Managing Your Total Cost of Credit Card Acceptance February 25, 2009 2:00-3:30 Eastern Time Introductions Eric Mock Director Partnership Development Steve Brookbank GM Program Relations Group
Presenters Eric Mock, director of program management at Chase Paymentech, manages eight strategic partnership portfolios including the ASAE credit card processing program. He has been with Chase Paymentech for five years and his responsibilities include new partner launches, developing marketing campaigns, and generating overall partner growth. Before joining Chase Paymentech, Eric worked in the Sales and Promotions department for the Dallas Cowboys Football Club for six years Eric holds a bachelors degree in marketing from Texas A&M University Presenters Steve Brookbank, director of program relations for Chase Paymentech Solutions, is responsible for a number of national strategic partner relationships. He has been with Chase Paymentech for 10 years and his responsibilities include overall relationship management, contract administration, and general success of referral partner relationships (national associations, franchises, and strategic partners). He brings 25 years of experience in banking and finance to his role at Chase Paymentech, 17 of which have been in the payment processing industry. Before joining Chase Paymentech, Steve served as vice president-- marketing product manager for the Affinity Financial Services division at Mellon Bank, Pittsburgh. Prior to that, he was Mellon Bank s senior product manager. Steve holds a bachelor s degree in business administration from the Indiana University of Pennsylvania, and he is a graduate of the Central Atlantic Advanced School of Banking at Bucknell University in Lewisburg, Pennsylvania.
Agenda Nature of the credit card processing business Organizations within the processing industry Definition of interchange rates Types of pricing structures and various miscellaneous fees How to read your statement Tactics for managing processing fees Using technology to minimize costs Nature of the Processing Business
Polling Question #1 When your members purchase through your association (membership dues, books, meeting registration, etc.), how do most members pay? Check Credit Card Cash Other State of the Industry Since 2003 electronic payments surpassed cash and checks as the preferred method of payment for consumers. In the last six years you have probably seen your processing fees get higher and higher. Allowing members to pay with plastic is no longer an option; it s a requirement in the modern world.
Credit Card Transaction Growth Types of Payment MasterCard Visa American Express Discover JCB Private Label 30/60/90 same as cash Fleet MasterCard and Visa are considered bankcards because they are issued through financial institutions. American Express and Diners Club are commonly referred to as T&E cards because they were originally marketed to the travel and entertainment industries like hotels and restaurants.
US Merchant Acquiring: Payment Trends It is anticipated that electronic payments at the point of sale (POS) will continue to replace cash and checks. US Merchant Acquiring: Payment Trends Check 27% Prepaid 1% Forms of Payment and Dollar Volume Processed by Payment Instrument ACH 9% Cash 24% Credit 28% PIN debit 4% Offline Debit 7% Today, paper-based currency represents approximately half of all transactions, but this number is anticipated to drop to 34% by 2010 as electronic instruments are more widely adopted by consumers and businesses. 1 Source: 2004 Fed Reserve Payment Report 1 Ramond James, 2/2007
U.S. Volume Share MasterCard and Visa are the largest card Associations worldwide making up over 83% of the marketplace. American Express 13.7% MasterCard/ Diners 29.0% Discover 3.7% Visa 53.6% Source: Visa Operating Certificates, MasterCard SEC filings, American Express SEC filings, Morgan Stanley SEC filings, Nilson, and Visa USA Estimates. *Note: Diners volume is reported as part of MasterCard due to the MasterCard/Diners alliance program. Visa and MasterCard excludes on-line debit. Organizations within the Processing Industry
Acquirer An acquirer is a Visa/MasterCard/Discover-affiliated bank or bank/processor alliance that is in the business of processing credit card transactions for businesses and is always acquiring new merchants. Independent Sales Organization (ISO) An ISO is an Independent Sales Organization that represents a bank or bank/processor alliance. They have an agreement to sell the services of the bank or bank/processor alliance, and are allowed to mark up the fees and sign up merchants. These entities are classic Middle Men, as they are typically not performing the services sold. They match the banking services they sell with Front End solutions for accepting transactions in order to offer merchants a working system. ISO s fees tend to be higher than a traditional acquirer because they are reselling services to merchants in the marketplace
Processor A Processor is the company that actually routes an Authorization Request from a Point of Sale device to Visa or MasterCard, and then arranges for Fund Settlement to the merchant. Processors need to have a Sponsoring Bank in order to gain access to the Visa and MasterCard networks. When a Processor or other entity has made such an arrangement with a Sponsoring Bank to resell their services, they are called an Agent of that bank. Life of a Transaction 1 2 3 4 Acquirer Consumer Presents a card for payment of services. Merchant Interacts with Point of Sale Solution, swipes payment card, enters amount, and sends an authorization request to the Acquirer. Acquirer Acts as the gateway to the Card Association and Issuers. Moves the transaction from the Merchant to the Card Association. Card Association Forwards the authorization request to the Issuer.. 8 7 6 5 Acquirer Merchant Merchant receives the authorization response and completes the transaction. Acquirer Returns the authorization response to the merchant.. Card Association Returns the authorization response to the Acquirer. Issuer (Bank) Approves or declines the transaction. Authorization response is returned to the Card Association.
