Well, it's that time of year again when Visa and MasterCard make adjustments to their Interchange Rates. Typically, these adjustments take place in the spring and the fall, usually in April and October. If you're unfamiliar with what Interchange Rates are, let me present what Visa identifies them as on their website:
"Visa uses interchange reimbursement fees as transfer fees between financial institutions to balance and grow the payment system for the benefit of all participants. Merchants do not pay interchange reimbursement fees; merchants pay "merchant discount" to their financial institution. This is an important distinction, because merchants buy a variety of processing services from financial institutions; all of these services may be included in their merchant discount rate, which is typically a percentage rate per transaction."
Now, as you can see, they also call them "interchange reimbursement fees". Let me break it down for you a bit more clearly. You, as the merchant, pay your credit card processing provider, the acquirer, a Discount rate. This Discount rate is what you see quoted on your statements in various ways which, in many cases leads to your ultimate confusion....by design. This rate was either negotiated by you with your provider or was more than likely provided as a comparison to what you may have had with a previous provider. The Discount rate that you pay represents a markup above what the Interchange Rate is which is where your processor (the acquirer) make their profit for providing the service to you. In turn, the acquirer pays the interchange reimbursement fees to the card issuing entity and those fees are utilized for the "benefit of all participants" as indicated above.
So, these fees are for numerous things like the cost to issuing banks of issuing cards, maintaining accounts, sending statements, monitoring transactions for authorization, collecting payments from card holders, etc, etc. These fees are also used for paying rewards to those card holders that have such cards. You, in turn, pay higher rates for accepting these cards and therefore, in a way, are paying your customers for shopping with you. With the huge and ever increasing numbers of these types of cards ("What's in your wallet? ") in existence these days, you better know what you're paying for the privilege of accepting them.
As of this writing, we know there will be adjustments and, in fact, your provider may have already notified you on your September statement of just how much they will be increasing your rates, effective with your October processing month. Neither Visa or MasterCard has posted the October rates yet, however. So, what I would recommend that you do, RIGHT NOW is to go the VISA SITE and the MASTERCARD SITE find, and download the April Interchange Rates. Then, in a couple weeks, go back to these sites or even sign up for their RSS feed so you will be notified, and get the October rates when they become available. Do the comparisons to see where the actual increases were, compare them to what you're paying and see where you stand. I'd say, you should then probably get with your rep (if you can locate them) or Customer Care and get a total rate review of your account.
If you've read any of my articles in the past, you know that I am a strong advocate of becoming more thoroughly educated on credit card processing. It is an ever-increasing cost center in your business and it's crucial that you are fully aware of what your costs are and if there is anything that can be done to reduce them.
Thanks for reading and if you have found this article to be helpful, please pass it along to others that you know could benefit from it. I wish you continued, prosperous endeavors in your business.
Friday, October 22, 2010
Wednesday, October 13, 2010
Net Effective Rate for Credit Card Processing Fees
When you look at your monthly credit card processing statement, (and I'm sure you do in great detail every month... don't you?), have you ever calculated the Net Effective Rate? Really, this is simply a tool to determine exactly what you are paying, in total, for ALL of your fees. This would include all of the following:
This comes in real handy when you are getting rate comparisons from different companies. Of course, when someone is trying to lure you away from your current provider, they'll present you with their "best rate" which would typically be for a swiped debit card. Let's just say they tell you that is 1.15% + $.25. At a glance, that may sound pretty good compared to what you think you are currently paying.
So, here's what you absolutely must do. Have the merchant rep from the processing company that is trying to attract your business, give you a complete and thorough comparison of ALL fees as compared to one of your current processing statements. Then, do the math and come up with the Net Effective Rate to see how it stacks up with what you are currently paying. Unfortunately, in this industry, reps are very skilled at telling you just enough to make their proposal "look" like it is better than what it ultimately might really be. After all, the bottom line in all of this stuff is... YOUR BOTTOM LINE! Do the math so you don't take a bath.
- Discount Rates
- Monthly Service Fees
- Statement Fees
- Batch Total Fees
- PCI/DSS Fees (Data Security)
- Debit Access Fees
- Amex Per Item Fees
- Administrative Fees
- Any other miscellaneous Fees
This comes in real handy when you are getting rate comparisons from different companies. Of course, when someone is trying to lure you away from your current provider, they'll present you with their "best rate" which would typically be for a swiped debit card. Let's just say they tell you that is 1.15% + $.25. At a glance, that may sound pretty good compared to what you think you are currently paying.
