Quick Take

  • The best way to protect your business from Payment Systems Corp. is to never have a conversation with them in the first place.
  • If you do meet with an agent, realize that nothing they promise is likely to be real – even if it’s in writing!
  • You could very well pay as much as $15,000 for a $300 terminal that Real Merchant Solutions will provide at no cost!

Read the full details below

How Payment Systems Closes the Trap

The Payment Systems Inc. ripoff is a cruel fraud perpetrated on businesses across America. To understand why a merchant would even consider a proposal like the one we’ve analyzed here, it helps to read part one of this article which explains  how Payment Systems, Inc. lures merchants in and sets the bait. Here’s how they close the trap:

The Payment Systems TrapDisplayed at the very bottom of this page is a fifteen page document that is an actual Payment Systems Inc. agreement presented to a merchant in April of 2014. Recently, to assist a merchant that had come to us for help, we had the chance to review this paperwork in time to prevent the agreement from going into effect. If you have been scammed by Payment Systems or are considering using their merchant service, this page by page review will send chills down your spine.  (To enlarge the document, use the magnifying glass at the top of the document image, open a full screen view in a new window by clicking the icon at the top right, or download the document to review)

Three Months Credit

The first page shown below is not included in every deal, but is the kind of thing that Payment Systems will gin up to pull a suspicious merchant over the finish line. This document states that “Payment Systems hereby authorizes a total credit of $300 towards three months of service…” That claim is followed by a “Price Match Guarantee” which states that “Payment Systems hereby guarantees a “price match guarantee” on our processing rates of 1% Credit 0% debit. We will match and beat any lower rate”.

Although it is not stated anywhere on this page, when this was presented to the merchant, he was told that he would get three months of processing without charge, and that he could cancel any part of the agreement within three months of the date he signed without penalty, obligation, or Early Termination Fees (ETF). Of course, this written “pledge” does not say that, but the promise to meet and beat any offers that might be lower that 1% and 0%, as well as the vow to issue a $300 credit does seem to be straightforward and unambiguous. To burnish their credibility, the document is signed by both the rep and the Payment System’s manager, and then solemnly countersigned by the merchant.Payment Systems will tie your hands

Generally these claims, whether written or verbal are untrue. The merchant will not get three months of processing for free, will not be able to cancel the agreement within three months, and will not pay just 1% for all credit card transactions or 0% for debit card transactions. Although it is a fact of life that sales people will sometimes put the best spin on a service they are trying to sell and perhaps shade the truth, it is almost impossible for most people to believe that anyone would look them straight in the eye and tell complete lies without flinching. It may be hard to believe, but it is how Payment Systems makes their money. In most cases the reps are able to do this with a clear conscience because they haven’t yet figured out how the scam works and don’t know the truth.

In fact, this added page cleverly protects Payment Systems, not the merchant. As we shall see, the Lease Agreements are tight and generally not subject to cancellation, but this kind of pledge helps close one of the few loopholes Payment Systems is vulnerable to. When a merchant refuses to make the required lease payments within the first 90 days, Payment Systems is liable for a charge back of the commission the Leasing Company paid them. This means they risk forfeiting much of their ill gotten gain.

When things go wrong (and they will go wrong very quickly), the merchant will try to contact either the rep or the company. Although most reps will not keep the job for 90 days, those that haven’t quit yet or been terminated will quickly learn not to answer, or will change their number to avoid the tsunami of complaints from angry merchants. If the merchant does reach someone at Payment Systems, they will usually claim that the excessive charges the merchant is has noticed are you set up errors or processing mistakes, and assure the merchant that they will make things right. Remembering that he was promised three months of free processing, many merchants will be lulled into ignoring the warning signs and fail to take action.

Payoff / Reimbursement / We Owe Authorization Form

The second page of the document is entitled  “Payoff/Reimbursement/We Owe Authorization Form”. This merchant had signed a contract with his existing, high rate processor that called for an Early Termination Fee (ETF) of $750 to paid if he cancelled their agreement. Knowing this, Payment Systems told the merchant that they would pay off the existing contract and cover those costs.

Actually, they won’t. Read the exact language they use on this document:  “Upon 30 days of successful processing with Payment Systems and printed submission of Merchant’s bank statement or valid receipt showing Merchant’s Incurred costs of the Payoff Amount the undersigned shall be credited to their processing account in amount of $750.”

Payment Systems Shell GameOK, so even though the rep has promised that they will pay the $750, and the merchant usually believes that he will just get a check or a deposit to his account for that amount, what the language actually says is that he will get $750 credited to their “processing account”. Note also that this offer requires “printed submission of Merchant’s bank statement”. The merchant has the responsibility to  pay the $750, show that amount debited from his bank account and then arrange for the “printed submission” in hopes they will receive the vague promise of a $750 credit to their processing account.

