by Michael Dattoma
Q: Can you explain credit card interchange plans and if they can save me money? I am currently being charged different rate tiers (such as Qualified, Mid-Qualified, and Non-Qualified rates) and my fees seem to keep going up each year. What is my best course of action?
A: Once upon a time, credit card processors created an innocent-sounding system called “bucketing” or tiered plans. That is what you are on currently. All credit card transactions were lumped into three or four neat little groups (buckets), and a corresponding rate was assigned to each. Today, the most common buckets are qualified (if you swipe a card), mid-qualified (if you key-in a card and perform AVS (Address Verification), and non-qualified transactions. (Downgrades for no AVS, not settling on a timely basis, or other penalties.)
So what determines the rates in these buckets? This is where you see how these plans work against you and why your fees are so high. Neither Visa nor MasterCard regulates the bucketing system—which leaves it to the processing company to decide what goes in and out of every bucket. These classifications can vary from one deal to the next, and the processors don’t even have to disclose these terms in the contract you sign. The mark-ups on these plans can be massive, yet since most retailers credit card statements read like hieroglyphics, they go undetected.
Most merchants think bucketed systems are their only option, but some, like you, have discovered the secret of the nation’s largest retailers: the interchange pass-through rate structure.
Interchange rates are the prime rates or wholesale cost that processors pay to the issuing banks (which issue the credit cards to the consumer) that work with Visa and MasterCard. To this basic cost, processors add their fees and administrative assessments to arrive at your final rate. So let’s say you swipe a standard Visa credit card in your store. With interchange pricing, your cost for that transaction is the true interchange rate, or wholesale cost, plus whatever mark-up and per-item fee the processor adds on. Unlike the bucketed system, there are no buckets with completely arbitrary pricing — just one rate schedule for all transactions based on actual Visa/MC costs.
In truth, bucketed systems also have a built-in incentive for processors to downgrade your transactions to mid-qualified and non-qualified, charge higher rates and increase margin. When a card doesn’t swipe correctly or the wrong information is entered to verify the transaction, you pay more and the processor makes more. With interchange pricing, the processor doesn’t profit when problems arise. Your processor acts like a partner, not an adversary, and is much more likely to let you know about inefficiencies in your processing system.
As you can see it’s not just the rate that matters, it is the credit card structure that matters even more. Your qualified rate may look low to you, and easy to spot on your statement, but it is the underlying markups on downgrades and other hidden fees that can cause your effective, true rates, to balloon.
There is another credit card plan called bill back that looks like interchange, (because they break out the different interchange categories) but are really a hybrid of the bucketed rates and are a major red flag for hidden fees. In these plans you are charged a targeted rate, similar to a qualified rate, and then are charged arbitrary surcharges based on different interchange categories that are processed. This plan is the most onerous in that it includes the most hidden fees, with statements that are impossible to comprehend.
There is only one true, pure interchange plan, and that is an interchange pass-through plan. As I have explained, retailers that are not on an interchange pricing structure are most likely paying much higher costs on payment processing.
At first glance, interchange can be a little confusing, but you don’t need to be an expert to benefit from it. Once you are educated on the benefits, you will understand why an interchange pass-through credit card structure is the most advantageous for your business.
If you would like a deeper education on interchange pass-through send me an email and I will send you an overview of Interchange 101.
by Michael Dattoma
Q: Can you explain credit card interchange plans and if they can save me money? I am currently being charged different rate tiers (such as Qualified, Mid-Qualified, and Non-Qualified rates) and my fees seem to keep going up each year. What is my best course of action?
A: Once upon a time, credit card processors created an innocent-sounding system called “bucketing” or tiered plans. That is what you are on currently. All credit card transactions were lumped into three or four neat little groups (buckets), and a corresponding rate was assigned to each. Today, the most common buckets are qualified (if you swipe a card), mid-qualified (if you key-in a card and perform AVS (Address Verification), and non-qualified transactions. (Downgrades for no AVS, not settling on a timely basis, or other penalties.)
So what determines the rates in these buckets? This is where you see how these plans work against you and why your fees are so high. Neither Visa nor MasterCard regulates the bucketing system—which leaves it to the processing company to decide what goes in and out of every bucket. These classifications can vary from one deal to the next, and the processors don’t even have to disclose these terms in the contract you sign. The mark-ups on these plans can be massive, yet since most retailers credit card statements read like hieroglyphics, they go undetected.