So, here's what you absolutely must do. Have the merchant rep from the processing company that is trying to attract your business, give you a complete and thorough comparison of ALL fees as compared to one of your current processing statements. Then, do the math and come up with the Net Effective Rate to see how it stacks up with what you are currently paying. Unfortunately, in this industry, reps are very skilled at telling you just enough to make their proposal "look" like it is better than what it ultimately might really be. After all, the bottom line in all of this stuff is... YOUR BOTTOM LINE! Do the math so you don't take a bath.
Combat Skimming of Credit Cars at Your Business
The fraudsters are getting even more active these days than before. They're out to steal credit card numbers in any way they can and they're not just after the processors and major retailers any longer. The term often referred to is "skimming" which is defined as the "unauthorized capture and transfer of payment data to another source for fraudulent purchases". According to ADT Security Services Inc., skimming nets fraudsters approximately $350,000 daily in the United States. And payment consultancy Celent LLC estimates skimming drains the global economy of $1.2 billion annually. So, you can see why the bad guys are actively searching for any opportunity or target that they can.
Skimming can be accomplished by stealing the data directly off of payment cards or by infiltrating payment networks via POS terminals, terminal locations, wires, communication channels, switches and so forth. One of the most common types of attack occur directly at the Point of Sale terminal and usually takes place with the merchants own personnel. Staff and outside contractors are "targets" of fraudsters, either through "bribery or coercion," The people that fall for this "temptation" are people who have both criminal intent and they have direct access to the customers credit card and aren't really observed or monitored much at the time of payment.
One specific industry is particularly prone to this situation and that would be in restaurants. Typically, the wait staff disappears with the diners' credit cards and can skim the card numbers in private or simply write down the appropriate information for later sale to the bad guys. If you happen to be in the restaurant business, you may want to seriously consider obtaining a few wireless terminals that can be taken directly to the customers table. Not only will this protect you but your customers will feel more at ease as well. And, a side benefit to this would be that now you will be able to capture pinned debit transactions and the resulting savings that go along with it.
You may have read in the news not long ago about huge data breaches at a couple major retailers as well as some of the largest payment processors in the business. Even they weren't immune to these sophisticated crooks. However, security measures have stepped up dramatically in those places so the cons are looking for easier targets. Smaller merchants are particularly vulnerable to skimming attacks. Mom-and-pop operations are busy with the day to day running of their businesses and might overlook signs that their terminals, or elsewhere in their business, have been compromised.
The security standards council has prepared a FREE 25 page supplement for merchants that provides photographs of how merchants can detect evidence of tampering. The report also recommends that merchants routinely inspect their businesses from the POS to the point where the cables leave the building. There are also pictures available to show merchants what actual tampering devices look like. For example, a key logger attached to an electronic cash register, for example can be smaller than a quarter and can easily be mistaken as part of the register.
Another suggestion is for merchants to limit the access to payment locations that customers and vendors have. These tampering devices can be quickly placed virtually anywhere in the system path. Installing surveillance cameras would also be a good idea and worthwhile investment. Times are tough these days and the fraudsters, either through bribery or coercion target staff and outside contractors to assist them in their endeavors.
The FREE report has helpful tips to help merchants quantify their risk levels. There are more than two dozen questions posed to merchants that are designed to evaluate whether they could be classified as low, medium or high risk to skimming attacks.
The second appendix is basically a checklist that allows merchants to document the details of their POS terminals and systems. "Take a picture of your device," Russo said. "What's the serial number? Where's it located? Where is the label? Is the label on the right side or the left side? So that when periodically somebody goes around and looks at these things to check them, they check them against this list to see if there's anything that looks different from what they had before."
Skimming can be accomplished by stealing the data directly off of payment cards or by infiltrating payment networks via POS terminals, terminal locations, wires, communication channels, switches and so forth. One of the most common types of attack occur directly at the Point of Sale terminal and usually takes place with the merchants own personnel. Staff and outside contractors are "targets" of fraudsters, either through "bribery or coercion," The people that fall for this "temptation" are people who have both criminal intent and they have direct access to the customers credit card and aren't really observed or monitored much at the time of payment.
