10KeystoCreditCardProcessing Apracticalguideforallbusinessestolowertheircredit cardprocessingcosts [Type the document title] [Type the date] [Type the document title] [Type the date]
TableofContents INTRODUCTION 3 10 KEYS 4 1. INTERCHANGE PLUS PRICING (IC PLUS) 4 2. KNOW YOUR BUSINESS TYPE 6 3. GET SET UP PROPERLY 6 4. KNOW YOUR CARD MIX AND AVERAGE TRANSACTION 6 5. USE LATEST TECHNOLOGY 7 6. REVIEW YOUR STATEMENTS 8 7. ACCEPT ALL CARD TYPES AND TRANSACTION METHODS 8 8. BE IN CONTACT WITH YOUR ACCOUNT EXECUTIVE 9 9. GET MULTIPLE BIDS FOR CARD PROCESSING SERVICE 9 10. BUY VALUE NOT PRICE 10 THE DURBIN AMENDMENT SAVINGS 11 2
Top 10 Keys to Lower your Credit Card Processing Costs 1. Switch to Interchange Plus Pricing 2. Know your Business Type 3. Get set up under the correct Visa/Mastercard Program 4. Know your card mix and average transaction 5. Use Latest Processing Technology 6. Review your statements (at least every 6 months) 7. Accept All Card Types and transaction methods 8. Be in Contact with your account executive 9. Get multiple bids for card processing service 10. Buy value not price Introduction is conducting a series of whitepapers to empower small business merchants to save on their processing and avoid getting ripped off. Credit card processing continues to become more complicated with new fees, technology and regulations. We realize that you can be overwhelmed with all the changes. This is why our white papers can help, so that you can get back to what is really important, running your business and taking care of your customers. Along with this white paper, you will receive multiple free, no obligation quotes. Please consider these quotes seriously. These quotes are to be used as benchmarks and will help you navigate the tricky waters of credit card processing. These processors are pre-screened and are experts in the field. As a small business owner, you have been inundated with offers from credit card processing companies promising to save you money. Usually most offers start with a low rate. Each merchant services provider tries to trump each other with that lower rate to win your business. If you ve been in business for some time and switched processors, you might have realized that those low offers don t always pan out. In fact from 2000 to 2010, the average credit card processing rates for retail has risen from about 2.00% to 2.66%. That does not include extra fees like statement fees, batch fees and PCI fees. This rise is despite a huge drop in debit card rates and increase in debit card usage. Why the increase? Rewards cards are one of the main culprits. Banks are passing on the cost of those fancy rewards, airline miles, etc, to the merchants. 3
The second main reason is a lack of merchant processing education. Merchants are trained by the banks to respond to low rates. The problem is that there are 440 Visa/MasterCard/Discover rates and the banks are only showing you the lowest transaction rates. (For a listing of rates www.visa.com and www.mastercard.com) The correct question to ask is not What is your rate?, but What is your effective rate? The effective rate takes into account all the possible Visa/Mastercard/Discover categories that a transaction may qualify. Knowing your effective rate will give you a more accurate estimate as to the true cost of your processing. You can figure out your effective rate by using a simple formula. Effective Rate = your monthly processing charges/your monthly processing volume. For example: If you process $10,000 dollars a month in volume and your processor charges you $300, your effective rate is $300/$10,000 = 3.00% This guide outlines 10 key strategies to lower your card processing costs. Below is a detailed explanation of each key strategy. By following these steps, you will be an expert in credit card processing and you will do yourself a favor by lowering your processing cost to the maximum extent and saving substantial amounts of money. 10Keys 1.InterchangePlusPricing(ICPlus) This type of pricing used to be reserved for Fortune 500 companies. Not any more. Now, even Mom and Pop shops can take advantage of IC Plus pricing savings. Banks are hesitant and sometimes outright refuse to give IC Plus Pricing to small businesses because the banks can t maximize their profits. They d rather sell you enhanced billback or 3 tier pricing, which is much more lucrative. The recent Durbin Amendment makes it imperative that you switch to interchange plus pricing to ensure you realize the cost reduction savings. Merchants that are not on interchange plus pricing will see their savings go to the 4
processor, which is not compelled by law to lower the rates. (Please see Durbin Amendment Savings at the end for more details.) Why interchange plus? As mentioned before, there are 440 different Visa/Mastercard/Discover Categories and you want each one of your sales transactions to qualify for the lowest possible rate category. This is exactly what IC Plus Pricing does. The pricing method places each transaction in the appropriate category and charges the corresponding rate. No other pricing method does this. For example, the most common pricing method, 3 Tier places each transaction according to the processors preferences. The processors prefer placing most transactions in the Mid and Non Qualified tiers as opposed to Qualified tier. Yet, these same processors will sell you on the Qualified Rate Tier. This is a classic bait and switch. IC Plus pricing is pretty simple. There are 3 components that make up your rate. Interchange + Visa/Mastercard/Discover Assessment Fee + Processor Rate Interchange consists of 440 Rate Categories. For most businesses, only about 60 categories will apply. That is still many. The range of rates vary widely from 0.95% + $0.10 for debit cards to 3.25% + $0.10 for certain corporate