By sean

Unlike Visa and Mastercard, who publish their discount rates (known as interchange fees), American Express does not.  However the American Express 2007 Annual Report reveals that, on average, Amex’s discount rate was 2.56% (2007), 2.57% (2006) and 2.58% (2005).  That is about 0.77% higher than the average Visa interchange rate, which is 1.79%. However, that average includes the much lower rates that American Express charges some very large companies.  For example, the book Paying With Plastic (P.196), describes the sweetheart deal between American Express and Costco.

In 1999, American Express and Costco…announced that they would be partnering to offer American Express consumer and corporate charge cards that also functioned as Costco membership cards…as a result of the partnership, American Express became the only payment card to be accepted at Costco, which had only accepted Discover for the previous eight years.  Industry estimates suggested that the merchant discount paid by Costco to American Express was as low as 1.1 percent.

Small stores more typically will pay a 3.25% – 3.75% discount.

Let TransFS help you find the best deal on credit card processing for your business. Start here to get multiple bids from top quality processors at no cost, all apples-to-apples comparison, and transparent pricing. What you see is what you get. Users save an average of 40% on credit card processing with the most transparent pricing: interchange plus.

Image thanks to http://www.flickr.com/photos/28473961@N02/2720590720/

By sean

For card not present transactions (including those conducted over the internet) the way to get the best interchange rate is to do address verification.  Address verification involves entering the customers’ address and transmitting it across the processing network, where it is compared with the customer’s address on file with his/her credit card company. A response code is returned to tell the merchant if the address was a full match, partial match or not a match.

Interestingly, getting a better interchange rate is not dependent on the address matching, rather, it is dependent on attempting to match the address.  However, usually it doesn’t make sense to actually accept a payment where the address doesn’t at least partially match because it is almost certainly fraudulent (remember, when the customer doesn’t sign the merchant bears responsibility for fraudulent and charged-back transactions).

Here are the AVS codes and what they mean:

• X – Street address and 9 digit ZIP code both match
• Y – Street address and 5-digit zip code both match
• A – Street address matches but zip code does not match
• W – Zip (9 digit) matches but street address does not match
• Z – zip (5 digit) matches but street address does not match
• N – No match on either zip or street address
• U – system unavailable.  This is the code that will always be returned for a non-US card, it will sometimes also be returned on a US card (but rarely)
• R – system unavailable – retry – this happens when there is a technical or communications error on the network.
• E – error – AVS data submitted was invalid – if the data sent to the network is garbled or incomplete
• S – Not supported – S only happens on cards issued in the US where AVS is not supported.  Typically this is the case for pre-paid and gift cards
• B – Address information not provided for AVS check
• G – Non-U.S. Card Issuing Bank
• P – AVS not applicable for this transaction

By sean

Pizza is one of my favorite foods, my favorite pizza places here in Chicago are Coalfire and Pompei.  Here is my estimate of how much an average pizza shop pays to accept credit cards:

• According to Entrepreneur.com, the average revenue of the 40,164 pizza restauranst in the US was $598K in 2007.
• The 2008 Hitachi Consulting Study of Consumer Payment Preferences (P.6) tells us that the average restaurant collects 58% of it’s payments with credit and debit cards.
• We have several pizza restaurants among our customers.  On average, they are paying 2.33% in interchange.  Unfortunately, as small businesses, most also pay a significant markup to their credit card processors.  For a business of about $500k in annual revenue the markup is on average about 0.90%, although some have a better deal and many have a worse deal.

From this information we can compute that the average pizza restaurant pays around $598K x 58% x (2.33% + 0.90%) = $11,203 each year in credit card processing fees.

Shameless plus – pizza restaurants that used TransFS to find their credit card processor pay an average markup above interchange of 0.15% + $0.10 with no-tricks interchange plus pricing.

By sean

Big businesses, some of which provide credit cards to thousands of employees to make corporate purchases, like to have data about where and on what their employees are spending money.  Even though such businesses typically do not carry a balance on their credit cards (they can borrow much more cheaply from banks or the bond market), they conduct so many transactions that Visa, Mastercard and American Express compete fiercly for their business. Making these customers even sweeter, interchange rates for business cards are much higher than for consumer cards.  For example, a retail transaction using a Visa business card would qualify for the Commercial – Retail interchange category and cost 2.20% + $0.10 while a retail transaction using a non-rewards Visa consumer credit card would qualify for the CPS/Retail (Credit) interchange category and cost 1.54% + 0.10.

In order to provide the detailed information that the business customers want about employees’ spending habits, the card issuers need to rely on merchants to report the data.  In order to encourage merchants to collect and report the more detailed information, Visa and Mastercard offer a slight discount from the already high commercial interchange rates for transactions when the extra data is reported. They classify such transactions based upon how much extra data is reported into three groups: Level I Data, Level II Data and Level III Data.

By sean

Reporting Level II transaction data can result in lower interchange rates for purchases made with a corporate credit card. To qualify for level II the following data must be included with the transaction:

Merchant Name, Transaction Amount, Date – these are all also required for level I and are captured and reported automatically by all credit card terminals and point-of-sale systems.

Tax Amount, Customer Code (16 characters), Merchant Postal Code, Tax Identification, Merchant Minority Code, Merchant State Code – most terminals and point-of-sale systems can be programmed to report this information but oftentimes merchants that have the capability to include this data in the order do not because it is cumbersome, particularly if they are not using a point-of-sale system.