One specific industry is particularly prone to this situation and that would be in restaurants. Typically, the wait staff disappears with the diners' credit cards and can skim the card numbers in private or simply write down the appropriate information for later sale to the bad guys. If you happen to be in the restaurant business, you may want to seriously consider obtaining a few wireless terminals that can be taken directly to the customers table. Not only will this protect you but your customers will feel more at ease as well. And, a side benefit to this would be that now you will be able to capture pinned debit transactions and the resulting savings that go along with it.
You may have read in the news not long ago about huge data breaches at a couple major retailers as well as some of the largest payment processors in the business. Even they weren't immune to these sophisticated crooks. However, security measures have stepped up dramatically in those places so the cons are looking for easier targets. Smaller merchants are particularly vulnerable to skimming attacks. Mom-and-pop operations are busy with the day to day running of their businesses and might overlook signs that their terminals, or elsewhere in their business, have been compromised.
The security standards council has prepared a FREE 25 page supplement for merchants that provides photographs of how merchants can detect evidence of tampering. The report also recommends that merchants routinely inspect their businesses from the POS to the point where the cables leave the building. There are also pictures available to show merchants what actual tampering devices look like. For example, a key logger attached to an electronic cash register, for example can be smaller than a quarter and can easily be mistaken as part of the register.
Another suggestion is for merchants to limit the access to payment locations that customers and vendors have. These tampering devices can be quickly placed virtually anywhere in the system path. Installing surveillance cameras would also be a good idea and worthwhile investment. Times are tough these days and the fraudsters, either through bribery or coercion target staff and outside contractors to assist them in their endeavors.
The FREE report has helpful tips to help merchants quantify their risk levels. There are more than two dozen questions posed to merchants that are designed to evaluate whether they could be classified as low, medium or high risk to skimming attacks.
The second appendix is basically a checklist that allows merchants to document the details of their POS terminals and systems. "Take a picture of your device," Russo said. "What's the serial number? Where's it located? Where is the label? Is the label on the right side or the left side? So that when periodically somebody goes around and looks at these things to check them, they check them against this list to see if there's anything that looks different from what they had before."
Merchant Services and Early Termination Fees
Every merchant services or credit card processing agreement that I have ever seen, has a contract term. Typically you will find that they are three years in length. If you terminate early, for pretty much any reason, you will be assessed an "early termination fee". And, usually, this fee will be automatically deducted from the bank account that is on record with the with the credit card service provider.
Whenever you consider starting a relationship with a new credit card processing company, you will always want to make certain that you actually read the fine print of the agreement. The primary part of any new agreement that merchants agree to that they actually look at, tends to be the "Schedule of Fees". Even those aren't necessarily clear in all instances but should be thoroughly understood before signing on the dotted line. Most merchants rarely look at all the Terms and Conditions. Now, that said, most contracts have the same verbiage but the "Term and Termination" portion can be quite different from one processor to another.
Get out your current copy of your merchant account agreement. Take a look at the back and look for the before mentioned section. Most often, here is what you will see or something very close to this:
"This Agreement shall remain in full force and effect for an initial term of three (3) years. This Agreement shall be automatically extended for successive one (1) year periods (underlined to draw your attention to this part) on the same terms and conditions expressed herein, or as may be amended, unless Merchant gives written notice of termination as to the entire Agreement or a portion thereof at least 60 days prior to the expiration of the initial term (underlined once again for emphasis) or any extension or renewals thereof, in which case this Agreement will terminate at the end of the then current term. Notwithstanding anything to the contrary set forth herein, in the event Merchant terminates this Agreement in breach of this Section 13, the lesser of the following amount(s) shall be immediately due and payable to the services provider--(a) the maximum amount permitted by applicable state law, or (b) $295, if such termination occurs within the first twelve (12) months period of the initial term of this Agreement, or $195, if such termination occurs after the first twelve (12) month period of the initial term of this Agreement..."
You see, whether you realize it or not, service providers have expenses in setting up and maintaining your merchant account so, therefore, they feel if you bail early, they're entitled to some compensation. Simply put, you absolutely need to know what the terms are before you make any commitments.