Definition of Interchange Rates Interchange Rates Rates that a merchant s bank (the acquiring bank ) pays a customer s bank (the issuing bank ) when merchants accept cards using card networks such as Visa and MasterCard for purchases. Over 100 different interchange rates. Pricing categories are set by the credit card Issuers through the associations, and are by far the largest component of the various fees that banks deduct from merchants' credit card sales, representing 70% to 90% of these fees.
Visa/MasterCard Interchange Rates Visa Interchange Rates http://usa.visa.com/download/merchants/visa-usa-october2008- interchange-rates.pdf MasterCard Interchange Rates http://www.mastercard.com/us/merchant/pdf/mastercard_interch ange_rates_and_criteria-october_2008-final.pdf What Determines Interchange Fee Interchange fees are based on: Merchant type and average ticket dollar amount Whether the cards are physically present If the card's magnetic stripe is read or if the transaction is handkeyed Type of card (reward, corporate, etc.) Time and amount of settlement Other factors
Let s take a few questions now If you would like to ask a question, please type your question in the box at the lower left corner of your screen and click on the Send button located next to the box. Types of Pricing Structures and Various Miscellaneous Fees
Polling Question #2 What types of pricing structure have you seen on your statement? Interchange Pass Through Three Tier Billback Surcharges All of the above Not sure Types of Pricing Structures Interchange Pass Through Plus a per item Plus a percentage Both, per item and a (%) percentage Three Tier Program Bill back surcharge
Interchange Pass Through Processors pass on exact interchange and assessment costs from the card associations to the merchant Add markup on top of interchange Per item fee Percentage Or both Sample Interchange Pass Through plus a % Statement Interchange Rates Added Percentage on top of interchange (Processors Profit)
Three Tier Pricing Structure Qualified The card is swiped through a terminal, and the merchant batches the transactions within 24 hours. Most swiped credit cards will fall into this category. It is typically the lowest rate. Mid-Qual This rate applies to rewards cards and key-entered transactions. It also applies to charges batched in 24-48 hours, that would be Qualified had they been batched sooner. Non-Qualified All corporate and government/purchasing cards are charged this rate regardless of batch processing time. Other transactions batched after 48 hours are also charged this rate. This is typically the highest rate charged. Three Tier Sample Statement
The Expansion of the Three Tier Six Tier program Qualified, Mid-qualified, and Non Qualified rates for both credit and check cards. Nine Tier program Qualified, Mid-qualified, and Non Qualified rates for credit, check card and rewards cards. Billback Pricing Targeted qualified rate Surcharge or downgrades on cards accepted outside the targeted rate Rewards Cards Keyed Entered Cards Corporate Cards Government Cards International Cards Purchasing Usually in excess of 1.00% on top of the targeted rate
Bill back Surcharge Sample Statement 2.5% 3% effective Look closely at your statements Do you understand the different fee structures and the reasoning for each? This can be a very complicated undertaking even intimidating and yet it is one of the most crucial. Knowing what is on your statement can make you aware of problems, inconsistencies, etc. If something does not make sense, CALL your processor and have them explain it to you.
