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Archive for June, 2009

Jun 30

Switching Credit Card Processors for Online Merchants

By sean

I recently found an older article at Internet Retailer magazine, entitled  How to Pay Less for Payments by editor  Don Davis. It has some good stories about business owners negotiating credit card processing deals to save money.

To get the best deal, retailers must be prepared to go shopping among the many processors—or transaction acquirers in payments lingo—vying for their business, and to examine every rate and fee in the contract, says Allen Weinberg of payments consulting firm Glenbrook Partners.

“The guiding principle is that everything is negotiable,” Weinberg says. “But it’s important to keep in mind that every acquirer has a profitability target they feel they must meet. If you win on a couple of points, they will likely try to make it up in another area.”

and…

a note on downgrades (emphasis added)

The acquirer will likely emphasize the rate it charges on a standard Visa or MasterCard credit card purchase—2.2% of the transaction amount plus 30 cents is a typical charge for midsized online merchants. But that won’t be the rate on every transaction, because the Visa and MasterCard interchange rates—the fees acquiring banks pay to card-issuing banks—are higher on certain kinds of plastic, such as rewards cards and corporate cards. And some acquirers will add their own mark-up to the higher fees on those cards.

And a note about the difficulty of switching payment providers for an online merchant (it’s not that hard):

For many online retailers, switching processors is easy because they connect to the processors through gateways—VeriSign, Authorize.Net and USA ePay among others—that each have links to many processing companies. The processors in turn connect to the card networks for authorizations and to the banks that settle funds among card issuers and retailers.

The Bowl Co., for instance, has integrated its back-office system with Authorize.Net and other gateways. Changing from one processor to any other connected to those gateways just means changing the account number the retailer uses, Dumont says. “For me, it’s a matter of changing a few lines of code.”

If you are an online company that accepts credit card payments, check out the article, Don Davis is an expert on the topic, before his role as editor of Internet Retailer magazine he was the editor for a payments-related industry magazine, and the article is exactly on-point.
And, if you don’t want to waste a lot of time shopping for a new credit card processor, consider running an auction at TransFS.com to get a number of competitive bids from high-quality credit card processors in just a couple hours.

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Jun 26

Marking up Downgrades

By sean

One of the worst practices in the credit card processing industry is called Marking up the Downgrades.  A Downgrade occurs when the business owner has a tiered pricing agreement with his/her merchant account provider (credit card processor) and a transaction occurs that does not qualify for the lowest possible interchange rate.

For example, a rewards card might have been used (rewards cards are now more than half of all cards), or a business credit card might have been used, or the transaction might have been done over the phone or internet rather than in person.  What most business owners don’t know is that the processor usually makes additional profit from such downgraded transaction than on ordinary transactions.

Here’s a specific exmple:  The interchange rate for a non-rewards Visa card at a retailer  is 1.54% + 0.10.  The retailer may have negotiated a 1.64% + 0.20 rate for Qualified transactions, providing the processor with a reasonable markup of 0.10% + 0.10 (or $0.20 on a $100 transaction).  However, if the customer uses a rewards Visa card instead the interchange rate would be 1.65% + 0.10.  In a tiered pricing scheme, the processor might qualfy such a transaction as “Mid Qualified” and charge the merchant 2.19% + 0.20.  Notice that now, instead of 0.10% + 0.10 (or $0.20) the processor makes 0.54% + 0.10, or $0.64 on a $100 transaction, around 3x as much as on the Qualified transaction.

Many business owners, upon inspecting their bills, realize that a significant portion (sometimes more than half, even) of the transactions are being cleared at a higher Non Qualified or Mid Qualified rate and causing the actual rate he/she pays to the processor to be much higher than was originally agreed upon.

Most business owners also find such a situation, where the processor makes a much higher profit on the downgraded transactions, unfair, since the details of what causes such a downgrade, and how much additional profit is being made on the downgrade, are rarely disclosed.   In this article a Vice President at Global Payments, one of the biggest credit card processors, explains how extra money is made off the downgrades in a tiered pricing system.

We recommend that all merchants insist on interchange plus pricing, where the exact interchange rates charged by Visa and Mastercard are disclosed on every statement, along with the exact markup charged by the credit card processor.

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Jun 23

Visa and Mastercard v. Retailers: Who has the power?

By sean

The pace of articles relating to credit card fees is accelerating at a rapid pace due to the credit card legislation going through congress.  In fact, there are so many articles flying around that it is hard to keep up.  So, what does that mean for TransFS and for you?  It means that we should be filtering the myriad articles out there down to the top handful in order to help you, our valued customers and other small business owners (hopefully soon to be customers), get the skinny on what is happening in the credit card world.

