Judge backs local firm; tosses credit card fees
When a consumer purchases an item with a credit card, it sets in motion a transaction so complex that it can ultimately hang the merchant out to dry in processing fees.
When a Santa Monica court last week was asked to rule on such a case, it provided an unusual glimpse into the “middle men” who profit whenever a customer uses plastic.
A judge ruled last week that a credit card processing company overcharged a Santa Monica interior design firm by collecting “round trip” fees — on both the purchase and the subsequent credit canceling it.
Interior Spaces Inc. sued Cardservice International, Inc. in Santa Monica small claims court for a “double charge” on a $24,000 transaction. But Cardservice International turned around and sued Interior Spaces for $3,000 in processing fees because the interior design firm had closed its checking account before Cardservice International could seize the money.
In December 1999, Interior Spaces signed a six-month contract to use Cardservice International as its processing company, so its customers could make credit card purchases. Everything went smoothly for a few months until a customer put a $24,000 charge on her Visa — an amount well over what Cardservice International allowed.
Grant Schimelpfening, a recovery analyst in Cardservice International’s legal department, said Interior Spaces actually processed $60,000 in transactions in a short period of time — more than allowed by contract. As a result, Cardservice International held the money in a “reserve” account, and charged Interior Spaces a 2.35 percent handling fee on both the credit card purchase as well as the cancellation which came after the customer agreed to pay in cash or check instead.
Interior Spaces Treasurer Peter Canepa admitted his firm went over the limit. But he explained that the contract wasn’t clear and he tried to work with Cardservice International in finding a solution. He said the company’s customer service department wasn’t helpful and Interior Spaces couldn’t get out of the “double charge.” Canepa said his firm canceled its contract with Cardservice International after six months. But Interior Spaces still faced a $3,000 claim in processing fees on a credit card deal which never happened.
Judge pro tem Edmond Siegel ruled that Cardservice International isn’t entitled to $3,000 because it charged the fees for money both coming in and going out.
Interior Spaces didn’t win its claim because it never actually paid the money, since it closed its bank account.
Cardservice International serves as the intermediary between the merchant and the card issuing bank. The processing company represents what is called an “acquiring bank.” So if a merchant issues a credit to a customer’s credit card, the merchant gets the money back and then the card issuing bank turns to the acquiring bank, which takes the money from Cardservice International, which then collects from the merchant.
Sound confusing? It is, according to Jaak Treiman, director of Cardservice International’s legal department.
“I have been representing Cardservice International for eight years... and I still have trouble telling people what we do,” he said. “It’s high risk, high profit.”
When a merchant processes a high dollar purchase, Cardservice International takes a risk because it might ultimately be unable to collect from the customer even though the merchant gets paid. That’s why monetary limits are set on credit card transactions and why the processing company uses a “reserve account” for the merchant until the charge clears from the credit card company.
“We get real nervous when we see something out of the ordinary and we’ll freeze everything,” Treiman said of the $60,000 in card transactions from Interior Spaces.
He said merchants get confused because they already have been paid by the card issuing bank. They don’t understand that the processing company charges fees on any transaction that requires money being moved.
“Whenever there is a transaction, we get paid,” Treiman said.
Judge Siegel saw it as an overcharge, but he at least gave both parties ample time to explain how the complicated process works. Treiman said such time is unusual in small claims cases.
“One of the classic problems in small claims court is we are viewed as the large corporation,” Treiman said. “And having to explain how the process works and what we do makes it tough.”
“One of the classic problems in small claims court is we are viewed as the large corporation. And having to explain how the process works and what we do makes it tough.” — — JACK TREIMAN Cardservice International, director
Judge Siegel deduced through the confusion that Cardservice International’s “contract” is designed to confuse the customer — a claim Interior Spaces’ Canepa made early in his testimony.
The two-page contract which Interior Spaces received from Cardservice International didn’t include a limit on the transaction amount. Instead, it was found in “Article 1.16” in a booklet that came later.
“It behooves you not to do business with people like this,” Judge Siegel said to an agreeing Canepa.
“Small merchants are forced to work with people like this,” Canepa told the judge.
Even Treiman admits the contract is convoluted. But it’s better than it was, he says.
“The contract is long but at least it’s easier to read now... you don’t need a magnifying glass anymore,” he said. “Still most people don’t have the patience to read it. I can empathize with the merchants because it’s difficult to make heads or tails of it. No rational person will read it.”
Canepa read the booklet too late. He thinks the company intentionally buries vital information.
“It was a booklet that says whatever you do is wrong and whatever they do is right,” he told the Daily Press after the court hearing.
Treiman said it’s possible that his firm’s customer service fell short in this case.
“What Peter said may be,” he said. “Nobody is perfect and people mess up.”
Canepa said its experience prompted Interior Spaces to drop credit cards altogether, and its customers now use only cash or check.
Originally published in the Santa Monica Daily Press print edition on January 9, 2002. Read the original PDF.