cards. Assessment fee is the rate Visa/Mastercard/Discover charge for each transaction. Currently this fee is 0.11% + $0.02. This fee does not vary by card or transaction types. The processor fee is exactly that the rate and/or transaction fee your processor charges. This is the only negotiable part of the interchange fee available to the merchant. Please keep this in mind when negotiating with your potential processors. This fee does not vary by card or transaction types. To get the final rate, you simply add up all the components. For example: Visa Retail Transaction Rate would look like this 1.54% + $0.10 + 0.11% + $0.02 + 0.10% + $0.13 = 1.75% + $0.25 Please keep this rule in mind. Swiped transactions have lowered rates that keyed transactions. Swiped or Keyed business cards have higher rates than swiped or keyed consumer card transactions. Debit card transactions have lower rates than credit card transactions. 5
Please remember in choosing your pricing method, keep in mind your effective rate, which you want to lower. The rate range is more important than the lowest rate. The lowest rate only applies to one transaction type. The rate range applies to all the cards and ultimately determines your effective rate. 2.KnowyourBusinessType Visa/Mastercard use pricing indicators or business types to apply discounts to your rates. In the beginning, Visa/Mastercard used to charge one rate for every industry. Some industries refused to accept credit cards because they thought the rates were to high and cut into too much profit margin. Supermarkets were one of the biggest holdouts. So, Visa/Mastercard began offering discount rates to specific industries, card types, and processing methods. This is why there are 440 different rate categories. These discounts paved the way for credit card acceptance at supermarkets, gas stations and fast food restaurants. Your business may qualify for one of Visa/Mastercards special programs. For example, if your business has an average transaction of less than $15, you may qualify for the small ticket program. If you are paying 1.64% + $0.25 per transaction now, then under the small ticket program you could get your rates as low as 1.65% + $0.04. Now your processor will probably tack on another six cents to cover its costs. Still, you would save fifteen cents a transaction or 1.5% on a $10 transaction. Visa/Mastercard has programs for most industries like restaurant,b2b, MOTO, Quick serve restaurants, Convenience Store, Hotel, Gas Stations, Supermarkets, charities, insurance, utilities, government etc. 3.Getsetupproperly Once you know your business type, you want to make sure that you are processing under that correct business type to take advantage of the savings. You will need to call your processor and ask. If you are not set up properly, you need to find out why and fix it. Your processor may not have intentionally set you up under the wrong business type, but it has reaped a financial reward from you. This is why you need to constantly be pro active in accepting bids for your merchant services. Do not become complacent with your current provider, because like it not many have their best interests at heart. 4.Knowyourcardmixandaveragetransaction There are dozens of card types out there, personal cards, rewards cards, corporate cards, debit cards, purchase cards. Each type of card has a direct 6
impact on the rate that you pay. You need to know a break down of the card types to effectively minimize your processing charges. You will also need to know the percentage of swiped transactions, keyed in transactions, and business card transactions. Lets say your processor provides you with a super low swiped rate, but you are keying in most of your transactions. Or if you are set up with a low consumer card rate, but take mostly business cards. Remember many processors will sell you low rate to get your business. The low rate may not apply for the majority of transactions. A higher rate may apply. This is why you need to know your card mix. If you are not sure of your card mix, your processor should have a website where you can review your transactions. Some processor s websites provide in depth analysis of your transactions. This is valuable information. Please use it to your advantage. As mentioned before, IC Plus pricing offers the greatest savings for most businesses. There are some exceptions. If you know for example that you accept 95% personal cards swiped through your credit card terminal, you would be better off with a low 3 tier pricing. The reason is that you can predict that nearly all of your transactions will qualify at the lowest qualified rate and only a few transactions will qualify at the higher Mid and Non Qualified rates. If you take a majority of Business cards, you might be better off under a special B2B pricing program. Most small business owners are not sure of their card mix. Usually, the card mix is all across the board. In this case, you are better off with IC Plus pricing. Knowing your average transaction will save you money. You can find your average transaction on your statement or you can simply divide your monthly volume by the monthly number of transactions. This is important to know, because if your average transaction is below $15, you may qualify for the small ticket program. If you have a high average ticket, your business may benefit from pin debit savings. 5.UseLatestTechnology A few years back there was the story of the merchant who had purchased one of the first credit card terminals, a Verifone Zon Jr. XL for a pricey sum. He had heard so many stories about his fellow merchants getting fleeced on terminals that he vowed never to buy another terminal again. One day a merchant services rep walked into his store and analyzed his statement. He noticed that his rates were extremely high. When he saw the Zon Jr. terminal, he realized that the obsolete equipment was the cause for the 7
