Posted by Sharon Robb on Wed, Jul 28, 2010 @ 11:20 AM
On July 21st 2010 President Obama signed into law, Barney Franks Restoring American Financial Stability Act of 2010. The purpose of the bill is to protect American consumers from abusive financial practices and create accountability and transparency in our financial systems. Some of the specifics of the Act can be read from the actual bill (link above) or Wikipedia already offers a solid outline on the regulatory agency's and issues - check it out.
Tucked neatly inside the bill is what interests us - the Durbin Amendment . In basic terms, the bill amendment gives the Federal Reserve final say on whether or not debit card interchange fees proposed by Visa and MasterCard are reasonable and proportional to the actual processing costs. It would also allow merchants to offer discounts for non-card purchases as well as the power to set minimum/maximum card purchase amounts. Not surprisingly the amendment was strongly supported by our largest retailers and merchant groups, claiming their lower costs would also benefit the consumers via a lower cost of goods.
Like the rest of the law - it will take time to clarify, study and then finally implement - and the federal government has a year to determine what reasonable and proportional is. Banks with assets under $10 billion are exempt from the regulation.
Advocates of the amendment often refer to all interchange as a "hidden tax", but interchange was introduced with credit cards and why is this cost of doing business different from the cost of utilities, shipping, and various overhead that we know from business 101 is incorporated into the cost of goods sold? A May 2010 article in the WSJ was the first I've read lambasting what we tend to forget - cards have been a coup for retailers and consumers. The consumer gets protection in the case of a bad purchase or return policy, rewards, efficient tracking and reporting on purchases, payment convenience and the retailer increases sales, reduces theft at the register, limits fraudulent checks, etc. There ARE benefits.
So what's going to happen? the fall out as it were? only time will tell but there are lots of opinions out there, some pro the regulation, some not so much.
No one knows for sure but here's what's being bandied about -
- Merchants - will set minimum purchase amounts for consumers to use cards, may offer cash discounts or charge a surcharge to use a credit card (that's gonna hurt), and will see lower processing costs for debit cards if the Fed's say current rates are too high. Will savings be passed along to the consumer/buyer - most guess no.
- Banks - have billions in revenue at stake that may be lost. If this happens chances are consumers will see an uptick in other fees - checking accounts, annual credit and even debit card fees, etc. Rewards programs could be eliminated. Banks are not non-profit entitys - if they lose money in one area - they will look to create it in others. The consumer will pay the price.
- Buyers/Consumers - may lose the ability to make low end purchases with a debit card (under $10? under $20?), will see an increase in overall banking fees, credit could get tighter if banks tighten reins because their capital base is squeezed, more limited payment options.
- Community Banks and Credit Unions - not included in the regulation if revenues are under $10 billion, were not pro its passage. They worry that merchants will find a way to not accept their cards at the POS because of the higher interchange costs and they will not be competitive in issuing debit cards - may lose customers.
Most surmise that the only group that will benefit of course, are merchants, whose cost of accepting debit cards will likely go down. We'll see.
In the meantime, we are in agreement with a recent June article by Kate Fitzgerald in ISO & Agent Weekly - an industry rag - where she quotes a report by the Mercator Advisory Group -
"The amendment "appears to largely view debit payments as though they were a 'public utility,' failing to recognize the substantial innovations and competition occurring in this area surrounding fraud and security needs, risk assessment, timely settlement, guaranteed payment, and other social benefits." Interchange represents the cost of a business to business transaction in an remarkably competitive market with rapid innovation. Who should determine this cost? Who determines your cost of goods? your services?
Whatever happens, we'll let you know....keep an eye on that bank account - associated costs may grow next year, and for gosh sakes carry cash... in some instances, it may become your only payment option. One step forward, two steps back?
Posted by Sharon Robb on Mon, Jun 14, 2010 @ 03:31 PM
K - we promised more on this and Dorsey and Square are moving along in Beta, press, pricing and more - let's talk!
First - take a look at our first blog re Dorsey's Square - the card reader, the premise and the promise of a very unique credit card processing product - with your iPhone or Droid. Awesome. What's new since our first writing...
Pricing - it's out. Currently Square is charging 2.75% of the sale and 15 cents/transaction for card present and 3.75% for keyed transactions (card not present - always more costly). As far as standard industry pricing goes - the swiped fee is high, the keyed is high, the transaction cost is pretty average. Square does not take into account standard industry discount pricing (qual, mid qual and non qual). No costs for payment gateways though, or PCI, statements or monthly minimums - attractive...if you are a merchant with low processing volume.
A recent Fast Company article by Noah Robischon touts the device as an evolution and "champion" in the big bad credit card processing industry (we suffer this indignity a lot but I like this rag...must they???). We AGREE with Fast Company - we like the product - it's cool and of a new era but take umbrage with a few liberties in the article and well, portions of the Square site and claims.
