Private Label ACH Debit Programs What Doesn t Meet The Eye Can Be A Real Eye-Opener Merchants are increasingly focusing on managing payment transactional costs. As a result, some merchants are considering creating in-house private label card programs that rely on the ACH network to clear and settle transactions rather than going through card networks. Their considerations are largely influenced by the low cost of transaction processing on ACH. October 2014
Private Label ACH Debit Programs MasterCard s view is that this approach is overly simplistic. Extensive research and analysis shows that merchants need to consider several factors in order to make an informed decision when determining which network to build their programs on such as: Costs: In comparing the cost of processing on the ACH network to the cost of acceptance of a card transaction, merchants can underestimate the true cost of an ACHbased transaction. Merchants need to consider the indirect costs as well as the costs of the discounts or rewards that consumers expect from such programs. Merchant Risk: Without the benefit of real-time authorization and guaranteed settlement, merchants could potentially be exposed to much higher risk on an ACH-based transaction. Consumer Preference: From the cumbersome onboarding process to sharing of bank account details, consumers express several reservations when it comes to signing up for such loyalty programs. Loyalty: Merchants expect these programs to deliver incremental consumer spend. However the increased basket size required to break even can range from 15 30% depending on the merchant type. Understanding Value Propositions MasterCard coordinated with and commissioned two leading payment consultants, Kaiser Associates and Edgar, Dunn & Company to conduct research aimed at understanding why some merchants and consumers consider ACH-based vs. card network-based payment programs. The reports cited in this paper are those commissioned by MasterCard. Main reasons cited by merchants: Lower transaction processing costs Increased ability to control/leverage consumer data to drive incremental spend Attracting new customers Main reasons cited by consumers: Attractive incentive offers or discounts (e.g., 5% topline discount offered by a leading retailer). It is important to note that without such incentives, consumers felt little or no need to enroll in a closed loop merchant program and carry an additional card in their wallets. The convenience of linking payments with the merchant s loyalty program Actual vs. Perceived Costs When evaluating the cost benefits of an ACH-based program, the total costs can be more than anticipated especially once hidden costs inherent in running the program are considered. ACH-based program costs can include: Direct Costs: Transaction processing costs, NSF/fraud and float costs Indirect Costs: Private label management costs, staff cost, IT and system costs Consumer Incentives: Private label discounts/rewards to consumers In the Edgar, Dunn & Company study it was found that in the case of a store-branded private label program, almost 30% of the cost comes in as indirect costs to the merchant. In the case of the merchant offering consumer rewards or incentives, the indirect costs plus the cost of rewards could account for over 60 70% of the overall cost of the program depending on the extent of rewards offered. It is easy for these indirect costs to be buried in various parts of the merchant s organization. For example, costs such as onboarding and customer communications related to the private label program are generally managed by the marketing department, platform costs are absorbed by the IT department, and treasury has visibility only into the transaction processing costs. In contrast, most card-related costs are visible to the merchant in the form of the discount rate and fees. It is critical for merchants keep this in mind when evaluating network options. 3
MasterCard Private Label ACH Debit Programs 68.3% $1.790 per transaction 19.4% 0.1% 0.5% 0.3% 8.8% 0.2% 0.1% 2.3% Processing Cost NSF & Fraud Float Costs Indirect Staff Cost Edgar, Dunn & Company Cost Study, 2014 IT/Systems Cost Private Label Management Costs Bank Costs Other Costs Private Label Discount Debit Cards $0.440 per transaction 90.1% 8.2% 0.9% 0.3% 0.3% Processing Cost NSF & Fraud Indirect Staff Cost IT/Systems Cost Other Costs Edgar, Dunn & Company Cost Study, 2014 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////// When all costs are considered, debit may be less expensive for a merchant than ACH especially true for certain categories like grocery, discount stores, department stores and drug stores where due to significant PIN Debit volume the cost of accepting debit is much lower that an ACH-based program. ///////////////////////////////////////////////////////////////////////////////////////////////////////////////// 4