So, let's just say that some new merchant account rep (or as they're called in the industry MLS or Merchant Level Salesperson), performs a statement analysis for you. When they're all done, they show you the results and, of course, tell you they can save you a "ton of money". Your first inclination is to want to make the change because, of course, you want the projected savings in your pocket. But, wait a minute, where are you in your existing contract? Well, you know that if you outright cancel to make the move to the new provider, you WILL PAY AN EARLY TERMINATION FEE. So, what are your alternatives? Well, it's really all about math so get out your calculator and look at the numbers.
Okay, so the new guy/gal has shown you a $20 a month savings....not bad but how's that all shake out? Assuming your early termination fee is $195, it would take you about ten months before you would actually start realizing those savings (after paying the early term fee) if you decide to make the change. Here's another option that you may consider. Does your existing contract have a "Monthly Minimum" fee. Quite often you will have a $10-$25 Monthly Minimum in your Schedule of Fees. This means that even if you don't process a dimes worth of credit cards in any given month, the processor is still getting something. Let's suppose that you have say eight months to go before your existing contract expires and you have a $20 Monthly Minimum. You could make the switch, not call in to "officially" cancel, take advantage of the savings and just pay the $20 minimum fee to the previous guys (in this example, it would be $160 for the eight months so it's less than the $195). The risk you take here is that the provider just happens to notice that you aren't running any transactions thru them any longer and they automatically assess the early term fee per the agreement. Oftentimes, however, they really don't notice. But, the other thing that you need to be alert of is you will still need to contact them and " give written notice of termination as to the entire Agreement or a portion thereof at least 60 days prior to the expiration of the initial term" or it will renew for one more year and they will likely, sooner or later, catch up with you and collect the fee. These fees can easily eat away at any "projected" savings by the new provider and cause great frustration on your part.
As I've written many times before, it is crucial that you have any proposal made to you, explained in detail so that you fully understand all that is being promised. Sometimes, when someone has given you one of those "huge savings" proposals and you are still in the midst of a contract, you can use that with your current provider to negotiate a better rate with them. Simply call Customer Service and tell them you've received a quote for better rates and ask them what they can do for you to encourage you to stay. Don't tell them the numbers that you've gotten but just tell them that you have been offered what appears to be a "much better deal" and you wanted to give them the opportunity to sharpen their pencils or you may entertain going elsewhere. It's just a thought to consider especially if the service you're currently receiving, is up to your requirements.
One last thing while we're on the topic of Early Termination Fees. There are still some contracts out there that I have experienced that say something to the effect of "Early termination fees can be $295 or projected loss of revenue, for the balance of the contract, whichever is greater" So, let's just say that the credit card processor has calculated that they were going to be making $50 a month on your account and you had eighteen months to go....do that math. Now, that one could really sting so, once again, make sure you know what you're getting into. And, definitely get out your existing agreement, read the fine print and get fully acquainted with what your currently obligated to.
Whenever you consider starting a relationship with a new credit card processing company, you will always want to make certain that you actually read the fine print of the agreement. The primary part of any new agreement that merchants agree to that they actually look at, tends to be the "Schedule of Fees". Even those aren't necessarily clear in all instances but should be thoroughly understood before signing on the dotted line. Most merchants rarely look at all the Terms and Conditions. Now, that said, most contracts have the same verbiage but the "Term and Termination" portion can be quite different from one processor to another.
Get out your current copy of your merchant account agreement. Take a look at the back and look for the before mentioned section. Most often, here is what you will see or something very close to this:
"This Agreement shall remain in full force and effect for an initial term of three (3) years. This Agreement shall be automatically extended for successive one (1) year periods (underlined to draw your attention to this part) on the same terms and conditions expressed herein, or as may be amended, unless Merchant gives written notice of termination as to the entire Agreement or a portion thereof at least 60 days prior to the expiration of the initial term (underlined once again for emphasis) or any extension or renewals thereof, in which case this Agreement will terminate at the end of the then current term. Notwithstanding anything to the contrary set forth herein, in the event Merchant terminates this Agreement in breach of this Section 13, the lesser of the following amount(s) shall be immediately due and payable to the services provider--(a) the maximum amount permitted by applicable state law, or (b) $295, if such termination occurs within the first twelve (12) months period of the initial term of this Agreement, or $195, if such termination occurs after the first twelve (12) month period of the initial term of this Agreement..."
