Jan. 31: This story has been updated to include a statement from Mercury Payment Systems.

The payments processing giant Heartland Payment Systems Inc. has filed a federal lawsuit against Mercury Payment Systems LLC, alleging false advertising, unfair competition, intentional interference with contractual relations and intentional interference with prospective economic advantage.

The lawsuit, filed yesterday in U.S. District Court in the Northern District of California, San Francisco Division, accuses Mercury of misleading merchants by hiding excess profits in interchange fees.

According to a news release issued by Heartland, in 2006, Heartland introduced "interchange plus" pricing statements for merchant customers, indicating all fees separately. Other processors, including Mercury, followed suit for many of their small and mid-sized merchants, Heartland said. Standard interchange plus merchant contracts for electronic payment service typically require a merchant to pay the bank/card brand interchange fees at cost, plus the fees charged by the processor, according to Heartland.

Heartland alleges that Mercury and other payment companies get around interchange plus pricing transparency by illegally building their markup into purported interchange fees, and in the complaint, Heartland said it has reviewed hundreds of monthly statements from Mercury for different merchants throughout the U.S., which indicate that Mercury has regularly charged inflated interchange fees without disclosure.

For example, Heartland said, instead of charging merchants Visa's acquirer processor and MasterCard's brand usage fees – both of which are less than 2 cents per transaction — Mercury sometimes charges customers up to nearly 6 cents per transaction without disclosing the mark-up.

Heartland said Mercury provided payment processing services to about 75,000 merchants in 2012 and alleges that its competitor passed inflated fees to 75 percent of those merchants, which it said would yield more than $68 million in overcharge profits annually.

The suit seeks to end Mercury's allegedly deceptive pricing practices and to "recover full value for each merchant and prospect Mercury has wrongfully taken from Heartland."

The lawsuit's ultimate objective is to "help ensure a level competitive playing field in the electronic payment processing industry," Heartland CEO Robert Carr said in the release.

Late Thursday, Mercury issued the following statement in response to the lawsuit:

"Mercury will vigorously defend against the lawsuit filed by Heartland. Mercury Payment Systems' rapid growth in the electronic payments market is directly attributable to the value and flexibility we provide our merchants and partners, and we stand by our business and pricing practices. We are proud of our consistently high satisfaction rates and low merchant attrition rates among merchant acquirers over the past 10 years."

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