Leveraging Analytics & Managing Debit & Credit Card Merchant Fees Webinar
This video is from the Proformative webinar "Manage the Cost of Debit & Credit Card Payments" held on February 7, 2013. The webinar features a presentation from Anand Goel, Founder, Optimized Payments Consulting.
The cost of processing credit and debit card payments has been increasing over the last decade. What are the long-term implications and strategies for companies in effectively managing their electronic payment acceptance costs as customers increasingly demand multiple vehicles to remit electronic payments?
The Managing Debit & Credit Card Merchant Fees webinar video also includes a discussion around the impact that the Durbin Amendment has in the arena of card processing costs, outline a revenue control framework to attendees so they can understand and implement a strategy to reduce the cost of credit/debit card payments.
Managing Debit & Credit Card Merchant Fees Webinar
Anand Goel: "As John mentioned, we have a lot of information to share with you. My personal goal for the presentation today is for you to walk away with at least one actionable nugget of information that you can use within your organization. Let’s get started.
The objective of today’s call, we’re going to be talking about electronic payments, is specifically to understand the impact of the Durbin amendment and learn of a five-step framework that you can use to better understand and manage the cost of card payments.
I’m going to give you a one-page overview of Optimized Payments Consulting, talk about interchange, discuss the Durbin impact on debit cards, and then how you can use analytics within your own organization with some simple tools, to simplify interchange. We’ll discuss a five-step process, followed by a Q and A.
As John had mentioned, if, during the presentation, if anything is not clear or you want something to be elaborated on, make sure you put in your questions so we can address them at the end of the presentation.
John, I’m going to turn it over to you for our first polling question.
John Kogan: Yep. That was quick. We’re going to jump right into our first polling question, which I’m launching right now. You should see it momentarily. “What is the biggest challenge, or challenges, when it comes to managing your card payments? You’ll see the selections there. I’ll leave this up for about 30 seconds. If we have time, we’ll actually turn this around and allow Anand some time to comment on this during the Q and A.
I would love everyone to participate even if you’re not here for
Okay. I’ll close that down. We’ll go ahead and get back to Anand. Please.
Anand Goel: Great. Thank you. Quick summary of who we are. We started our firm about five and half years ago, we’re based in Atlanta. Our team is consistent of pros from the payments industry. What we do is offer consulting services to merchants to really help them understand and lower the cost of electronic payments. Unlike many companies in the industry, we don’t sell card-processing services, we’re purely consultants.
We work with a lot of Fortune 1,000 companies, representing retail, Internet, B2B, healthcare and telecom sectors.
Let’s dive into the presentation. When folks in
Interchange is defined as the wholesale price charged by the card networks, Visa, MasterCard and Discover, for settling a credit or a debit card transaction. All the interchange that you, as merchants pay, go to the bank that issued that specific card. For example, if you use a Citibank Visa credit card at a Macy’s department store, and you charge $100, the interchange rate of let’s say, CPS retail, which equates to $1.61 on a $100 transaction, goes to Citibank because they issued the credit card.
You can find the latest interchange tables on Visa and MasterCard’s websites. If you want a Discover interchange table, Discover doesn’t publish it on their website, but you can get it through your acquirer or your [ISA].
For issuers, issuing banks, interchange represents a significant amount of revenue and it pays for the cost of money because when you use a credit card, you’re borrowing funds today and, if you pay it when you get your statement, within the allotted three to four weeks, you pay zero interest. Basically, the bank is giving you an interest free loan and interchange pays for the cost of money.
Secondly, it pays for rewards programs. A lot of us use cards because we get miles points and those that value is paid out of the revenue that they collect from interchange. An interchange also pays for internal costs, including fraud, and interchange represents a significant amount of profits for a lot of card issuers. So that's interchange.
One of the questions that we get asked very often is when you do go download a Visa, MasterCard interchange table, is why are there so many interchange rates? If you combine the three networks together you're going to find there are over 700 interchange categories and they have proliferated over the years and there are a lot of macro market considerations and micro merchant specific considerations that have given a risen to so many interchange rates. Let me touch on a few.
The big market considerations are there's competition amongst the card networks. With Visa and MasterCard they're always trying to get banks to issue their branded cards, but in that competition they're always creating new rates or increasing rates so banks will issue their cards that have higher rates. So it's kind of a perverse competition. Instead of that competition driving down pricing, that competition actually causes interchange rates to go up as they have over the last couple of decades.
So there are also card networking issuer strategies as the card networks try to go after new verticals so you can think about over the last decade Visa and MasterCard made attempts to go after small ticket transactions or government transactions or
In order to get new industries, verticals, to accept card acceptance, they offer lower attractive rates. So that causes new rates to be built out. And also emerging technologies, like ENV and mobile which will cause an additional set of rates to be coming out in the marketplace. There is also legislation. The most recent one being the Durbin amendment which took affect October of 2010, which caused the regulated debit interchange rates to be set at five basis points and $0.21 and that created a new set of interchange rates and then you have unregulated, the old debit interchange rates. The legislation plays a part here.
Editor's Note: When you get a chance, take a quick look at some of the many other recorded webinars in Proformative's video library, such as: Business Analytics For Corporate Finance Webinar, Corporate Financial Planning Webinar, Career Networking Webinar, Budgeting & Planning Webinar and Netsuite Webinar, to name just a few.
So those are some of the macro considerations. Then you can get into the micro considerations which cause interchange rates to proliferate. Like what industry are merchants in? There's a set of interchange rates for airlines, restaurants, T&E merchants, business-to-business merchants, regular retailers, e-commerce. But the type of merchant does matter and type of card also. Just because it's a Visa card, all Visa cards are not the same. You could have a Visa traditional card, rewards card, initial card, debit card, corporate card. So the type of card makes a difference and, then, obviously, the method of entry. Was the card swiped or keyed? Keyed transactions typically have a higher interchange rate, than swiped cards because they carry more
The last category is . . . the last consideration is risk and adherence to compliance standards. So those are things like authorization versus settlement timing. If you're a retailer, you have until the end of the day to settle all of your transactions that were authorized that day. If you delay for a day or two, you will pay higher interchange fees and, then, your authorization amounts have to match your settlement amounts, with the exception of certain industries where you have checks. But outside of those industries, the auth amount and the settlement amount have to match. If it don't, you end up paying higher fees.
Then you have address verification schemes that Visa uses for keyed or card [inaudible 00:09:27] transactions. Commercial card elements like level 2 and level 3 for business cards. Of all the macro and micro considerations that you as a merchant understands, you don't really have a lot of control over any of these in terms of influencing interchange, with the exception of this last category, risk and adherence to compliance [inaudible 00:09:49]. This is an area where you can understand and optimize your internal processes to make sure that you're getting the best interchange rate available."
End partial; Managing Debit & Credit Card Merchant Fees Webinar