MERCHANT ACCOUNTS
How CNP Merchants can
Better Process Visa & MasterCard
1. Discounts and High
Average Ticket Values (ATVs):
Most
merchants are quick to congratulate themselves on securing a “low” percentage discount
rate from their payment processor. Unfortunately,
these merchants don’t always pay attention to the fundamental mathematics
behind the average price of the products they are selling. For instance, 2.1% sounds like a great
discount rate, and in fact often times it is.
If you happen to sell high-ticket items, however, percentages can eat
into profits in terms of absolute dollars.
Compare two merchants: one selling power adapters for $15.00, and another
merchant selling computer for $500.00. At
2.1%, the first merchant would pay approximately $0.32 per transaction, while
the second merchant would pay about $10.00 per transaction. While it might make sense that a processor is
entitled to earn higher fees on a more expensive product, merchants should
negotiate to minimize the absolute fees they are paying. Merchants
with high ATVs should therefore scrutinize percentage-based processing fees.
2.
Per-Item Transaction Fees and Low ATVs:
Payment
processors frequently add fixed, per-item fees to every credit card
transaction. It’s tempting for merchants
to overlook these small transaction fees.
A per-item fee of $0.15 may not sound like much, but consider the two
merchants we discussed above. A per-item
fee of $0.15 represents an additional 1% charge for the merchant selling $15.00
power adapters, bringing its total fee to 3.1%.
This same $0.15 fee represents a paltry 0.03% up-charge for the merchant
selling $500.00 computers, bringing its total fee to 2.13%. Merchants
with low ATVs should therefore scrutinize per-item-based processing fees.
3.
Downgrades:
Payment
processors often quote discount rates using a tiered model. These tiers are typically called “qualified,”
“mid-qualified” and “unqualified.” As
you might expect, qualified transactions receive the lowest fees. Mid-qualified
and unqualified transactions – also known as “downgrades” – receive higher
fees. In most cases, qualification is
based on the timeliness and quality of the data passed to the Associations. Regrettably, many merchants receive
downgrades on more than one third of their total volume. Some of these downgrades are unavoidable like
those from rewards cards and certain international transactions. Merchants can minimize their downgrade rate by
insuring that they pass along the correct information (for example, address
verification data), and submit settlements in the appropriate time frame. Merchants
must therefore work closely with their payment processors to insure that the
proper data and settlement standards are incorporated into their sales processes.
4.
Bundled vs. Pass-through Pricing:
In
order to accept credit cards, merchants pay a variety of fees to multiple
players including the Card Associations (“assessment” fees), card-issuing banks
(“Interchange” fees), and payment processors (processing fees.) Most merchants’ fees are structured using a
bundled model, whereby all of these fees are combined into a single rate which
may include a percentage-of-sale fee, a fixed per-item fee, or a combination of
both. The problem with this model is
that it is virtually impossible to discern exactly what the merchant is paying,
and to whom these payments are going to.
Over the past five years, another pricing model, commonly known as the
“pass-through” method, has emerged as a popular alternative. Under this structure, payment processors
report fees in separate sections dedicated to each of the players involved in
the transaction. In this manner it easy
for the merchant to determine just how much the processor – the merchant’s
gatekeeper into the credit card systems – and the other parties are
earning. What’s more, itemized
Interchange reporting allows the merchant to effectively understand and manage
downgrades. Pass-through pricing offers merchants the most transparent form of
reporting, providing for easier reconciliation and downgrade remediation.
5.
Pricing:
Merchant
Account pricing is often the hottest topic in merchant circles because it can
represent one of the greatest cost centers.
We have already learned that fees are typically paid to three parties:
the Card Associations (“assessment” fees), the card-issuing banks
(“Interchange” fees), and the payment processors (processing fees.) We have also discussed that fact that
merchants with high ATVs should scrutinize percentage-based processing fees,
while merchants with low ATVs should examine per-item-based processing
fees. As you might have guessed what
pricing really comes down to is the average ticket value of your product, and
what the payment processor whishes to earn on each transaction.
