Interchange Best Practices. web conferencing services

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5 Presenters Moderator Dodd Roberts MAG CEO/President Interchange 101 Kathy Hanna The Kroger Company Interchange and Management Analysis Troy Carrothers Kohl s Laura Ermer McDonald s Kelly Andrus Tesoro Refining and Marketing Chris Priebe Southwest Airlines Best Practices Committee Chairs Doug Linkowski Marriott International Chris Priebe Southwest Airlines Event Facilitators Russ Rhine Arkadin Rhonda Sullivan SAS 5

6 Interchange 101 Kathy Hanna The Kroger Company Presenter 6

7 Agenda 1. What is interchange? 2. What are the components? 3. How is interchange distributed? 4. What are the common pitfalls? 5. What can merchants do to affect interchange cost? 7

8 What is interchange? Interchange is the rate charged to a merchant by a bank for providing debit and credit card services. The rate is determined based on factors such as volume, average ticket price, risk and industry. The merchant must set up this service with a bank/acquirer, and agree to the rate prior to accepting debit and credit cards as payment. Interchange is a multi-billion dollar industry. 8

9 Estimated components of interchange network branding 3% network rewards 1% issuer processing 9% network servicing 4% network processing 4% other issuer transaction costs & profit margin 35% issuer rewards 44% Source: Diamond Management & Technology Consultants: A New Business Model for Card Payments 9

10 Other fees besides interchange Visa APF fee dues and assessment Base II settlement fee image documentation fee outgoing exception item risk fee zero floor limit account verification fee auth misuse fee raw data fee for RTC MasterCard NABU fee dues and assessment settlement fee documentation image fee retrieval request fee AVS fee chargeback assessment fee chargeback support document fee 10

11 How is interchange charged? Market Segment T&E fuel grocery other retail Product credit debit commercial rewards Processing Technology card terminal AFD/self-service key entry e-commerce 11

12 How is interchange distributed? Issuers Acquirer Network 12

13 Pitfalls that increase interchange No authorization Late presentment Key entered Bad or missing data 13

14 What can the merchant do? 1. TALK with acquirer on regular basis- Ask WHY? WHY? WHY? 2. Understand downgrades and surcharges-correct actions 3. Review billing reports timely (daily, monthly, etc.) 14

15 Questions? 15

16 Interchange: Analysis and Management Kohl s Troy Carrothers Presenter 16

17 Kohl s Interchange: Analysis and Management Analysis Understand your interchange origin and trends: Perform monthly analysis of network invoices Understand your mix between: a) in-store and on-line b) credit and debit c) signature and PIN d) card present and exceptions Understand your true interchange costs: Compare the networks marketing benefits against the net expense Do you know: a) The financial impact of every interchange increase? b) Your sales breakeven point for every interchange price change? c) Your chargeback rights? d) When you should challenge a network response? 17

18 Kohl s Interchange: Analysis and Management Management Look for opportunities: Reduce exceptions by challenging your internal processes Reduce fraud and chargebacks with clearer return policies and the implementation of fraud detection technology Don t be shy ask your acquirer for help Create a flexible payment hierarchy in-store and on-line to draw attention to the lowest cost (net) network Take advantage of the grey Kick the habit reduce your dependency: Introduce a rich loyalty program for non-interchange related transactions Allocate interchange expense back to your stores to gain store level involvement Incent your store managers to promote the loyalty program Don t believe what you read the majority of your sales can be made on your own proprietary tender trust me! 18

19 Questions? 19

20 Interchange Management McDonald s Laura Ermer Presenter 20

21 McDonald s interchange management What is It Prompting at the POS based on tender type Primary Objective COST SAVINGS Implementation Scope National across all ownership types Timing Upon launch in

22 22

23 McDonald s interchange management Benefits Debit interchange cost savings Speed of service (D Thru) Challenges Card network rules (PIN & sig debit) o Discrimination o Min/Max o Cardholder choice Communications Customer experience 23

24 McDonald s interchange management Breakeven Calculation The transaction amount at which the 1. Blended PIN debit interchange cost IS EQUAL TO 2. Blended signature debit interchange cost Based on the current market share at McDonald s of each debit network 24

25 McDonald s interchange management Currently based on blended interchange by auth type vs. individual networks (PIN vs. sig debit) Treasury monitors rate changes and calculates breakeven amount I/T implements changes in breakeven Field communications issued upon changes in breakeven 25

26 McDonald s interchange management Interchange Reporting Data provided by interchange qualification: Total transaction counts and amounts Rate (includes dues/assessments) Primary uses: Calculate market share of each debit network used for: interchange management breakeven calculation management reporting for cashless program Validate accuracy of interchange fees charged 26

