Card Processing: Shake Down, or Shaking Hands?

REGISTER NOW

Heartland Payment Systems calls it "insidious." An analyst says it's a commonly known practice. A point-of-sale vendor at the center of the dispute refutes it as a mythology.

All three groups are describing what Heartland alleges is a "tying" arrangement involving rival processor Chase Paymentech and a dominant point-of-sale card payments vendor in the table-serve restaurant space. In a federal anti-trust lawsuit filed in November, Heartland lays out charges of how rival Chase Paymentech unfairly games the card payments channels in the restaurant arena to guarantee itself a seat at the table — either as the contracted processor of authorized transactions or by gaining a hidden subsidy arranged via an indirect relationship with MICROS Systems, a kingpin acquirer company in the dining/hospitality field.

Heartland is seeking damages, and an end to "[t]he artificial and illegal barrier to entry that Paymentech has constructed through its shrewd and illegal dealings with MICROS," declares Heartland chairman and CEO Robert A. Carr, in a company press release. The lawsuit names Dallas-based Paymentech, its gateway subsidiary Merchant Link Inc. [MLI] and MICROS, all of whom deny the allegations and vow to fight the lawsuit.

It will be the work of a judge or jury to determine whether Princeton, NJ-based Heartland can prove it's been harmed by anti-trust tactics, especially since it has a solid vertical presence (160,000 restaurants, hotels and retailers) and just reported record third-quarter earnings. But the lawsuit is a rare public airing about the extent to which independent sales organizations/acquirer technology influences merchant choices of processors or gateways, and raises questions whether more substantial church-state rules must be erected to dictate where a handshake ends in a multiple-party transaction systems integration.

Several sources say there is no disputing that MICROS and Paymentech have a significant share of the restaurant card transaction pie. "Chase Paymentech does have a monopoly on MICROS Systems and they become — almost automatically — the processor of choice for restaurants using MICROS," says Aite Group payments analyst Adil Moussa. "Everybody kind of knew, and people didn't complain about it."

Restaurateurs themselves have been largely mute because their interest lies with MICROS' well-regarded hospitality merchant services, such as table reservation systems, according to Moussa. Payment systems are an afterthought, particularly as MICROS offers an easy integration with gateway provider Merchant Link, where they don't have to worry about support options and changing card system specs, says Moussa.

According to MICROS, that's what drives the preference for client connections with MLI/Paymentech, not contractual requirements. "We have a relationship with MLI, [and] we think it's quite positive," says Thomas Patz, evp and general counsel for the Columbia, MD firm. "MLI provides a high degree of customer support to our customers and reduces significantly errors in processing credit cards, which can be a very complex and error-prone process."

But in exchange for standardization from card swipe through transaction integration, says Financial Insights analyst Dana Gould, are fewer choices down the road if they want to switch processors. "It's throughout the [payments] industry," says Gould. "Those people who get into the front door first tend to lock [others] out, so [merchants] can't bail out too quickly."

Heartland alleges the MICROS arrangement illegally pushes restaurants toward Merchant Link and Paymentech — either by contract or disincentives tied to Paymentech competitors. In its lawsuit, Heartland describes how Merchant Link charges a four-to-six cent transaction fee on all processors except for Paymentech — which uses the waiver advantage to undercut other processors. "We believe they are doing this because they are getting a kickback from Merchant Link," says Heartland evp and general counsel Charles Kellenbach. "But we will find that out in the discovery phase."

In response to a call for comment, a Chase Paymentech and Merchant Link spokesperson stated in an e-mail that the two firms "go to great lengths to ensure that they operate at all times with the highest of ethical standards and in full compliance with all applicable laws and regulations."

MICROS' Patz is adamant that no such arrangements exist. MICROS' estimated 150,000 software and POS terminal clients in the restaurant industry are free to choose all their own card payments systems, from the card-swipe terminal to the processor. "There's no forcing any technology on any restaurateur," says Patz. "We have hundreds and thousands of customers that don't go through [Merchant Link]."

Analysts and attorneys looking at the case believe Heartland has a steep burden of proof. MICROS is certainly not without competition for the cards transactions business for restaurants. Other big players include Radiant Systems' Aloha end-to-end POS products and Maitre' D Restaurant software. "That's where the sticking point exists," says Moussa.

In addition, Heartland has to prove Paymentech and Merchant Link's position "is really having an anti-competitive effect," according to John Douglas, a former FDIC general counsel and regulatory/banking partner with New York law firm Paul, Hastings, Janofsky, & Walker.

But the lawsuit also comes on the heels of American Express' partial settlement with Visa over similar anti-trust behavior (locking AMEX out from issuers). And Heartland's action just might spur some friends of the court to speak out, as well, according to Moussa. "I would not be surprised to see other processors following the same route to open MICROS to everybody else."

(c) 2008 Bank Technology News and SourceMedia, Inc. All Rights Reserved.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER