Over the past several months, Wells Fargo has been savaged so thoroughly that even we at Dealbreaker have to feel some pity. But somehow almost none of the coverage has focused on its alleged abuses of a population held sacrosanct by broad swaths of the American public and regularly called the “backbone of America” by leaders of both major political parties. We are talking, of course, about small business owners.
Yet the bank’s small business division was no exception to its broader cultural issues that have bubbled up recently. Wells Fargo Merchant Services made a practice of referring small businesses already using the bank to its credit card processing services, former employees told Dealbreaker, then keeping clients in the dark about the escalating credit card processing fees that ate into their narrow margins. As in the bank’s retail arm – where the discovery of millions of sham accounts has plunged Wells Fargo into an unholy public relationsnightmare – steep sales quotas incentivized sales staff to mislead clients about their offerings.
As the Wall Street Journal reported Wednesday, these abuses came to light in a recent internal review within the bank. Bank management has now revamped the Merchant Services unit after a review of the business found “some employees falsely reported customers’ sales and pushed small firms into costly contracts they didn’t understand,” according to the WSJ report.
A former Wells Fargo Merchant Services representative in Florida put it in blunter terms: “Wells Fargo loves to fuck their clients,” he told Dealbreaker. “They don’t give a shit about their merchant services.” The bank’s recent changes aim to change that perception. What’s unclear, however, is whether the bank has overhauled the underlying fee structure it charges small businesses.
This isn’t the first time Wells Fargo has taken heat for its small business practices. In 2005 the bank settled for more than $30 million with California merchants who claimed they were charged fees that weren’t authorized or disclosed appropriately. And Wells Fargo is hardly unique when it comes to opacity and confusion for small business owners. The credit card processing industry is hopelessly complex, with a galaxy of issuers, networks and processors each siphoning off tiny fees on every card transaction. Wells Fargo Merchant Services, which the bank operates in partnership with card processor First Data, is just another player in that crowded space.
“Like most of the big banks, Wells Fargo is aggressive,” said Ben Dwyer, founder of CardFellow, an online marketplace for card processors. “That’s a nice way to say they’re going to get the biggest margins they can through whatever business models they can.”
But Wells Fargo Merchant Services has set itself apart in the abnormally convoluted way it communicates those fees to business owners, incentivizing sales staff to gloss over crucial details of the 64-page contract. Crucial to the system is billing method that, despite Wells Fargo’s promise of “simplified pricing,” makes it all but impossible for small businesses to understand which fees are being assessed and how.
One of the primary ways Wells Fargo has obscured the fees small business owners paid was by bundling all the payments made over a single month, and then, in a practice known as enhanced billback, adding subsequent charges in later bills. “Wells Fargo would charge a fixed rate of 2.5 percent,” the Florida sales rep explained. “Then two to three months later you get another separate bill for everything over 2.5 percent.”
An illustration: Say in February a business owner receives a bill for January’s transactions. It sums to 2 percent of sales – exactly what Wells Fargo quoted. But in March, the owner receives another bill that tacks on additional fees – known as interchange fees – which bump the total January rate up to (say) 2.5 percent. Further muddling things, multiple charges are bundled together on single lines, so small businesses can’t tell exactly which transaction generated which fee.
“Any form of bundled pricing is going to make a significantly higher margin for a provider,” Dwyer said. “It’s a beautiful thing – not only is it more money, but it’s more money that business don’t even know they’re paying.”
For small independent businesses, those fees can sting. “They never tell you what these little fees are,” said Michelle Kirk, who runs a business called Broken Beauties, which sells fashionable arm slings. Despite being quoted 2.9 percent, she said, her monthly fees ended up well exceeding that number. In November, 2016, total fees amounted to 7.9 percent, according to a monthly statement Kirk shared – and that’s before annual and monthly charges were tacked on. “It’s so convoluted it’s unbelievable.”
Even the base-level fees are subject to rise without much warning. As former sales staff explained, the rate they initially quote business owners was just an introductory price. Buried in the contract – and rarely, if ever, elucidated to small business owners – was a proviso that allowed Wells Fargo to effectively raise fees twice a year after giving merchants a one-month warning. According to the merchant agreement, simply continuing to use the service counts as confirmation of the higher fees.
But merchants say they never received the notices in advance of fee changes. “They never notified the client,” the former Florida rep said. “They purposely make it literally impossible for a client to figure out what they’re paying.” Two former employees told Dealbreaker they kept clients in the dark about the way fees rose – as well as the $500 termination fee for clients fed up with ballooning charges but unaware of the one-month cancellation window.
Whether it all adds up to illegality is a different question. “There are different ways that you could screw their merchant to make a lot of money, but at the end of the day there was nothing illegal – just a lot of non-disclosure,” said the former Florida employee, who asked not to be identified out of career concerns. (This salesman ended up leaving the bank over the pressures and conflicts he felt there. “It was a constant battle between myself and my conscience,” he said. “As a rep I was basically incentivized to lie to the customer.”)
For its part, Wells Fargo says it’s making changes. “We have taken several steps to strengthen Wells Fargo Merchant Services to ensure our team members do what’s right for our customers,” a bank representative said in a statement. Those changes include eliminating incentives for retail bankers to refer clients to Merchant Services and changing the compensation structure in the division. But a spokesman declined to say whether Wells Fargo was changing the way it bills and charges clients.
Until then, the message for small businesses is clear: Caveat emptor.