You see, whether you realize it or not, service providers have expenses in setting up and maintaining your merchant account so, therefore, they feel if you bail early, they're entitled to some compensation. Simply put, you absolutely need to know what the terms are before you make any commitments.
So, let's just say that some new merchant account rep (or as they're called in the industry MLS or Merchant Level Salesperson), performs a statement analysis for you. When they're all done, they show you the results and, of course, tell you they can save you a "ton of money". Your first inclination is to want to make the change because, of course, you want the projected savings in your pocket. But, wait a minute, where are you in your existing contract? Well, you know that if you outright cancel to make the move to the new provider, you WILL PAY AN EARLY TERMINATION FEE. So, what are your alternatives? Well, it's really all about math so get out your calculator and look at the numbers.
Okay, so the new guy/gal has shown you a $20 a month savings....not bad but how's that all shake out? Assuming your early termination fee is $195, it would take you about ten months before you would actually start realizing those savings (after paying the early term fee) if you decide to make the change. Here's another option that you may consider. Does your existing contract have a "Monthly Minimum" fee. Quite often you will have a $10-$25 Monthly Minimum in your Schedule of Fees. This means that even if you don't process a dimes worth of credit cards in any given month, the processor is still getting something. Let's suppose that you have say eight months to go before your existing contract expires and you have a $20 Monthly Minimum. You could make the switch, not call in to "officially" cancel, take advantage of the savings and just pay the $20 minimum fee to the previous guys (in this example, it would be $160 for the eight months so it's less than the $195). The risk you take here is that the provider just happens to notice that you aren't running any transactions thru them any longer and they automatically assess the early term fee per the agreement. Oftentimes, however, they really don't notice. But, the other thing that you need to be alert of is you will still need to contact them and " give written notice of termination as to the entire Agreement or a portion thereof at least 60 days prior to the expiration of the initial term" or it will renew for one more year and they will likely, sooner or later, catch up with you and collect the fee. These fees can easily eat away at any "projected" savings by the new provider and cause great frustration on your part.
As I've written many times before, it is crucial that you have any proposal made to you, explained in detail so that you fully understand all that is being promised. Sometimes, when someone has given you one of those "huge savings" proposals and you are still in the midst of a contract, you can use that with your current provider to negotiate a better rate with them. Simply call Customer Service and tell them you've received a quote for better rates and ask them what they can do for you to encourage you to stay. Don't tell them the numbers that you've gotten but just tell them that you have been offered what appears to be a "much better deal" and you wanted to give them the opportunity to sharpen their pencils or you may entertain going elsewhere. It's just a thought to consider especially if the service you're currently receiving, is up to your requirements.
One last thing while we're on the topic of Early Termination Fees. There are still some contracts out there that I have experienced that say something to the effect of "Early termination fees can be $295 or projected loss of revenue, for the balance of the contract, whichever is greater" So, let's just say that the credit card processor has calculated that they were going to be making $50 a month on your account and you had eighteen months to go....do that math. Now, that one could really sting so, once again, make sure you know what you're getting into. And, definitely get out your existing agreement, read the fine print and get fully acquainted with what your currently obligated to.
The Most Important Things to Consider about Your Credit Card Processing Agreement
In my years in the field, consulting with merchants regarding their credit card processing, it never ceases to amaze me how little they actually know about the process or the agreement. But hey, it's not your fault because most often you don't know all the questions to ask and the reps typically don't just volunteer all the details....for obvious reasons. So, what I hope to do here, with this article, is to give you some insight and, more specifically, the questions you need to ask, whether you're an existing merchant or a new one in search of merchant services. So, here's some ideas for you to strongly consider because it's imperative that you become informed:
- What is the term of my agreement? Typically, you will find them to be for three years with an "early termination fee" for pulling out early. You absolutely need to know what penalties there may be for your future reference. The reason is that you will always be prospected by reps in the industry, all the time, And, they have a way of making things "look" better than what they are actually are in reality. So, armed with the information that you have here, and possibly elsewhere, you'll be better able to apply the math to see if the "new deal" will ultimately be a cost savings. For example, let's say that your new proposal shows an anticipated savings of $25 a month based on your average volume and average ticket. Well, that would be a $300 savings over a twelve month period. So, with that in mind, and if let's say you would have a $195 early termination fee to leave your current provider, it would take you just under eight months to start getting into the green with the new guys. If, on the other hand, your early term fee is $295, it would take almost a year to get there. Simply, know your costs versus potential rewards, do the math and make an informed decision.