Also, note that this page states that the “Merchant understands the purchase or lease of equipment is a separate and independent transaction from the Merchant’s desire for credit and debit card processing services and that the processing contract and lease contract (the “Agreements”) are mutually exclusive of each other. Merchant further agrees that due to the customized nature of the equipment, there will be no refunds or return of any equipment.”

No refunds or returns. Despite what the merchant thinks and what he has been promised, the written agreement clearly states that this is a binding, non-cancellable agreement, and that the Merchant Processing Agreement (the MPA) and the equipment lease are two completely separate deals. One has nothing to do with the other. Even if the merchant cancels the MPA, which is possible, albeit it at great expense, he will be stuck with the equipment lease no matter what.

Merchant Services and Equipment Purchase Order

The third pages is less consequential, and is primarily a worksheet that Payment Systems uses internally to get the account set up. It is the fourth page that is critically important, and does further lull and bind the merchant into signing the agreement. This agent did mark down the Visa and Mastercard charges from 1.39% to 1%, and of course, this is the part they want the merchant to focus on; the 1% rate on credit cards and the 0% rate on debit cards. In fact, some credit cards may go through at 1% and some debit transactions may process at 0%, but subsequent pages will reveal that this promise will be neatly deflected and nullified, especially since the merchant is not really establishing a processing relationship with Payment Systems.

That page is critically important. Labeled Merchant Services and Equipment Purchase Order, this has the first mention of the terms of the equipment lease: in this case, payments of $99 a month for 48 months. The merchant is agreeing to pay a total, before taxes, insurance and other fees a total of $4,752 for a terminal that can be purchased brand new for between $229 and $400, and is available without charges from many reputable processors including all those partnered with Real Merchant Solutions.

In the graphic below, we show an example of a Verifone VX 520, the kind of terminal Payment Systems would provide for $4,752, alongside one one that can be purchased new, online for as little as $229, and the free version Real Merchant Solutions features from recommended processors. Can you spot the differences? (Hint: there isn’t any).

Three terminals

Also note on this page, under the heading “Rate Guarantee, Payoff Responsibility, and Prior Processing Cancellation” it states “Processing discount rates will not be subject to change or review during the term of the Merchant Processing Application and Agreement (“MPA) “. Merchants often assume this is a good thing, that they are locked into the 1% and 0% rates they think they are going to get on all transactions for four years. In fact, it means the merchant has no leverage to reduce the REAL rates when he figures out he has been cheated. Calls to Payment Systems to negotiate a lower rate will be ignored, and the merchant will again be advised to refer to the contract.

Next, the merchant is agreeing that he “…understands that the purchase or lease of equipment is a separate and independent transaction from the credit and debit card processing services and that the MPA and equipment lease contract (“Lease”) (collectively “the Agreements”) are mutually exclusive of each other. Merchant further agrees that due to the customized nature of the equipment, there will be no refunds or return of any equipment.”

Two paragraphs under the paragraph called “ISO Statement”, it states that “Payment Systems is an independent sales organization (ISO) that is party to the Agreements as a third party with a one-time or ongoing interest in the Agreements. Payment Systems does not claim or represent that it is the manufacturer, servicer, underwriter, or is any way affiliated with the other parties to the Agreements, notwithstanding the economic interests in the Agreements, unless otherwise stated in writing.”

What? These few dense statements establish that there are actually three separate contracts in play: One with Payment Systems, one with the actual Merchant Processor (not Payment Systems, as we shall see), and a third contract with the leasing company itself. The ISO statement is explicitly warning that each contract is separate and that Payment Systems will not provide either the actual processing nor provide or service the equipment to be leased.

An ugly turn for the worse

It starts to get really bad a few paragraphs later, under the heading “Documentation, Remedy for Default, and Early Termination Fee .” Despite what the agent promised and what the merchant believes, it clearly states  that “in the event of default or early termination of the Agreements and notwithstanding of anything to the contrary set forth herein Merchant shall be responsible for an amount of liquidated damages equal to all monthly fees due for the remainder of the existing term of the MPA, including all monthly minimum fee commitments, plus a de-conversion fee of five hundred dollars ($500) which in no case shall be less than nine hundred and ninety five dollars ($995).

“Notwithstanding of anything to the contract set forth herein.” In other words, no matter what other written assurance are made, these legal commitments will prevail. The least a merchant would be required to pay to cancel the MPA will be $995, but it could very well be more, depending upon the definition of “an amount of liquidated damages equal to all monthly fees due for the remainder of the existing term of the MPA” . In this example, it is haqrd to pick out what the monthly fees due will be, but you can be assured they will surface.More Payment Systems Surprises

This merchant’s previous processor required an Early termination Fee (ETF) of $750. That amount is quite high, but an ETF of $595 or $295 is quite common. In fact, there is never a reason to ever enter into an agreement that calls for an ETF, and Real Merchant Solutions will not recommend a processor that will not waive such fees.