Most merchants think bucketed systems are their only option, but some, like you, have discovered the secret of the nation’s largest retailers: the interchange pass-through rate structure.
Interchange rates are the prime rates or wholesale cost that processors pay to the issuing banks (which issue the credit cards to the consumer) that work with Visa and MasterCard. To this basic cost, processors add their fees and administrative assessments to arrive at your final rate. So let’s say you swipe a standard Visa credit card in your store. With interchange pricing, your cost for that transaction is the true interchange rate, or wholesale cost, plus whatever mark-up and per-item fee the processor adds on. Unlike the bucketed system, there are no buckets with completely arbitrary pricing — just one rate schedule for all transactions based on actual Visa/MC costs.
In truth, bucketed systems also have a built-in incentive for processors to downgrade your transactions to mid-qualified and non-qualified, charge higher rates and increase margin. When a card doesn’t swipe correctly or the wrong information is entered to verify the transaction, you pay more and the processor makes more. With interchange pricing, the processor doesn’t profit when problems arise. Your processor acts like a partner, not an adversary, and is much more likely to let you know about inefficiencies in your processing system.
As you can see it’s not just the rate that matters, it is the credit card structure that matters even more. Your qualified rate may look low to you, and easy to spot on your statement, but it is the underlying markups on downgrades and other hidden fees that can cause your effective, true rates, to balloon.
There is another credit card plan called bill back that looks like interchange, (because they break out the different interchange categories) but are really a hybrid of the bucketed rates and are a major red flag for hidden fees. In these plans you are charged a targeted rate, similar to a qualified rate, and then are charged arbitrary surcharges based on different interchange categories that are processed. This plan is the most onerous in that it includes the most hidden fees, with statements that are impossible to comprehend.
There is only one true, pure interchange plan, and that is an interchange pass-through plan. As I have explained, retailers that are not on an interchange pricing structure are most likely paying much higher costs on payment processing.
At first glance, interchange can be a little confusing, but you don’t need to be an expert to benefit from it. Once you are educated on the benefits, you will understand why an interchange pass-through credit card structure is the most advantageous for your business.
If you would like a deeper education on interchange pass-through send me an email and I will send you an overview of Interchange 101.
by Michael Dattoma
Q: I am trying to get a handle on how much time and effort I should spent in social media initiatives and what kind of return on investment I could expect. Frankly, it’s hard to know where to start. Any suggestions?
A: Social media is obviously is a hot topic today for retailers. There has never been a time in history where a retailer, without much capital, can fully engage with customers and potential customers at this level. When you think about it, fashion is inherently “social” so what a wonderful medium to play within to connect with customers.
These technologies are developing at such speed that it can be a bit daunting to determine how to best integrate social media into your marketing and branding efforts. There also seems to be a lot of debate on what to expect in terms of sales conversion from social media efforts and how to monetize the social media space.
First off, you want to ensure that you are properly harnessing the power of social media if you wish to benefit and control the way your business is perceived. All too often when social media is used, retailers think it is enough to simply sign up to a few social networks and then put them on autopilot. This is not an effective strategy. You will only get an ROI out of social media if you make the proper time investment, and put together a strategic plan on how to incorporate social media into your overall business plan.
As far as ROI and sales conversions, retailers should first step into the social media space to connect with their customers, and allow them to engage your brand, rather than focus solely on sales as a starting point. By doing so, social media can create a strong relationship with your customer and deeper brand loyalty, and that in turn will have an impact on sales.
Facebook and Twitter are the best social media platforms to build a social media strategy, Facebook being the 800 lb. gorilla. According to a research study published by ForSee, more than half of everyone that shops online uses Facebook, and of those online shoppers who engage in social media, more than 80% use Facebook.
Start with Facebook. Make sure you have someone to monitor it and post good, timely information. Promote it to your most loyal customers through your regular communications venues (emails, ads, stores, etc.) Use your Facebook page to post promotions and product information.
Think about what kind of content you can share to provide value and “buzz” to your audience. How can you create excitement around your business? The buzz phrase in social media is “content is king.” You need to develop content, even bite sized content that people like and see value in.
And remember, Facebook are Twitter require time commitments. Keep it fresh and answer your customers consistently and constantly. Before too long you will begin to harvest the revenue generation that comes from a well thought out, long term, social media strategy.
by Michael Dattoma
Q: I just read about the cap on debit card interchange, and I’m wondering how this will impact me as a five-store menswear chain. Will I see a significant drop in my fees? How will I be able to account for it?
