agents placing inexpensive, non-EMV hardware since it will be expired by all processors soon?
The greatest danger to our industry is from within. These indefensible practices may be legal (for now), but they are criminal in nature. There is a real economic impact of up to hundreds of millions of dollars on all communities when merchants are robbed and have to spend so much of their time and energy fighting unfair charges, an incessant nightmare they are unable to escape from because no one helps them.
Registered ISOs, small or large, are able to add fees arbitrarily at any time, even if these fees were not in a signed merchant agreement. In fact, over time, the processor approves additional fees, which hit merchants even harder.
One such fee is a “monthly inactivity fee.” I recently saw two ISOs implement such fees, one for $99 and another for $199. They typically implement these fees with less than 30 days’ notice and, if merchants wish to terminate their accounts, the ISO offers to do so for $495 to more than $1,000.
The legal counsel for one of the largest processors in the U.S. told me recently that she is aware of “inactivity fees” of up to $199.00 per month that her department has to approve and has approved for the same ISO. She said: “There are many merchants who sign a contract and then leave for another processor. They should be penalized.”
I agree many merchants leave. But most are among those who have been defrauded and do not wish to do business with an ISO and agent who have robbed them. To punish them further is unconscionable.
A Call to Action
The practices I’ve described in the accompanying article erode merchants’ trust and confidence in us. Allowing these practices to continue has monetary costs to merchants and moral cost to the industry. I propose the following solutions:
– Merchants should be educated to ask tough questions, to read everything they sign, including the copy of the terms and conditions, and to ask for all promises in writing.
– The card brands should mandate that ISOs and their MLSs leave behind clear instructions on whom to lodge a complaint with. No merchant account should be opened before confirming that this document was provided to the merchant.
– Sponsoring banks and processors should not allow arbitrary fees. Doing so is bad business.
– The early termination fee (ETF) should be banned. The vast majority of merchants do not switch to a new processor if they receive the kinds of services and solutions they need to run their operations smoother.
– The leasing companies should: perform an annual criminal background check on their own staff and agents; offer a reasonable cap on monthly lease payments; refuse lease agreements for non-EMV-compliant hardware; mail a copy of the lease agreement to merchants and offer them the opportunity to request cancellation; and ensure a process that will protect merchants against fraud and make them whole.
– Conscience and common sense, not the law of contract, should prevail. Unfair contracts should be terminated immediately with no early termination fee.
– States should enact laws forbidding contracts that were signed through gross misrepresentation of facts that resulted in no savings to the affected merchants and unnecessary equipment leases (with supporting facts).
– Merchant-based organizations should lobby their state lawmakers for bills to be introduced and voted on so these criminals are prosecuted to the fullest extent of the law.
– Processors and sponsoring banks should be vigilant about identifying predators and place them on a terminated ISO file. They should perform a monthly Internet search on all their registered ISOs.
– I am certain there is a clause for recourse to sponsoring banks and to the processors should abuse occur. I believe all agreements confer the right of offset and withholding residual income. But if one doesn’t exist in a contract or the verbiage isn’t strong enough, one should be inserted immediately.
– Visa and MasterCard should mandate that the industry provide a mechanism for the MLS/agents to share information about ISOs that engage in unscrupulous practices.
– Visa and MasterCard should commission the creation of a Web site that will list all registered ISOs and their local sales offices, as well as information on key personnel at the sponsoring banks and processors who would address grievances.
– Leasing companies that act in collusion with these criminal gangs should be held accountable for their actions by the card companies, sponsoring banks, processors—and the law.
– Sponsoring banks must mandate disclosing an equipment-lease agreement during underwriting and create algorithms that will flash a red alert based on processing volume, profitability, and the monthly lease numbers and payments.
– Banks should provide full training to their staff on automated clearing house rules so they can in turn assist merchants on reversing fees if and when merchants have revoked their ACH authorization to leasing companies and processors in writing; and they should encourage and work with lawmakers to create laws that criminalize violation of ACH rules in all states.
– Finally, the U.S. Department of Justice and state legislatures should regulate the transaction processing and leasing industries and impose severe and effective penalties for unscrupulous actors, including blocking their access to our industry and to the ACH network.
—Alex Nouri is president of EFT Direct, Ann Arbor, Mich. Reach him at email@example.com.