Expense is likely to shift to sources other than discount rate % Sources of billing fees 2010 forecast Increases in interchange create margin compression for acquirers Other sources of revenue must be found to maintain profitability without changing the discount rate Source: Aite Group Polling Question #3 How many types of fees could your association be charged each month for processing credit card transactions? 1 3 types of fees 4-6 types of fees 7 10 types of fees More than 10 types of fees
Common Miscellaneous Fees Authorization Fee Statement Fee Batch Fee PCI Compliance Fee false sense of security Supplies Fee AVS (address verification) Monthly Minimum Cancellation Fee Authorization/Transaction Fee Fee charged every time a merchant point of sale system communicates with the authorizing network Approval - transaction was approved Decline - transaction was not approved Call Center - response pending more information, merchant must call the toll-free authorization Charged on the following: Sale Void Refund
Authorization/Transaction Fee Example Statement Fee Fee is for preparing and providing the merchant a comprehensive monthly merchant statement detailing all transactions processed.
Batch Fee A batch fee (also known as a batch header fee) can be charged to a merchant whenever the merchant "settles" their terminal. Settling a terminal, also known as "batching", is when a merchant sends their completed transactions for the day to their acquiring bank for payment. Some providers perform this automatically. It is important to close a batch every 24 hours or a higher rate will be assessed by Visa or MasterCard. PCI Compliance Fee The PCI DSS was created by Visa Inc., MasterCard Worldwide, American Express Co. and Discover Financial Services to standardize and improve data security practices throughout the industry. The PCI Security Standards Council, which manages the PCI DSS, now also manages the Payment Application Best Practices (PABP) and has renamed it the Payment Application Data Security Standard (PA DSS). Processors are beginning to pass on their expense for PCI compliance to their merchants by the following: Annual PCI Compliance fee On average $90 to $200 Monthly PCI compliance fee in excess of $5.00 per month
Example of PCI Compliance, Statement and Batch Fee PCI Compliance Fee (Statement Messaging)
PCI Annual Compliance Fee Example Address Verifications Service (AVS) Fee Fee accessed to validate a cardholder's given address against the issuer's records, to determine accuracy and deter fraud. Used for mail order/telephone order transactions. A code is returned with the authorization result that indicates the level of accuracy of the address match and helps secure the most favorable interchange rates. AVS fees typically range from $.10 to $.25 per inquiry. This fee is Important fee to consider because most of Associations credit card volume is card not present transactions Without AVS transactions will downgrade from mid-qual to nonqual, a 35 basis point swing
Cancellation Fee Fee assessed when merchant terminates processing relationship prior to the contract term (three year agreement) Industry average is $250.00 Monthly Minimum Fee assessed to ensure merchant pays a minimum amount of fees per month to cover the expense of maintaining the merchant account and therefore creating profit. Charged when merchants fees don t exceed the monthly minimum. Industry-wide monthly minimums range from $15-$25 per month. Important fee to consider if your association s credit card volume is seasonal, sporadic, or if you don t process many credit cards in a given month.
Float vs. Daily Discounting Float Processing volume is deposited in your bank account on a daily basis and fees are not deducted until the following month. Allows you to float and gain interest on your processing volume. Daily Discounting Merchant Account Providers subtract the discount from your sales each day and only the left over amount is deposited into your bank account. Daily Discounting Example Total daily sales Total daily fees Daily net funded total Total daily fees total daily fees
How can I manage my processing fees? Interchange Best Practices Authorization Ensure valid authorization for each transaction Obtain electronic authorization for best qualified rates Obtain AVS on Card Not Present Transactions Use CVV2/CVC2/CID validation to help prevent fraud Settlement Settle transactions within 24 hours Ensure all required data fields are filled o AVS, CVV2, CVC2 or Commercial card data when applicable
Polling Question #4 Determining our association s effective rate will help us to: Ensure we re priced relative to peers Calculate our total cost of acceptance Forecast future processing expense Manage interchange Calculate Your Effective Rate Pull out several of your last processing statements and a calculator. Enter the TOTAL amount deducted from your account for service. Make sure this number includes ALL charges during the statement periods, including any back billing that shows up in later months. Divide the number entered in step 2 by the TOTAL amount of sales volume processed during the same statement periods. Multiply by 100 to get a percentage rate. This is your effective rate for that time period