The article -
- The "disruption that could be caused by Square in the convoluted credit card system". Ah convoluted - agreed - we'd like things (i.e. all those interchange rates) to be simpler (like taxes maybe?) but credit card system? card issuing and acceptance are far from one and the same - vague terms like these are confusing and muddy the waters.
- "the card company"...same thing. This is? Visa? MasterCard? the issuing bank? the ISO (independent sales organization?) - all different interests and roles.
- Merchant Fees and chargebacks are deducted at the month end making it difficult for businesses to gauge cash flow? (Square settles daily) Um, anytime a merchant likes he can opt for daily assessments, in fact, if you have lousy credit the processor will insist - it's not a plus and inhibits cash flow. Why pay daily when you can divy up at the months end?) - and todays processors give merchants 24/7 real time access to the daily details of their transactions, chargebacks, sales volume, and costs - todays merchant is more savvy than Robischon gives credit and so is the big bad processor.
- As a "result of the financial crisis, more and more of a microscope is being placed on this industry". The scrutiny of interchange has rightly been in place for a long time - long before the financial crisis caused in large part by the subprime housing debacle.
- Square has a more transparent pricing alternative. Since Visa and Mastercard went public - wholesale pricing has been available to every size merchant - it doesn't get any more transparent than cost plus.
- A Free "reader" - don't know a merchant account provider today that isn't giving away equipment - old hat.
Don't get me wrong - we like the concept of Square! but with 1000 "Beta" users already, I doubt Visa or MasterCard is sweating bullets that this is what will evolutionize electronic payments. We still maintain that the concept and product serves a unique market - P2P payments and the small volume merchant. Neat product - disappointing article.
The Square site and cost comparisons to a "typical merchant account" - oh come on - have you googled merchant account lately??
- No contracts - pulllleeeaze - 17 pages of terms and conditions covering underwriting, card network rules, reserves, PSA (payment services agreement) that must be signed prior to processing, no guarantee or warranty that service will work or be available and well, so on.
- Free Reader - already addressed this - you want a free one - ask any merchant provider - no problem. You want a free, wireless credit card processing terminal? - they'll probably give you that too....
- Free setup - Google please - we've been providing free applications and set up for YEARS and so is just about everyone else.
- Card present discount rate??? 1.79 quoted by Fast Company as industry average - close - pretty ballsy of Dorsey to claim 2.9%.!
Lastly, when you don't get funded or your money is held in reserve - who ya gonna call? Not Square - I guess you can email though. I can think of at least a million merchants who definitely might not like that.
Come on guys - we like your product... it is techie, gadgety cool - but let's make sure we put it ALL out there. Squares terms and conditions (contracts in laymen terms) also notes transaction limits on the site - but we can't find'em - crucial to processing merchants....don't want to get that big order only to have the funds held because of going over the established "limits".
We don't like the complexity of the industry any more than our merchants do (try training new staff!) - but the issue is not as black and white as some such as Robischon would make it out to be.
Posted by Sharon Robb on Sat, Feb 27, 2010 @ 09:10 AM
And by chaos you know what I mean - the financial debacle in the US, right now. The Dow's up -but for how long? Lending is non-existent, bankers are still drawing some ah, unusual salaries and bonuses and now Barney Frank of the House Financial Services Committee says the issue of interchange fees is not on the 2010 agenda.
Arggghhhh. That's for my merchant friends. I can tell by the way they hang up when we call them to market our electronic payment services that they are confused about what we do....we don't make money on interchange. We do collect interchange fees for card issuing banks for each credit or debit card transaction run by our merchants. We PROCESS the transaction. Whew! just wanted to clarify... again.
If you're still confused about interchange revisit our blog on the issue -you're certainly not alone.
What is of concern is the rising cost of these fees - set by VISA and MasterCard and paid to the banks that issue their branded cards - for the merchants that pay them. Merchants and advocacy groups have been pushing for years for interchange fee regulation and caps - claiming the fees force them to raise the costs of their goods and services to the consumer. Maybe.
Unfortunately the issue is complex. Will the regulation of fees really mean a cost reduction on the consumer end of things? A November 2009 article in the New York Times examines the outcome of just such an act when the Australian government stepped up in 2003, cutting merchant fees in half. The results have been predictable - tough to sort through.
While merchants are paying less - it would seem sometimes the consumer is paying more - with less available credit, fewer or shrunken rewards programs (no!), higher annual credit card fees, and shorter time periods before the accumulation of interest on balances.
More bizarre is the unexpected surcharges by Australian retailers and merchants to the consumer that uses a credit card (not allowed currently by the card networks but with deregulation....) - and this after their own costs have been lowered. Not only are some merchants covering costs with the surcharges, some are making a profit. Now that's a fine how do you do!