surcharges. The poor sales rep tried to convince the merchant that to save money he d have to switch to new equipment. The sales rep explained that the Zon only read the one track of information embedded on the back of magnetic strip of credit cards. Visa/Mastercard required that both tracks be read. The merchant would not budge. Another five years passed, and finally the Zon gave out. The merchant coughed up the money to purchase a new machine. The next month, he noticed that his processing charges per transaction were nearly 2% less than the month before. The sales rep had been right. He had been wrong. The merchant had saved a few hundred dollars on keeping his old equipment, but lost thousands of dollars in unnecessary fees because he was processing incorrectly. The moral of the story is that to ensure you maximize your savings utilize the latest equipment and technology. It really will make a difference. Another factor to consider is PCI Compliance. PCI Compliance is the credit card processing industry s program to eliminate fraud by compelling merchants to follow their security regulations. Some older terminals are no longer PCI compliant and merchants who continue to use those terminals will face heavy fines if their terminals are compromised. 6.Reviewyourstatements It is really revealing to know that most merchants seldom if ever review their statements on a monthly basis. This should not be the case. Don t expect your accountant to review and pick up irregularities from your statement. Many CPA s are statement illiterate. When you look at the statement, you are looking for any changes in rates and fees and any other irregularities. April and October are the two months out of the year where you must review your statements. These months are when Visa/Mastercard association meets to set rates for the year. This is the time when your rates are most likely raised. If they are raised, give your dedicated account executive a call or your processor s retention department and kindly ask them to lower your rates back down. If they don t, then switch processors because it s obvious that they value those few extra pennies over your business. 7.AcceptAllCardTypesandtransactionmethods There is an old adage in business if you want more sales, make it as easy as possible for your customers to pay. That means accepting all the cards - Visa, Mastercard, Discover, American Express, JCB and Debit cards. 8
Some merchants refuse to accept American Express because the rate is too high. The question you need to ask yourself is whether you mind paying the higher transaction costs to gain a sale or lose the sale to save on the higher transaction cost. If the former is more important to you, accept American Express. A few years ago, pin debit used to be the best way to cut your processing costs. That is not always the case anymore. Visa/Mastercard have cut the interchange rates for signature debit transactions. The debit networks have raised their transaction fees. But for merchants with high average transactions, pin debit is still a great tool to save money, because the debit transaction costs are so much less. If you are a retail business, ask your processor if they offer check guarantee. If you truly want to lower your transaction costs many check guarantee companies like Telecheck and Certegy offer rates below 1%. Then put up a sign that you welcome checks because some people still write checks. 8.Beincontactwithyouraccountexecutive Do you have a dedicated account executive? Do you know who your account executive is? If not, then you need to get a new processor with an account executive attached. There are so many changes occurring in credit card processing industry that you need to be pro active in your response. You need a go to guy to help you. That s your dedicated account executive. A good merchant services account executive can help you analyze your statement, ensure that you are set up under the correct business type, help you decide the best pricing method, advise you on the latest technology, help you win chargebacks, and resolve other issues. 9.Getmultiplebidsforcardprocessingservice When was the last time you had your statement analyzed? Even a better question, when was the last time you even looked at your statement. If your business is like most businesses, 50% or more of your revenue is generated through credit card payments. It pays to know what you are paying and ensuring that you are not paying too much. The best way to the best deal on credit card processing is to get multiple bids. When banks compete, you win is not just a slogan but good advice. Our company works with several of the top processors, and this gives us the flexibility to put our clients with the appropriate processor. 9
10.Buyvalue notprice The famous saying goes that price is a one time thing, cost is ongoing. Many merchants are lured into bad processing agreements by artificially low rates and/or free terminals. You can find these offers advertised on the internet all day long. Rates as low as Free Terminal with every account Don t be fooled. If you ve reached this point in the guide, then you ve educated yourself pretty well. You know that rate means nothing. Effective rate is everything. (Effective rate is all your processing costs divided by your volume.) Rate is what got you to sign. Effective rate is what you actually pay. Go with a company that offers the latest technology. Don t pay extra fees or PCI compliance penalties because of obsolete equipment. Look for value add like loyalty programs, gift cards, check guarantee, online account access, POS systems. These features can make a difference. These other services and products can give you a competitive