Because
both Visa
and MasterCard
publish Interchange and assessment fees, and because you know what your ATV is,
applying a little high school math will let you see what the payment processor
is earning. Pricing will also be
affected by the size and financial health of your business. Riskier products like pornography and
gambling tend to see the highest rats.
Regardless of your business, you have the information to determine
exactly what you are paying.
Pricing
is often presented as combination of percentage-based and fixed per-item
fees. Knowing your ATV, converting this
confusing pricing to a pure percentage or pure fixed fee is a simple matter of
multiplication or division. To calculate
your “all-in” processing fees simply divide you total aggregate merchant fees
(e.g., discounts, interchange, downgrades, authorization, chargeback,
reporting, transmission, etc.), by your gross sales volume. Is it a fair
number? Well it’s very hard to tell
without understanding your business, but suffice it to say that if your ratio
is greater than 2.4%, you should probably review your payment processes.
6.
Low Cost Providers and Customer Service
It
is a time-honored tenet that business should strive to obtain products and
services at the lowest possible price.
Frequently, merchants adhere to this principle a little too zealously. Payment processing is large, extremely fragmented
industry, and it is filled with a plethora of players residing in numerous of layers. It’s simply not that difficult for a merchant
to get “good” pricing in today’s highly competitive processing
environment. It is however, often difficult
to get good customer service. Low
pricing typically comes at a cost, and that cost is usually poor customer
service. Determine whether the provider
that sold you your account will inevitably be providing you with processing and
customer service. Does the vendor offer a 24x7 call center? Is your processing
firm a good fit for online business? Remember, payment processors handle
virtually all of your cash and often affect your customers’ buying experience. Competent
customer service is therefore a critical component in running an effective
credit card operation. Consider spending a little bit more for outstanding
customer service. Constantly review your
own customer service processes.
7.
One Size Does Not Fit All
Online
merchants tend to forget that e-commerce represents a relatively small
percentage of all credit card use. As
with most professions, there are specialists, and payment processing is no
exception. With an online transaction, authorizations,
refunds and chargebacks are handled in profoundly different ways than your
typical brick-and-mortar sale. Fraud,
for instance, is a particularly poignant example of one of these
differences. Because the credit card is
not physically present (“Card-Not-Present” or “CNP”), the charge is more prone
to misuse and is therefore more likely to spawn chargebacks. Another example is recurring payments, which
provide their own challenges in a CNP environment (and often time opportunities,
as we’ll see below). Fortunately there
are payment processors that specialize in CNP transactions like Litle & Co, Paymentech, Merchant e-Solutions, Transfirst, CyberSource, and others. Don’t
rely on processors that focus on retail, point-of-sale transactions; CNP
specialists will reduce fraud, mitigate chargeback costs, and in some
instances, increase billings.
8.
This is Direct Marketing
During
the Internet bubble, brash young executives extolled the virtues of their “new
companies,” which were guided by an advanced, Internet-driven philosophy, and which
didn’t necessarily need to deliver profits.
When the bubble burst, so did most of these “new companies.” The ones that survived were the companies
that knew all along, that e-commerce is just another form of Direct
Marketing. This same principle
applies today to payment processors catering to the Internet crowd. While these processors certainly need special
technology, they also require a rich and deep knowledge of the direct marketing
business. Whether you are selling
clothing, electronics or subscriptions, direct marketing should play a
significant role in your payment processing function. Recurring charge businesses, like record
clubs for instance, require direct input from payment processors that
understand marketing. These processors
must be adept at handling situations like expired cards and impermanent
authorization declines in such a way as not to cause unnecessary customer
cancellations. These processors should
also be involved in payment-related customer communications, be they written or
via e-mail. Choose a processor with a deep and rich history supporting direct
marketers.
9.
Reporting
Cash
is the life’s-blood of your business.
