score:4
The hotel has very good reviews on Tripadvisor and as long as you booked it on their actual website (http://www.olivegreenhotel.com/) its unlikely to be a scam, although it sure looks like one.
Stating the obvious: if they weren't able to charge you for the room, I don't see how they can charge you for a cancellation. I'd do the following:
write a back a polite letter "unfortunately you have not been been able to process our payments even after three different options were given. We therefore need to cancel the reservation and cancellation fees do not apply".
Keep a copy of that letter.
Upvote:4
Do not pay them anything. I doubt that they will try to charge you because they know it's their fault that you cancelled.
Threatening them that you will write your story (along with a low rate review) in Tripadvisor or booking.com might convince them to cancel your booking right away.