The pain doesn’t stop there. The termination fee is only what price the merchant will be required to pay if they want to cancel just the agreement with Payment Systems. There is also an ETF to be paid to the real processor, are stiff penalties for cancelling the lease. “In the event that Merchant defaults on the lease, an amount shall be due to Payment Systems for seventy percent (70%) of the remainder of the monthly base payments of the existing term of the Lease, not including taxes or insurance.”  Really? Even though Payment Systems is not the company providing the equipment, they will receive 70% of the remaining lease payments due? Why would that be?

Let’s add this all up. In this case, the merchant thinks he is going to save thousands of dollars each year, but it will take just days for the merchant to begin to realize that things are not what he expected. In almost every case, the agent will fail to mention that the leasing company will immediately withdraw the first and last month’s payments, plus the pro-rated share of taxes and insurance, plus a paperwork fee, plus a setup fee. In this case, several hundred dollars will be withdrawn from the merchant’s account a few days after he signs, but it may be withdrawn by a company whose name appears nowhere in this documentation, because just like mortgages, these “performance receivables” are bought and sold between leasing companies on a regular basis.

If the merchant doesn’t raise hell about that, the first statement he receives in the mail, usually between the tenth and the fifteenth of the following month, is almost always different than what he expects as rates and fees are higher than what was anticipated. Often the merchant will not even realize that the charges have been inflated because he is busy running a business and may not even have time to review the statement or notice the discrepancies right off. If he does question the rates and charges, he may try to contact the agent or Payment Systems themselves, and if the call comes in within the first 90 days, Payment Systems will do anything they can to mollify the client. They may promise corrections or adjustments, and will likely do what they can to keep the lid on the deal, at least for the first 90 days.

They are highly motivated to do so. Despite the fact that the contracts are legally binding and non cancellable, in fact, the Leasing Company will hold Payment Systems responsible for a non-performing contract if the merchant defaults within the first 90 days. Here’s how that works:

In this case, the lease term call for 48 payments of $99, for a total of payments (excluding taxes and fees) of $4,752. Upon approval of the Lease and installation of the equipment, the Leasing company will typically pay Payment Systems a bounty equal to that same 70% called for in the liquidated damages section mentioned above, so they would be paid $3,326. Out of that amount, Payment Systems will deduct various fees for the equipment and internal overhead and then pay the agent a commission of approximately 50%. Here’s the breakdown:

48 month x $99 a month (total of Payments) $4,752
$4,752 x 70% bounty to Payment Systems $3,326
Actual Costs of Equipment (estimated) $275
Internal Overhead charged to the deal (estimated for leads, etc. ) $350
Balance available for commission split with agent after accounting for expenses noted above $2,676
50% Commission paid to agent $1,338

Let’s assume that the merchant decides to cancel after two months, because he has figured out that he has agreed to a very bad deal. If he prevails or just stops paying, the Lease company may charge back the commission paid to Payment System and they will charge back the sales agent. It is for this reason that the agents in the field and Payment Systems themselves will basically promise almost anything to make sure that the lease stays intact for those first three payments. Of course, the way the agreement with Payment Systems is written, they have a mechanism to try and recover that money from the merchant.

So what’s the worst that could happen if a merchant signs the paperwork we’ve included here, but then decides to cancel after, say, two months and has a fat bank account for Payment Systems to dip into? Here what the damages could be:

De-conversion fee $500.00
MPA Liquidated damages: (minimum, per contract) $495.00
70% of remaining Lease payments: $99 x 46 months x 70% $3,187.80
Minimum Due Payment Systems per Contract $4,182.80

Keep in mind that this total does not include taxes, insurance charges and any other fees that can be grabbed. It also not retire the debt to the leasing company, who may go after the merchant for the remaining 30% of the payments ($1,366.20 plus tax and other fees), or perhaps even the entire $4.554, which would represent 100% of the lease balance due, because remember, these agreements are all separate and individual. It also does not include any fees due the actual processor, which we will review down below.

What a deal.

Also, take note that at the very bottom of the page, just below the agent’s name, there is a sentence that reads “Retail sales apply to qualified, card present transactions”  and that “Additional surcharges or fee may apply for non-qualified or higher risk transactions.” We assume that the reader will not be surprised to learn that this will also work against the best interest of the merchant.

Merchant Processing Application and Agreement

Following all that verbiage, which only relates to the agreement between the merchant and Payment Systems, we come to the actual MPA between the merchant and the processor, in this case a company called TrustOne located in Villa Rica, Georgia. Most of the pages in this section (pages 5 through 10 in the attached document) are fairly standard and consist of boilerplate terms featured and required by most processors, both good and bad. Note that on their page 3 of 4 (Page 7 in the document below), there is mention of another Early Termination Fee of $299. Of course, this is in addition to the ETF mentioned in the previous agreement with Payment Systems. The fun never stops.