Maximizing revenues means little, however, if there’s no competent means
to account for your success. Payment
processors, especially those operating some of the older platforms, are
notorious for stagnant, hard-to-understand paper reports. What’s worse, these less-than-ideal reports
are usually provided on a monthly basis, weekly at most. In today’s world of technological innovation,
merchants should expect nothing less than real-time, Web-based reporting. At a minimum, these reports should include
summary and detail reports surrounding: 1) authorization successes, 2)
authorization failures (with reason codes), 3) sales and refunds, 4)
Interchange qualifications (downgrades), 5) chargebacks, 6) fees from all of
the players, and 7) merchant submissions and corresponding bank deposit
reconciliations. Ideally, all of these
reports should be exportable in .xls or .csv format. Given a
proper reporting system, it should take a clerk from a medium sized company no
more than 90 minutes to fully reconcile a month’s worth of credit card
activity.
10.
Chargebacks
Chargebacks
represent one of the worst ways a transaction can go awry. They are typically indicative of unscrupulous
customers (fraud), dubious products, poor customer service or an inadequate
payment processor. Because Visa and
MasterCard are concerned about these issues, they have imposed rules limiting a
merchant’s percentage of allowed chargebacks to one percent (1%). When a merchant exceeds this threshold, they
begin receiving fines. If the problem
continues, the fines become hefty and the merchant can actually lose its right
to process the cards. While we will
treat fraud as a separate matter, it is valuable to discuss some of the other cases. In all of these remaining scenarios, payment
processors can play a decisive role in keeping the merchant out of trouble.
Selling
a dubious product? Well, you are not the
first to make millions of dollars on the Internet selling hair growth tonic! Simply put, working with the proper payment
processor can keep you in business. You
may not like what the processor requires, but good processors are generally
skilled at striking equilibrium between optimal sales and acceptable chargeback
levels. The same goes for merchants
selling good products with poor customer service. Processors can usually reduce frightening
chargeback levels by suggesting changes in refund policies and other customer
service processes. The merchant may not
like the medicine, but it sure beats going out of business. Given these facts, choosing the right payment
processor, can make the difference between life and death. If you have chargeback issues,
choose a payment processor experienced in such matters or add on a third party,
chargeback specialist such as Vindicia
or Verifi. Always be truthful with your processor
regarding your products, and customer service policies.
11.
Fraud
According
to CyberSource, a leading online
fraud-prevention company, on average merchants lost approximately 1.4% of revenues
to fraud in 2008. The good news is that
this is an average, and a lot of merchants employ tactics that lower fraud
rates to less than 0.2%. Some merchants,
like sellers of electronic goods, are more susceptible to fraud. Other, like women’s clothing catalogs
experience very little fraud. Regardless
of your situation, there are two levels of fraud control tools at your disposal:
Intrinsic and external. Intrinsic
methods include schemes provided by the card Associations like Address
Verification Service (AVS), the Credit Card Security Code (CVV2, CVC, CID,
etc.), as well as PIN based solutions like Verified by Visa® and
SecureCode™ by MasterCard® Other intrinsic methods might include fraud
scoring based on order characteristics (value usually being one parameter). Merchants can also externalize their fraud
detection function to companies like CyberSource,
41st Parameter, and Accertify.
These companies utilize a variety of methods to combat fraud including sophisticated
risk scoring, heuristics, and negative files.
If
you are not certain how fraud is impacting your company, chargeback rates are a
good indicator. CB rates between 0 and
0.4% usually represent minimal fraud activity, and are best dealt with
intrinsic methods. CB rates between
0.04% and 0.7% may indicated moderate fraud and may dealt with using intrinsic
methods, external solutions or a combination of both. CB rate above 0.7% should be considered high,
and the merchant would be flirting closely with the Associations’ 1%
limit. In this case merchants should use
all available methods to abate the high fraud rate. In
every case, merchants should work closely with their processer to minimize fraud
risk in particular and chargebacks in general.