Yes, US banks make billions from interchange fees. They have lobbied hard against government intervention and claim that the consumer will experience rising costs with credit card use and fewer benefits should the fees be capped or regulated. Again, maybe.
Of course last year keep in mind - a new trend developed that will no doubt ooze into 2010, maybe even beyond - record losses. In yet another NY Times article last year, Banks Brace for Credit Card Write Offs, authors Dash and Martin tout estimates of between 82.4 to 186 billion in overall losses for card issuing banks, as the US continues to shed jobs and with that, the ability of Americans to pay their credit card bills.
What to believe? What to do?
Only that at the very least, for 2010 anyway - interchange fees will remain intact - plan on it. Merchants should be aware of costs and educate themselves on how to implement cost saving processing methods. The credit card processing industry seems hell bent on ever increasing complexity.
To do this, you need an electronic payments professional you can count on, not entry level sales staff. That's just the way it is. ASK your provider...how long have you been in this industry? Review your methods and pricing, secure a professional relationship and focus on what you do best - you're own products and services.
Posted by Sharon Robb on Mon, Dec 14, 2009 @ 03:09 PM
So many numbers!
Remember we've defined interchange - simple. Then we moved on to interchange cost plus pricing - also referred to as "pass through" or even wholesale pricing. This model of pricing credit card transactions remember - passes on the true wholesale cost of the transaction to the merchant - you can see it. It would be like seeing how much that Dell computer cost Best Buy - now you know the markup. Pretty sweet.
Merchants seem to be troubled by the fact though, that Visa and MasterCard have upwards of 150 or more different interchange rates based on how the credit card is processed, risk, type of card, type of business, etc.
We ask you to keep in mind however, that certainly most merchants do not encounter this many different interchange rates on their monthly statement. In fact the average merchant may see only 8-10 different interchange rates on their typical monthly statement from their payment processor. Not all that different from a statement with tiered pricing - just less costly!
Very clear cut really. Very dependable. The most cost effective, transparent pricing model in the industry, recommended by merchant advocates everywhere.
Posted by Sharon Robb on Mon, Jun 29, 2009 @ 08:59 AM
Was the Merchant Plight Ignored in the 2009 Credit Card Act?
In May when the Credit Card Accountability Responsibility and Disclosure Act of 2009 was signed into law some folks were disappointed by the Act's lack of attention to the subject of interchange. Senator Dodd, one of the bill's creators noted that the issue of interchange is convoluted and would have sunk the bill - and we agree - one step at a time.
Originally the bill had several provisions that would have supposedly provided some interchange fee relief to merchants such as allowing merchants to offer discounts for cash, check or debit card purchases (this provision was excluded from the act).
What the Act did include was a requirement that the GAO (Government Accounting Office) conduct an in depth study of interchange - due this fall. A number of analysts seem to agree - eventually government will get involved in regulating interchange, something merchants have been pushing for for some time.
Bruce Cundiff - a research director at Javelin Strategy & Research Inc goes further than Dodd and notes that not only is interchange a complex system but that upsetting the balance could have unintended negative consequences for all players - including card issuers, merchants and consumers. Michelle Singletary of the Washington Post put together a thoughtful article on the privilege of paying with plastic and we at XBS agree with her reservations, that at this stage of the game our customers will forgo the convenience of paying with cards - doubtful.
A study will be a good thing of course. Interestingly enough the GAO did a study last year that touted the benefits the federal government had experienced by accepting cards at various government agencies (fewer bad checks, reduced theft). The study also noted that other countries who had successfully capped interchange fees did not necessarily show that the savings were passed along to the consumer by merchants as is often alluded to.
So what gives? Is interchange fair? I've got free checking for both my business and personal checking account so you do have to wonder - how are issuing banks meant to make money? are they allowed to make money? who decides how much is too much? Why are interchange and processing costs not considered a fair cost of doing business - much like utilities, rent, payroll, marketing and advertising? It's confusing.
We are surprised to read that interchange fees are still referred to as hidden fees by the Merchants Payments Coalition since both VISA and MasterCard now publish these fees on their sites. Do consumers REALLY want to know? We have merchants who don't even want to know!
XBS still recommends the merchants best option for fair costs in payment processing is interchange cost plus pricing while the brouhaha continues. Remember, this pricing method gives the merchant price transparency (merchant is given the wholesale cost of the transaction) which is a pretty nice feature. I can't think of anything I buy, anywhere from anyone - that provides me this advantage.
We'll take a look at some of the proposed legislation in the upcoming months - and how it may or may not benefit those involved - which is all of us. In the meantime, please contact us for a no cost evaluation of your processing statement and an explanation of how our pricing recommendations can benefit your company.