Private Label ACH Debit Programs Merchant Risk When it comes to facilitating consumer payments, card networks are designed to facilitate commerce safely and securely between the various stakeholders in the payments ecosystem. ACH as a network, on the other hand, was designed primarily to convert checks to electronic payments. The batch processing of transactions on the ACH network does not come with the same level of controls as card networks for securing point of sale payments and digital commerce. Real-Time Authorization: Debit cards provide real-time authorization to the merchant on the availability of funds in the consumer s account. Unlike debit cards, ACH does not have real-time authorization of funds availability. Guaranteed Settlement: Debit networks combine real-time authorization with guaranteed settlement, a well-defined chargebacks process and sophisticated fraud tools. This allows the merchant to remain focused on their core business rather than invest time and effort in collection related activities. Though some ACH processors can provide guaranteed ACH settlement, these come at an additional fee to the merchant that need to be factored into the cost of acceptance. spend Limits: To manage the risk of getting paid on ACH-based programs, some merchants place limits on the transaction size or the purchase frequency. These limits can cause inconvenience and frustration to the consumer. Such restrictions also contradict the primary objective of most loyalty programs by limiting the increase in spend and/or basket size. Payment Errors: With certain ACH-based payment programs, the merchant carries sole liability for any payment errors. Card networks offer merchants greater protection and recourse. Fraud Prevention Tools: For some ACH-based programs, merchants may need to purchase additional fraud tools. With card networks, some of these tools are either integrated into the network s core capabilities or are managed by the card issuer. Regulatory Scrutiny: As private label ACH debit programs attain scale, merchants should expect increased regulatory scrutiny. Primary Consumer Concerns: Security and Privacy 400 350 300 67% 60% Total Consumers 250 200 150 100 50 56% 30% 27% 27% 18% 17% 11% 11% 0 Account Vulnerability Privacy Fraud Protection Accumulate an Additional Card Lack of Real Time Authorization Prefer Credit Card Rewards Onboarding Process Lack of Prefer Debit Additional Card Rewards Funds Compared to Credit Card None of the Above Kaiser Associates Research, 2013 5
MasterCard Consumer Preference Consumers prefer to limit sharing their account/routing details with non-financial entities. Kaiser Associates found that over two-thirds of consumers surveyed were concerned about account vulnerability, privacy and fraud on their ACH-based programs. Consumers feel more vulnerable when their bank account details are compromised than when their network cards are compromised. The fear of breach or error lessens the appeal of private label reward programs and limits their potential to deliver on the benefits merchants are seeking. Card networks continue to invest heavily to increase the integrity, safety, and security of the networks through initiatives like EMV in the card present space and tokenization in the digital space. In addition to the safety and security concerns of providing bank account details to merchants, consumers also indicated other pain points when it comes to ACH-based programs: Onboarding: The onboarding process in most cases includes providing multiple forms of identification and a cancelled copy of a check as part of the application process. This can be cumbersome and off-putting to consumers, leading to abandonment of the process. Lack of Real-Time Authorization: For consumers that maintain low balances in their checking account, ACHbased programs could lead to inadvertent Insufficient Funds (NSF) charges due to the delayed settlement of ACH debits. Convenience: Consumers need a compelling reason to carry an additional card in their wallet and would only do so if they receive significant rewards at a retailer that they frequent. //////////////////////////////////////////////////////////////////// Card networks continue to invest heavily to increase the integrity, safety, and security of the networks through initiatives like EMV in the card present space and tokenization in the digital space. //////////////////////////////////////////////////////////////////// Over 50% of the consumers preferred to link their store loyalty program to a debit card, versus just 13% who preferred to link it directly to their bank account. Linking Loyalty Programs Consumer Preference Customer Service: Consumers are confused about whom to call when they have a problem with their private label ACH debit program. Consumers end up calling their banks rather than the merchants, which may lead to a waste of their time, frustration and lack of visibility for merchants. Acceptance: Most private label ACH debit programs are closed looped programs, as a consequence of which, consumers need to apply for private label programs individually to realize benefits at each merchant. This requires consumers to carry multiple loyalty cards in their wallet. By contrast, card networks provide one card that can be used across multiple merchants, enabling a single link to benefits and rewards. 53% Prefer Debit Kaiser Associates Research, 2013 29% Unsure 18% Prefer ACH 6