- What rate am I paying for pinned debit transactions? Now, if you're using a PinPad, and your average transactions are under $50, you could potentially rack up some savings here by capturing more pinned debit sales. As you may, or may not know, pinned debits will cost you less than swiping them as a credit card. For example, let's say you make a $50 sale and your customer hands you a debit card that goes thru the NYCE network. Effective with the April 2010 Debit Network Fee schedule, a pinned debit on that $50 sale would have a "cost basis" of about $.55 (plus whatever transaction fee your processor charges you). That same transactions swiped, as a credit card would have a "cost basis" of about $.68 (and you know your processor is charging something more significant than that. So, here again, ask the question so, based on your pricing structure (whether i be 3 Tier, 4 Tier or Cost-Plus pricing), you absolutely know what you are being charged and you can train your staff accordingly for maximum savings.
- What rate am I paying for swiped, generic credit cards? You see, if you are on a Cost Plus pricing program (which by the way is the most transparent form of pricing) you will absolutely know what you are paying for all different types of transaction and card types simply by know what your "plus" is and have access to the Interchange Rates. The problem comes when you are priced on any form of Tiered pricing because, literally, the processor can make their own decision into which "bucket" they want to put your transactions. And, you can bet, it will typically benefit them....and not you!
- What rate am I paying for Rewards Cards? Now this, especially these days, can be a big one. Again, if you're on Cost-Plus pricing...no big deal once you know what your "plus" figure is. The reason is that you will simply get the exact Interchange Rate for the card or transaction type, plus the "plus", every single time. Once again, the problem comes when you're on a tiered structure. Come right out and ask your rep, and have them show you in writing, what you are paying for these Rewards Cards. Let's face it, more people have, and are using, some form of credit card that pays them some sort of "reward" whenever they use that card. And, guess who pays more to accept that card and indirectly, help pay the reward back to the customer......that's right....you, the merchant. And hey, look at your own spending using plastic these days. If you had the option to use your plain ole generic card, or one that pays you a reward, which one would you use? The problem with a tiered structure is that the processor can place those transactions in any "bucket" (Tier 2, Tier 3, or Tier 4) they wish and, furthermore, can change which buckets they go in at any point in time, as they desire. Here's where the next point comes into play.
- Check your statements monthly, in detail. There are numerous times when I consult with a merchant that they hand me their most recent statements, still sealed in the original envelope. They have given up trying to decipher them because they feel there are more important things to tend to. Let me tell you, that if you simply spend some time with them and have your rep or Customer Service, explain every line item in detail to you, they're not that difficult to understand. And, after all, who has a more motivating reason to comprehend them than you, the owner? In addition to looking at your statements every month, you want to compare them to previous months to look for any changes, either in rates or fees in general. If you find any, make the call and have the changes explained to your full satisfaction. Another thing to look at is the "Statement Message" or something to that effect that is usually found on the first page of your statement. Here is where reputable processors will alert you of changes that are coming up. And, some even give you helpful tips on improving your costs.
- When was the last time you asked for a rate review? Most merchants never even think of doing this. All it takes is a phone call to your rep or Customer Service and say something like this: "I've been with you for a while and am doing consistent business, and I'd like to have my account reviewed for any rate reductions that I may be entitled to". This is an especially good step to take after you have received a competing quote that "looks" better than what you currently have. Don't give your current provider the rates you've been offered but simply tell them that you're entertaining an offer and wanted to give them the opportunity to be "more competitive" in order to keep your business. Hey, it's worth the call, don't you think?
- Here's some other ideas you want to ask about: You will likely find numerous other fees on your statement, some of which are justified and worthwhile and some others that are simply profit generators for the processor. Here again, look for and ask for justification of these kinds of fees: debit access fees, monthly minimum fees, statement or service fees, gateway fees, "merchant advantage" or something similar to this (usually for terminal replacement or paper fees), PCI/DSS fees (if you see these, ask if they are monthly, annually or a combination of both and ask what benefit you get from them), and simply, any other fees that you don't understand what they are for.
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