A: The passage of this legislation was a huge victory for retailers, a $16 billion victory. First, a little background because we have been following this debit card legislation very closely.
This was a hotly contested battle between the retailers and the card-issuing banks. Debit cards generate fees of $16 billion for the banks annually. The Durbin Amendment, which was a piece of legislation added to the Dodd-Frank bill, sought to limit the interchange rates that banks could charge for debit from an average of 44 cents to 12 cents.
Interchange rates are the fees a bank charges to retailers when consumers use their credit or debit cards. The Durbin Amendment covered only debit card interchange where it was argued that banks enjoyed a windfall in fees, without the commensurate costs of issuing credit cards.
The banks made the case that a cap on fees would not give them a needed reserve to protect against debit card losses and provide the necessary risk management. It would therefore require them to limit the amount, or cap, what a consumer could put on a debit card, ultimately hurting the consumer.
In addition, the interchange fees funded the rewards program for debit cards. As a result of this legislation, many banks, such as Chase, are ending those rewards programs that had encouraged consumers to use these cards.
Last May, the Senate approved The Durbin Amendment by a 64-33 margin to cap the debit interchange fees, and the vote that took place last week, championed by Sen. Jon Tester (D-Montana), was a last attempt to delay the changes from going into effect to allow Fed to further analyze the potential impact. The banks failed to get the necessary 60 votes to make that happen, and the Federal Reserve Board will move forward to cap the charges banks can charge on debit interchange by July 21.
Now that the Interchange regulation on capping debit fees is official, what does it mean to you, the independent specialty retailer?
The first thing to understand is that any reduction in debit interchange doesn’t necessarily mean most merchants will realize these savings. As I discussed in a previous article, the majority of merchants are priced on a tiered credit card pricing structure (with a “swiped” qualified rate, a mid-qualified rate and a non-qualified rate). In a tiered-rate structure, individual interchange levels (such as debit) are not broken out but are bundled together, and as a result, retailers on this plan will not receive the penny for penny cost reduction the legislation provides.
So while the interchange fees for debit are being reduced by more than 70 percent, only a quarter to a half of the savings will most likely be passed on to merchants. The nation’s largest retailers, who had the lobbying heft in Washington to get this passed, and are all on interchange plans, will certainly get their share of the $16 billion. However, this will not be the case for the small and mid-size merchants that are still on tiered pricing plans.
In addition, there will be little motivation by processors, who enjoy high tiered-rate margins, to change clients to interchange pass-through and pass along the cost reductions. Since the fees on debit cards are coming down precipitously, the profit margin on tiered-rate programs will spike for processors using this structure. On a pure interchange pass-through plan, the savings all goes to the merchant, penny for penny. That means you need to make sure you get this structure in place for your business to benefit.
Another cautionary note is to be aware of faux interchange rate plans. There are programs disguised as interchange pass-through plans that are actually hybrids of both interchange and tiered-rate plans with sizable markups.
In an example of this type of interchange pricing, you would find interchange plus 20 basis points for a “qualified” transaction, but 50 basis points over interchange for a mid-qualified transaction and 100 basis points over interchange for anything they consider a non-qualified transaction. This goes against everything a true interchange program was designed to do, eliminate tiers and the large markups on credit card transactions.
So what actions should you take now in light of this legislation? Take a look at your most recent merchant statement and if you are not on a direct interchange pass-through pricing plan, make that a priority before the July 21st date when the Fed changes the fee structure. That will allow you to immediately benefit from the price reductions in debit, along with all the other financial benefits an interchange plan delivers over tiered pricing. (Again, see my previous article for benefits of interchange over tiered rate plans.
If you would like to discuss the benefits on interchange pass-through in more detail, e-mail me at michael@retailmerchantservices.com.
by Michael Dattoma
Q: I got hit with a few large chargebacks last year from fraudulent sales at both my store and on my website. Could you give me an update on all the ways I can prevent credit card fraud at my store and website so I can avoid those losses in the future?
A: Sure, fraud stings and we never want to make the same mistake twice. First, let’s make a distinction between Card Present and Card Not Presenttransactions in terms of fraud exposure. When a brick and mortar retailer accepts a credit card, it is swiped (Card Present), the charge is authorized, and the merchant will get paid, even if a stolen/fraudulent card is used.