27 Questions? 27

28 Petroleum Industry Specifics Tesoro Refining and Marketing Kelly Andrus Presenter 28

29 Petroleum industry specifics Processing Tips 1. All card associations require partial auth capability: Visa charges a partial auth non-participation fee of $0.01 per CRIND transaction that is not partial auth capable Pass on fees to the respective jobber if their systems are not properly configured for this feature 2. Velocity parameters must be in place for Visa transactions to qualify for CPS AFD rates 3. Authorization reversals: Visa and MasterCard require the reversal of authorizations where the transaction was cancelled and will never be settled: o Visa currently charges a $.045 cent fee per authorization o MasterCard has announced that it will also start charging a fee, but has not disclosed any details yet Tesoro s processor automatically sends a reversal for any nonsettled authorization, except when a valid zip verification is present 29

30 Petroleum industry specifics Processing Tips 4. Ensure CRIND limits do not exceed card association limits: Visa will downgrade to EIRF if transaction exceeds their limit Visa caps the CPS AFD rate at $0.95; however, the transaction amount to qualify for the cap is $105, which is above their CRIND limit for Visa consumer cards (Visa fleet limit is $150) Although MasterCard does not downgrade transactions that exceed their limit, the MasterCard AFD rate cap of $0.95 only qualifies for transactions of $112 or more, which is above the CRIND limit for consumer cards (fleet and purchasing card limit is $150) 5. Zip prompting at the pumps: Helps to minimize fraud None of the card associations offers any interchange savings or chargeback protection Tesoro requires our jobbers to prompt for zip; otherwise, the location is liable for any fraud chargebacks that occur 30

31 Petroleum industry specifics Interchange Management Tips 1. Review all unauthorized transactions: Utilize a tool such as Monarch to extract all unauthorized transactions by day Review declines for trends Set thresholds by decline reason In our reviews, we have found some issuers sending wrong zip verification responses, which had a significant impact to our pay at pump customers Other findings include jobbers that are attempting to accept a card type they are not set up for We also use this tool to monitor our company-owned sites for communication issues Re sponse / De finition UNMATCHED PREPAY TRANSACTION MATHED 30 WITH 01 ON HOST MATHED 30 WITH 05/ 13 ON HOST MATHED 32 (Void) WITH 11/ 13/ 34 ON HOST ACCT, AMT & TSEQ ALREADY USED PREPAY ONLY, DUPE PREV PROCESSED TRANS PREPAY ONLY, INTERNAL MALFUNCTION PREPAY ONLY PREPAY ONLY, VOID/ DRAFT NOT IN SYSTEM REQUESTED TRANS PROHIBITED

32 Petroleum industry specifics Interchange Management Tips 2. Review downgrade reports from acquirer: We can run reports at a client or merchant level We can specify a date range or run by a single day Reports can be downloaded into excel for easy incorporation into our analysis tool Address root cause with IT or jobber if downgrade is the result of action taken at the location (e.g., not closing batches daily, manual entry, exceeding CRIND limit, etc.) Not all downgrades are a result of processing errors at the location, address root cause with processor: o Do not assume you should be liable for all downgrades 32

33 Petroleum industry specifics Interchange Management Tips 3. Review interchange reports from acquirer: We can run reports at a client or merchant level We can specify a date range or run by a single day Reports can be downloaded into excel for easy incorporation into our analysis tool Verify that at least 90% of your transactions are qualifying for the best rate possible If you are not reaching this threshold, work with your processor/ acquirer to understand why and make corrections as necessary 33

34 Questions? 34

35 Airline/Internet Retailer Interchange Management Southwest Airlines Chris Priebe Presenter 35

36 Interchange management Keys to Success Identify controllable expenses Daily monitoring Hold acquirer accountable - SLA Hold your company accountable Review quarterly statistics Current Set Up 10 merchant numbers or less (one for each sales channel) Key daily interchange data from various acquirer reports into Excel Key monthly acquirer reports into Excel (balance to my GL) Keep it simple (accomplished with 2% of 1 associate) 36

37 Interchange management What are Controllable Expenses Pass through interchange rates vary according to card type, card present vs. card not present, authorized vs. non authorized, providing additional airline data, settlement date vs. authorized date, authorized date vs. ticketed date, etc. The only items I can t control are card type and CNP vs. Non CNP! How do we control Daily monitoring of less than optimal rates or downgrades Benchmark your expectations When less than optimal rates as a % of total rates exceed benchmark, research the root cause Reconcile our charges monthly by rate to the actual GL expense 37

38 Interchange management Examples of What We Catch Ticket Processing Group authorized purchases on Friday, but ticketed them on Monday, causing a greater than 24-hour timeline between the ticket date and the authorization date - saved $100K per year Reservations technology accidentally coded to skip all Visa authorizations instead of skip certain Visa test card authorizations - lost $10K on day 1, but fixed on day 2 Identified certain BIN ranges that had a disproportionate number of downgraded transactions (i.e. we had 1% downgrades but BIN X had 80% downgrades); turned out to be a Visa problem that was costing us $200K per year Acquirer error, which led to a one-day downgrade of +30% ($50K); recovered via Service Level Agreement 38

39 Daily monitoring of interchange 39

40 Monthly reconciliation acquirer reports to GL 40

41 Questions? 41

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