Reduce Interchange with Pin Debit PIN-based debit ranks as the most economical means of payment card acceptance for many merchants. Meets consumer demand for security. Direct connections to debit networks. Dynamic routing to the lowest-cost transaction network. Alternate routing to avoid delays. One processor for all debit and credit card activity. Less risk reduced fraud reduced charge back. Consumer Survey 50% of Americans prefer using a PIN 72% prefer to shop where debit is accepted Consumers say PIN debit is faster and more secure than credit Source: 2005 survey by the Polling Company Reduce Interchange with a Discounted Check Card Rate Check cards offer the lowest interchange rates available by Visa and MasterCard Examine your statement to ensure you are receiving a discounted check card rate Why? Having a check card rate will ensure some of you transactions will qualify at a lower rate lessening your overall processing expense What if I don t see a check card rate? Contact your processor immediately for a re-price
Avoid Chargebacks A card transaction that is charged back to the merchant after the sale has been settled. Chargebacks are initiated by the card issuer on behalf of the cardholder. Typical cardholder disputes involve product delivery failure or product/service dissatisfaction. Cardholders are urged to try to obtain satisfaction from the merchant before disputing the bill with the credit card issuer. Your risk is rare due to member s willing participation Ways to Decrease Chargebacks Post a disclosure of policies message Request copies of I.D. and credit card Obtain signature on delivery of goods Be weary of customers using free email addresses Handle suspicious orders accordingly - Insure what you can Let customers know what name will appear on their statement - Watch out for confusing acronyms Be overly cautious of orders for foreign countries If an order is too good to be true, it generally is. Use AVS (address verification system) Obtain membership # s on orders Verify CVC2 and CVV2 verification numbers
Utilize Fraud Prevention Tools AVS Address Verification Service CVV2 Card Verification Value 2 Card Verification Value (CVV2/CVC2/CID) 3 or 4 digit code on the front or back of credit card This number is not on statements or any other documentation This value is used to verify the card is in the presence of the cardholder
Limitations to AVS AVS only works for U.S. addresses Issuer participation More than 50 percent AVS not available If the ZIP Code for a cardholder is entered into the database as a five-digit number and the transaction information presents a nine-digit ZIP Code, the AVS check reports failure on the ZIP Code match. To protect against this, merchants should set up their systems to include only five digits. AVS does not protect against thieves with knowledge of both the credit card and billing address, as is the case with stolen wallets, purses or phone scams. Using Technology to Minimize Costs Internet Solutions Communication cost are generally less via Internet High Speed Connectivity Gateway/Online Terminal Online Reporting Interchange Management
High Speed Connectivity Provides a secure, direct Internet connection to authorization center that can reduce the average credit card processing time from 10-15 seconds for a dial-up connection to a mere three seconds. Advanced Security - encrypted using industry-standard SSL encryption Affordable - free up valuable telephone lines and continue to take calls, send faxes, etc. while they are processing transactions. Simple Setup No additional hardware and certified to several point of sale systems Online Terminal Web-based terminal solution allowing merchants to: Harvest orders off their web sites Accept telephone or mail orders Log on to Online Terminal to initiate card authorizations, settlements, refunds, etc. No hardware, or additional phone lines or other technical integration is required. P-card Levels I, II, & III Qualify for lower interchange rate
Features of Online Terminal Easy End of Day Closing Auto settled at the end of the day, securely log on and manually initiate the process. Complete control over end-of- day processing. Merchants can even specify a time of day (within their local time zone) to close out activity. A two level user logon protects against unauthorized use. Logons can be shared for multi-user access, or unique logons can be established. A "Multi-MID" logon may also be created so that merchants with multiple locations only need to keep track of one logon. Internet Reporting Innovative web-based tools that enables you to quickly and easily access all of your payment processing data. With a few simple clicks of a mouse, you have round-the-clock answers to your payment processing questions.
Internet Reporting Advantages Cost Savings view and analyze payment data quickly and efficiently Improved Cash Flow review deposit activity daily Time Savings review data faster and access it 24/7 Fraud tools help identify fraudulent activity Secure access with optional card masking Summary, detail and trending reports provide you the ability to effectively manage your payment processing data Customize how you view your data with user preferences and filters View, print, save or export your data for further analysis Easy to learn with online help just a click away Summary Review your statement every month Calculate your effective rate Take advantage of cost analysis Minimize interchange Avoid miscellaneous fees Use technology to minimize costs Internet solutions Online Reporting
Questions? If you would like to ask a question, please type your question in the box at the lower left corner of your screen and click on the Send button located next to the box. Eric Mock Director, Partnership Development Chase Paymentech Solutions Ph: 214-849-3603 eric.mock@chasepaymentech.com http://www.chasepaymentechsales.com/asae