In the last week we found one article that does a great job of summing up some of the key points in the current debate on interchange fees.  The article by “Trader Mark” on SeekingAlpha.com puts forth some very interesting merchant-side credit card processing facts that have come to light recently due to the battle in congress around consumer credit card fees. Here are a couple of the more interesting tidbits Mark mentions in his post:

  • Visa Inc., MasterCard Inc. and JPMorgan Chase & Co., already squeezed by new U.S. curbs on how credit cards are marketed to consumers, are girding for a renewed battle over $48 billion in fees levied on merchants.
  • Lawmakers are promising new rules to bring down the interchange fee, a charge on purchases sometimes topping 3 percent that’s split by the two banks serving the customer and merchant.
  • Supporters of the legislation include the biggest retail chains, restaurants and small businesses, which say the fees erode profit and inflate prices.
  • The debate pits the largest card lenders including JPMorgan and the two biggest payment networks, Visa and MasterCard, against Wal-Mart Stores Inc. and Target Corp. Interchange is the second-biggest cost after payroll, Target said, and merchants want to negotiate lower payments collectively without running afoul of antitrust law. (remarkable statistic)
  • The Credit Card Fair Fee Act would let merchants bargain together on interchange rates and designates the Department of Justice as arbiter. Card networks and lenders would be forced to disclose components of the fee and how banks share the money.
  • In a typical transaction, the retailer’s bank deducts 1.9 percent from proceeds of the purchase, a sum known as the merchant discount rate. The largest portion — the interchange fee — goes to the bank that issued the card. The bank for the merchant keeps what’s left. Interchange fees average 1.7 percent of the purchase, according to JPMorgan analyst Tien-tsin Huang.
  • Visa and MasterCard get paid a processing fee from each bank of 15 to 18 cents on a $100 purchase, Huang said in a June 5 report. MasterCard and Visa process about 58 billion transactions annually, company filings show.
  • Visa Europe Ltd. faces an antitrust complaint from EuroCommerce Inc., a retailer group that said this month that stores should be able to negotiate fees. MasterCard settled in April with European Commission antitrust regulators by reducing credit card interchange to 0.30 percent.
  • JPMorgan, Bank of America Corp. and Citigroup Inc., last year’s biggest bank card lenders, don’t detail interchange revenue. (i.e. they are not transparent)
  • “In every other aspect, merchants have the ability to negotiate and reduce their costs except this one,” said Jennifer Hatcher, spokeswoman for the Arlington, Virginia-based institute. Target lacks leverage because it’s “simply not realistic” to stop accepting cards, said Eric Hausman, a spokesman for Minneapolis-based Target

As we already know, Mastercard and Visa are not entirely forthcoming with their fee structures and it is next to impossible to negotiate the interchange fee due to the market dominance of just two firms (i.e. this isn’t really a free market since there is virtually no competition). If Target has trouble negotiating their rates then the rest of us don’t have a chance.

For now we will have to wait and see where this goes.  In the meantime, we at TransFS can help business owners lower their credit card processing fees through our reverse auction system where credit card processors compete for your business. Check it out if you want to save on your credit card processing fees and let us know what you think.

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Jun 21

Tiered Pricing for Merchant Accounts

By sean

The most common pricing scheme for small business merchant accounts (credit card processing accounts) is called Tiered Pricing.  Visa and Mastercard’s pricing rules, called Interchange, are very complicated.  The price of each transaction is calculated based on several factors, including 1. the kind of card used 2. the kind of business the card was used at and 3. the circumstances of the transaction (for more information read our article on interchange).  There are thousands of different interchange rates and a typical business will have transctions in a couple dozen different categories in a given month.

Credit card processors typically group those transactions into between 3 and 12 groups, called tiers, or categories.  Some of the transactions are given the Qualfied Rate (typically this is the rate that was negotiated when the merchant account was opened) and the others are given a Mid-Qualified or Non-Qualified rate (much higher rates often buried in the small print of the contract).

In theory, grouping transactions into categories to make merchant statements simpler is a valid idea.  In practice, however, it reduces transparency and often results in a bad deal for the business owner for a few reasons:

  1. What is qualified at one processor could be mid-qualified (or even non-qualified) at another processor.  This makes rate quotes from one processor very difficult to compare to another.
  2. Most processors do not disclose what interchange categories are grouped into each tier.  Since sometimes a lower interchange rate can be addressed by an action that the business owner can take, burying the actual categories within tiers can make it harder for business owner to identify opportunities to lower his/her rates.
  3. Since there is so little transparency into the rates, it is often the result of misunderstandings between the processor and merchant and sometimes can be an area where the situation is manipulated by the processor to generate additional profit at expense of the merchant.  Here is an article written by a VP at Global Payments, one of the biggest credit card processors, about how tiered pricing can be used to generate additional profit at the expense of the business owner.

Merchants – for best results, choose interchange plus pricing, not Tiered Pricing.  There are plenty of processors out there that offer interchange plus pricing and it is a much better and more transparent way of doing things.

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