Take note of the section on this page headed ERR where the agent did change everything to 1%. Wonder what ERR means?

Well, ERR stands for Enhanced Recovery Reduced, and is often described as one of the most opaque pricing structures in the industry. Essentially a bait and switch technique which allows a processor (TrustOne in this case) to offer a simple, low quoted rate in order to get the business, but then permits the processor to pull additional profits through unexpected charges based on a confusing table of hidden surcharges.

The way an unscrupulous processor can use this technique to take advantage of a merchant is by telling him that all transactions will be charged a flat rate, in this case 1%. Technically this is true: all the transactions will be billed at that rate. Unfortunately, most or even all of the transactions will also be billed a surcharge.

Take special note of the first paragraph on page 10 of the document posted below entitled Part 1: Confirmation Page. Here the processor states that “Your Discount Rates are assessed on transactions that qualify for certain reduced interchange rates imposed by MasterCard and Visa. Any transactions that fail to qualify for these reduced rates will be charged an additional fee (see section 17 of the Program Guide). 

Certain transactions? Which ones will qualify? Which will fail to qualify and be assessed additional fees? What will the additional fees be? What is the Program Guide?

Remember, Payment Systems seems to always write these deals on the tiered pricing model, so there will be qualified, mid-qualified and non-qualified transactions, but the merchant won’t be able to tell which are which, either when they process a card or when they review the statement. When a processor quotes a fixed rate using ERR of 1.00% + $0.09 as in this case, but a transaction goes through where the interchange cost is actually 2.20%, they would lose money on that transaction. The “Enhanced Recovery Reduced” strategy will let a processor charge the agreed upon fee of 1.00% for all transactions, but then also charge the difference between, or in addition to the agreed rate and the interchange rate so it can maintain a particular markup.

With ERR, merchants pay the original rate, plus the difference in the interchange rate, plus extra fees, which is why it is called “Enhanced”. The enhancement in this scheme simply enhances the processor’s profit and of course is not clearly disclosed to the merchant.

Battling “Bill Back”

When presented with an ERR rate, the merchant will never really know what the effective rate will be unless they know what the processor’s  target margin is, along with the actual interchange rate for a transaction. Sometimes ERR is referred to as “bill back ” to help keep the merchant in the dark, but it is really just more deception. In theory, the processor could offer a “guaranteed” rate of 0%, and the merchant could still pay a very high effective rate due to the surcharges. Also, unscrupulous processors that use ERR pricing with bill back are likely to also sneak in excessive monthly charges like account maintenance fees, regulatory compliance fees, statement fees, PCI compliance fees, and whatever else they can dream up, all to perpetuate the myth of low rates when really the effective rates can be quite high.

Real Merchant Solutions recommends that merchant always stay away from ERR pricing and stick to interchange plus agreements, which should be transparent and fair to all parties.

payment systems smoke and mirrorsAs with simple ERR, with this form of pricing the processor quotes a rate, for example 1.00%+ 0.09 / transaction and charges that rate for every transaction. As we’ve explained, what is often not disclosed  is that any transaction that falls into a higher interchange category, for example business and rewards cards, the processor will charge an additional fee. The worst thing about bill back is that the downgrades are charged a month later than the original transaction occurred, which makes it that much more difficult to determine the overall cost of the processing.

Even the phrase “Enhanced Recover Reduced” or “Enhanced Billback” should be a warning. Some processors will present this as a variation of an “Interchange” model, although it isn’t really. Others will suggest that this as straight three tier pricing if asked about the statements.

Why would there be a need to use something called a Bill Back program at all? It’s simple: it helps deceitful processors keep their merchants in an never ending fog. Essentially, Bill back exist for two reasons: to allow the merchant to be billed one rate and then billed back” another, and to further confuse things, to push the surcharges off to the next month’s statement rather than have them appear on the statement from the month that the sale was made.   It requires a great deal of time to research the actual cost per transaction with the bill back system, as it is often buried due to the variable interchange rates.

Again, a merchant will pay a set rate for qualified cards, but will then be billed back” for Mid-qualified or Non-qualified cards by the imposition of surcharges. Again, merchants will pay the qualified rate 1% rate on all transactions, but then on transactions that are mid or non qualified, they will pay the difference between the qualified rate of 1%, and the interchange rate which is a variable cost to the processor based on card, and then a surcharge on top of that.

Good times.

Please be sure to read the first article in this series, and then continue to the next article that describes how they screw their own agents and turn honest salespeople into accomplices .

If you’ve had an experience with Payment Systems, we’d like to know. Please comment below. You can also contact us if you’ve been victimized and need assistance. We may be able to help.

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Russell Halley

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