Posted by Sharon Robb on Wed, Mar 11, 2009 @ 07:09 AM
Merchants are the big winners on the interchange cost plus pricing model because it provides price transparency. But what exactly IS interchange cost plus?
Remember we have defined interchange and the basic tiered pricing model that most small to mid size businesses have been placed on for years by their merchant account providers. Keep in mind also, that until just a few years ago - VISA and MasterCard did not publish interchange rates for merchants to see.
With the wholesale cost of each and every type of transaction (some 150 to 200) now public information, as well as the assessments added on by bankcard (VISA and MasterCard) - all businesses can expect or demand - a cost plus pricing option.
Interchange plus or "pass through pricing" has three components -
- Interchange - is the wholesale cost of a transaction. These rates change several times a year but are always published on both the VISA and MasterCard websites. In addition XBS always provides the most up to date pricing on it's site for the most common interchange categories.
- Assessments - the very small percentage of the transaction that goes directly to VISA and Mastercard. Only .000925 for VISA and .00095 for MC - about 9 cents per $100. This pricing is fixed for ALL merchants in the USA.
- Delivery and Risk - above interchange and assessments - this is the flat rate charged by your merchant account provider for all costs and services including initial setup, ongoing maintenance and communications, the latest technology, fraud protection, risk recording, fund transfer, underwriting, etc.
Now the merchant can see the exact cost of each and every transaction and knows exactly what is being paid the provider for delivery and risk - a cost that never changes. The wholesale cost or interchange rate, which often goes up just incrementally with a downgrade - depending on transaction type - is passed on directly to the merchant and EACH transaction is processed at the lowest possible rate/cost.
In your tiered model - transaction costs often "swing" a little more wildly when downgraded depending on what rates your provider gave you for mid and non qualified transactions. While processing methods and strategies can work to reduce downgrades in tiered pricing - it will never reduce costs to interchange cost plus levels. Food for thought.
Posted by Sharon Robb on Tue, Mar 03, 2009 @ 07:43 AM
Some of you have asked us about the interchange cost plus pricing we recommend - and if it's so great, WHY then are we still offering tiered plans.? GREAT question.
First be sure and revisit our interchange defined blog and recognize - we only scraped the surface here. Let's be honest - some folks just don't want to know, can't bear the depth of the topic (we feel the same way) or can't/won't give us the time required to vet the whole thing - bigger problems I guess. It only takes 15 minutes of interchange talk before the merchants eyes glaze over (10 for me).
That being said - we don't walk away from merchants who don't want to change. The tiered pricing plan was developed to decrease the complexity of interchange - though in reality it created a loophole for providers to make a substantial profit on the often downgraded transactions. We provide this option paired with merchant application entry and terminal programming that will still provide the merchant the best opportunity to process at qualified rates.
Posted by Sharon Robb on Mon, Feb 16, 2009 @ 09:10 AM
We launched our Processing Profitably newsletter in March and started right in on the subject of interchange - what it is- and how it impacts the merchants processing costs. At the risk of repeating myself - I'm going to revisit the subject here -for you - and not just once, because it can be a real challenge to understand - it's bizarre - and as you may or may not know , the pricing method we recommend is bound tightly to the concept.
Definition
Interchange is the cost associated with processing a Visa or MasterCard, and now, DISCOVER card transaction that defines the percentage of funds from the transaction (sale) that will go to the bank that issued the credit card. Visa and MasterCard (the governing bodies - deserving of a whole blog unto themselves and for lack of a better word) adds a really, really small percentage fee ( .0009 and called assessments) on top of the interchange rate - to complete the true wholesale cost of the transaction. Interchange and assessment rates are non-negotiable.
Where the money goes
Your merchant account provider marks up the wholesale interchange rates and provides you, the merchant with credit card processing services. The majority of the fees go to the issuing bank , teeny slice to VISA/MasterCard, and the balance to the providers delivering the service.
Variables that impact the interchange "rate"
Interchange rates are established by, VISA and MASTERCARD (and again, now DISCOVER). It is a complex set of rules that determines transaction cost based on the type of card that is used by your customer (and there are A LOT of different card types my friend) and the method by which the card was processed, i.e. keyed or swiped? pin entered or signature with that debit card? Even the ticket price of the sale or your industry SIC code can impact the interchange rate - thus processing cost. In fact there are almost 200 different interchange rates that you could be charged, based on this, that or the other regarding your sale/transaction.
Uncle Sam is watching
As you might imagine, this interchange thing is gaining scrutiny at all government levels with a growing level of discomfort due to its complexity and overall "murkiness". Nobody likes murkiness when it comes to their financial well being.
One point to be taken from this complex pricing fiasco is that the merchant (you) has little or no control as to whether your sale will be processed at qualified, mid-qualified or non-qualified rates. We'll examine then, other ways to take control of your processing costs, such as interchange cost plus pricing.