Explaining credit card interchange plans

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.

Preventing Credit Card Fraud

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.