Even if the card does not swipe at the point of sale (bad magnetic swipe), as long as you take a physical imprint of the card to prove the card holder was indeed “present,” you will be protected in a fraud situation.
However, liability for fraud shifts from the card issuer to the merchant for Card Not Present sales (mail order, telephone/fax order, and internet sales). The merchant is generally liable for credit card charge backs, even when the bank has authorized the transaction.
Credit card fraud is something that can never be completely eliminated, but rather something that must be managed through best practices at the merchant level. You must develop a delicate balance between using safeguards to prevent fraud and not creating too many hoops for customers to jump through.
Let’s focus on a few preventative methods and procedures that can you can perform to limit credit card fraud.
Just because you get an “Authorization” does not mean you are safe.
Authorization approval does not mean that the merchant is guaranteed payment. Approval only indicates that at the time the approval was issued, the card hasn’t been reported stolen or lost, and that the card credit limit has not been exceeded. If someone else is using the credit card number illegally, the card holder has a right to dispute the approved charges, i.e. chargebacks.
Always get an Address Verification (AVS).
Address Verification is a simple and easy to implement process to decrease your chances of accepting a stolen credit card. When you process a credit card transaction; make sure you capture the card holder’s billing address and zip code. Manual non-swipe (Internet and MOTO) transactions will require you to capture card holder information. However, card present (swipe) transactions will not. Once you capture the card holder’s billing address and zip code you’re ready to process the sale.
Always use Card Verification Methods (CVM).
Car Verification Value (CVV) is the three-digit code on the back of a credit card (four digits for American Express). Like AVS, CVV is entered at the point of sale. The card holder’s CVV code is verified by the card issuing bank when the credit card sale is being processed. If you do not receive a CVV match you should consider declining the transaction. Online merchants should make CVV a required field.
Since most fraudulent transactions result from stolen card numbers rather than the actual theft of the card, a customer that supplies this number is much more likely to be in possession of the credit card.
Be wary of different “Bill” and “Ship To” addresses.
Require anyone who uses a different “ship to” address to send a fax/email with their signature and credit card number authorizing the transaction. Use Google to search for the numeric street address, street name, and zip code.AnyWho.com integrates telephone numbers, maps, and e-mail addresses. Check for bogus billing addresses like 123 Main Street. Use resources likemaps.yahoo.com to see if the address can be verified. If the billing and shipping addresses are different, request telephone numbers for both addresses.
To ship or not to ship…Create your own e-commerce criteria or merchant rules.
Some e-commerce merchants feel this is the best method to catch fraud. The merchant sets up rules to stop or flag specific orders for review. For example, the merchant could set up rules to review all orders from a specific IP address, specific country or if a certain dollar amount is exceeded, or shipping to a specific address. This method may flag valid customers for review, but it will reduce repeat or pattern-specific types of fraud. If the IP address is dynamically assigned by an ISP, a legitimate order could be delayed or rejected.
Ask for copy of credit card and driver’s license.
When a credit card order is received by fax, phone or Web, require the customer to also fax/email copies of both sides of the credit card. This at least provides proof that the customer has possession of the credit card at the time of the order. You could also require a copy of their state-issued ID, or drivers license. It also provides additional proof the person authorized the purchase, preventing a chargeback.
Be extra careful with International Orders.
You must weigh the financial benefits of accepting international orders against the possibility of fraud. Merchants who always refuse any foreign orders could be missing potential good sales. The merchant also needs to perform their checks before orders are shipped.
It is very difficult to apprehend fraudsters or retrieve goods after they have left the country. Always require closer inspection for orders that being shipped to an international address. Pay more attention if the card or the shipping address is in an area prone to credit card fraud.
Check if mailing address is a mailbox or “ship-forward” service.
Fraudsters prefer to stay untraceable but still need to collect physical merchandise. One way is to use a public P.O. box, a private mailbox, or a drop shipment forwarding address as a temporary point of receiving. Never send merchandise to a public rented mailbox, a P.O. Box (except for those you identify as legitimate major companies by phoning their listed number), or shipping forwarder, because the actual location and identity of the receiver is undetectable.
The easiest and best technique: pick up the phone and call the customer.
If you’re suspicious, pick up the phone and call the customer to confirm the order. It will save you a lot of time, and money, in the long run. Calling customers is not only an excellent way to detect fraud, but it can also be a valuable part of your customer service. The telephone call also gives the merchant the opportunity to welcome the customer, answer their questions, and build a solid relationship.
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