Private Label ACH Debit Programs Breaking Even With ACH Private Label Programs -3% +14% Merchant provides a 3% discount or rewards as incentive. Edgar, Dunn & Company Cost Study, 2014 $ Requires 14% incremental basket size for grocery and fuel. +16% Requires 16% incremental basket size for drug stores. Loyalty Merchants often justify launching ACH-based store loyalty programs in the hope that these programs result in increased basket size or incremental spend per customer. While this is true in certain verticals, merchants need to consider the following while evaluating these programs: The increase in transaction size from a loyal consumer needs to be significant in order for a merchant to break even on cost. Incremental Spend to Break Even: For a large retail chain with a successful private label ACH debit program, it took a 5% topline discount (plus free online shipping and extended returns) to gain momentum and scale. According to the Edgar, Dunn & Company cost model, a 5% discount would require merchants in these categories to see a 30 35% incremental spend per transaction to break even on costs. Limitations For a Bigger Basket Size: Not all merchants/ verticals have the breadth of products to influence larger transactions. Multi-product merchants like large discount retail chains leverage store loyalty programs to get consumers to shift their spending from other merchants as they have a range of products from groceries to clothes and pharmacy. The topline discount then motivates a consumer to consolidate their buying with this merchant to deliver the incremental basket size to break even on the program. Very few merchants have the range of products and services to consolidate share from the consumer wallet. //////////////////////////////////////////////////////////////////// The increase in transaction size from a loyal consumer needs to be significant in order for a merchant to break even on cost. //////////////////////////////////////////////////////////////////// Card-Based Loyalty Programs: Consumers generally prefer rewards on their credit and debit cards that are funded by the issuer of the card product. Card issuers are experienced in creating and delivering engaging rewards programs to their consumers but not all merchants have the expertise or the scale to do so. In addition, card-linked offer solutions, like those offered by Truaxis from MasterCard, provide the platform to merchants to target millions of qualified, active consumers in the banking system very efficiently. The Value of Credit Cards: Credit cards allow for and encourage increased transaction size and higher value purchases without placing additional risk on merchants. Further, studies performed by Lightspeed Research show that 30% of consumers spend less in stores that don t accept payment cards compared to stores that do accept cards. 7
MasterCard Top ACH Card Pain Points 4 3 3.75 3.65 3.65 3.25 2.65 2 1 0 Customer Onboarding Increased Training Errors Internal IT Investment Fraud Kaiser Associates Research, 2013 Other Considerations Research with top merchants with ACH-based store loyalty programs revealed the top pain points merchants face in implementation: The IT investment to build and manage these programs is significant. Very few retailers manage to attain the scale to make this a viable investment. Private label onboarding comes first or second as the biggest pain point for consumers. The cost of consumer education, acquisition and onboarding requires ongoing investment. Finding the Best Fit There are costs and benefits to both ACH-based and card networks for merchants. While evaluating private label ACH debit programs, merchants should consider the all-in costs of running the program, the incremental risk that they will be assuming as well as consumer preference for such programs. However, on balance, card networks seem to offer clear advantages in the areas that matter most to merchants as well as consumers: cost, fraud protection, convenience and control. Leveraging our global insights, advanced technology, and industry leadership, MasterCard can help you determine an optimal payments strategy that can drive your business forward. There are substantial costs in staff training at the check-out to handle this new system. 8
Published October 2014. Copyright 2014 MasterCard. Proprietary and Confidential. All rights reserved. Reproduction by any method or unauthorized circulation is strictly prohibited, and is a violation of international copyright law.