advantage. If you don t take advantage of them, then your competitors certainly will. Go with a company with a dedicated account executive. Ask the processor what happens if your account executive leaves? Can you be assigned a new one? A good account executive can save you much time and money and it is worth it to pay a little extra for that service. Go with a reputable company that tailors its processing to your business needs. Many merchants think they can solve this problem by going to their banks. Banks do not have the same control over merchant services like other products they sell. Most banks outsource their merchant services to big processors like First Data, Elavon, Paymentech. As mentioned before, the banks are looking to profit off of you by making a profit from your business. Don t expect to get a good deal from your local bank. But do expect to get a sympathetic ear when something goes wrong. Don t expect your banker to be able to do something about it. Second, your processor should be able to accommodate your needs. If you need next day funding, or have large transactions, or take advanced payments, want to accept health savings cards or fleet cards, your processor should be able to work with you to create a plan that will meet your needs. If not, move on to the next processor. Be wary of free terminal offers. As the sayings go, you get what you pay for and there are no free lunches. Credit card terminals aren t free to the processor and the processor will make sure it gets a return on the free terminal it gave to you. Find out what that cost is. The cost could be obsolete terminal, a long-term commitment, or excessive penalties for non-return of equipment. 10
Keep searching. If you are not completely satisfied with your current processor, then switch. The competition for merchant service accounts is fierce. You are in the catbird seat. The best advice when choosing a credit card processing company is picking the company, which you believe has the most integrity and will deal with you honestly. This will hold you in good stead over the long run. TheDurbinAmendmentSavings Small businesses will receive the biggest reduction in their credit card processing charges in the history of the electronic payment industry, but only if they are set up correctly. The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 included an amendment, which will greatly impact your credit card processing or more specifically your debit card processing charges. This Durbin Act will affect both signature and pin based debt interchange rates by drastically lowering them on October 1 st, 2011. Normally, the debit card processing rates (debit interchange rates) were set by Visa/Mastercard. The current debit card interchange rates are 0.95% + $0.20 for Visa and 1.05% + $0.15 for Mastercard. The Federal Government led by Senator Durbin has intervened and under the Dodd Frank Wall Street Reform and Consumer Protection Act reduced the debit interchange rates to 0.05% + $0.22. Merchants that process debit cards whether signature debit or pin debit will see huge savings on their merchant account processing statements. Debit, both pin and signature, comprise nearly 50% - 70% off all card transactions. Merchants could see their credit card processing charges cut in half. That is real savings. Unfortunately, many merchants, who do accept a high percentage of debit cards, may not see any savings, because their current credit card processing plan does not allow for the Durbin Amendment reduction. Instead their debit interchange savings will be going to their processors. This is especially true for merchants who are on 3 tier and enhanced billback pricing. The reason is that the processor is not compelled by law to reduce the rates. They are only reducing one component of your rate called, interchange, not the other two components, Visa/Mastercard Assessment and the processor s percentage. So if you are paying 1.64% + $0.20 per debit transaction, the difference of 0.95% to 0.05% will go to the processor and not to the you. There is away around this dilemma and to ensure that your company and not the processor realize the debit interchange savings. This requires the merchant to 11
switch to interchange plus pricing. This will guarantee that you will receive the reduction. The reason is that under IC Plus pricing, the processor is compelled to set the interchange rate at the current bank rate and then add his percentage on top. If the interchange rate is.05%, the processor must use that percentage as his base line and then add on its percentage of say 0.50%. In the 1.64% example above the processor has bundled his interchange and its percentage together. This is fixed pricing. As long as interchange is below 1.64%, the processor is going to charge that rate. Durbin Amendment Examples: Reduction in Interchange $100 Avg. Transaction Current Visa Debit interchange $100 x 0.95% + $0.20 = $1.15 Durbin Amendment Interchange $100 x.05% + $0.22 = $0.27 An example of how debit reduction will save you 50% or more on your debit transactions. Joe s Auto Repair has a $100 dollar average ticket. Joe pays 1.64% + 0.20 on swiped debit transactions. $100 x 1.64% + 0.20 = $1.84 Joe pays on average $1.84 per transaction. Joe heard about the Durbin Amendment and has decided to switch processors to receive Interchange Plus Pricing. IC Plus Savings on Debit Transactions: $100 x.05% + $0.22 = $0.27 Then we add in Visa/Mastercard Assessment (0.11% + $0.02) $100 x.11% + $0.02 = $0.13 Finally, the processor fee of 0.50%: $100 x 0.50% = $0.50 Add the charges all together 12
Total: $0.27 + $0.13 + $0.50 = $0.90 Over 50% savings over the current debt transaction rate. To find out how much your business will save, click here or go to www.tesomerchantconsultants.com, then click on Durbin Debit Calculator. 13