We’ve all been there; a promotional cable advertisement is received in the mail that is far more competitive than the rates we currently pay. At first, we wave it off, but curiosity gets the best of us, and as we read through our last few monthly statements, we realize the rates we’re receiving no longer resemble what we signed up for.
Over time, the same thing can happen to you with your payment processing expenses. You may find that fees from your vendors have changed, increased or multiplied as time passes from the date you signed up. For now, let’s focus on just credit card fees and not all the additional costs from other payment vendors.
In the order of importance, here are three tips I always provide businesses to ensure they are enjoying the best rates for their credit card payments. It’s important to note that the opportunities outlined only apply if your acquirer, sometimes referred to as a processor, offer an interchange-plus pricing option. In a simplified pricing model (i.e. 2.9% + $0.30), the opportunity for the savings defined below would benefit your processor rather than you.
For each card brand that you accept, there is a price range set by the card brands, Visa, MasterCard, American Express and Discover, which varies depending on how the card information is collected, the card type used, the data collected at the point of purchase and processed with the transaction, as well as the time between the authorization and capture. These price ranges established by each of the card brands are collectively referred to as interchange. We reference the least cost interchange rate a card type can qualify for as the “target Interchange”. As mentioned already, there are qualifying criteria required to realize the target interchange. The combination of card data, type, etc., and interchange qualification levels translates into a dizzying number of unique interchange price categories. Why should you care? The interchange price directly impacts the cost of processing credit cards. Being aware of the outlined relationships and their impact on expense makes focusing on how to achieve the target interchange a key to managing processing expenses.
In a little more detail, to achieve the target interchange price for a payment transaction, the card brands require that any data processed with the transaction is aligned to the method in which a transaction is initiated, whether the card was physically present and the card information was collected via swipe, dip, or keyed. Required information may also include the CVV (Card Verification Value), the first line of the cardholder’s address and zip for Address Verification Service (AVS) as well as purchase level details such as the items being purchased, the purchase order number, and tax rate. Even the MCC (Merchant Classification Code) assigned to you by the underwriter of your merchant account, will drive target interchange. A primary driver of interchange cost is the first touch and collection of credit card data, usually your checkout solution or payment gateway. When the correct data is not passed with a transaction, the transaction will downgrade to another (more expensive) interchange level or category. It is very easy for the endpoint solution to be out of sync with changes made by the card brands, new interchange incentive programs, and the rules to follow in order to minimize costs. Outside of interchange costs, there are other expenses that may be incurred based on how the transaction is processed. One example is the misuse of authorization fee, which requires any outstanding authorization not used to be released via an authorization reversal. Make sure, if you are shipping or delivering goods and services sometime after the credit card authorization is collected, that the vendor you use, supports this feature.
Requesting an interchange analysis from your current provider may shed light on the opportunity for potential savings via target interchange qualification.
More importantly, ask the question as to how you can qualify your transactions for the target interchange price. Some companies perform really well in configuring and coordinating the technology needed to minimize your company’s credit card expenses. Don’t miss out on cool tools or the ability to pass along the data needed to reduce costs through better-qualified transactions.
Older technology and the endpoint solution used, may not understand the card type used and not prompt for or pass for instance a purchase order number, just one data point required to achieve the target interchange on purchase and business cards. If you are not sending this data, the target interchange for a Business-2-Business (B2B) transaction is missed.
Why is this important? Well, 90% of your credit card acceptance expense is made up of interchange and card assessments, while approximately 10% of the cost is attributed to processor expense.
In many cases, the expense due to downgraded transactions can dwarf any other processing expense. Interchange pricing is typically quoted in basis points. Let’s take the example of business and purchasing cards, and for every qualifying B2B transaction you accept, you could be paying up to 75 basis points in downgrade fees. This creates an opportunity to save thousands of dollars depending on your card type mix and interchange qualification level.
There are endpoint solutions, payment gateways and integrated payments providers available in the market that use updated technology, and have an understanding of the interchange price categories to identify and pass the qualifying bits of data needed to ensure that your card acceptance expense is optimized. These types of companies can dramatically reduce the fees associated with interchange downgrades and overall payment processing expense.
Certain industries qualify for attractive target interchange categories, as the card brands wish to incentivize growth in specific industries, including Nonprofits and Service industries. Properly configuring your account to take advantage of these incentives can save a considerable amount of money in card acceptance expense. For instance, Nonprofit organizations qualify for target interchange pricing roughly .30% less than a typical eCommerce business. This equals 30 cents on every hundred dollars processed and can quickly add up! You may be surprised to learn American Express also offers incentivized rates for certain industries as well. Ask questions, find out if you qualify for any incentive programs and confirm you’re correctly configured for your business type and card acceptance.
The final element is the acquirer’s, remember sometimes referred to as a processor, pricing proposal. Basis points, monthly fees, and transaction costs make up the last 10% of the card acceptance expense. When reviewing your proposal, look for fees such as “club”, “portal” or “security“ (outside of PCI) as these may represent hidden costs that add up quickly. Review your gateway and checkout statements as well. These costs may be billed separately and could represent a layer of expense that can be eliminated by using an integrated payments provider, saving you at least 5 to 10 cents on every transaction.
Completing a pricing review that includes the tips above, is a great start to managing your card acceptance expense. Click here to schedule a free statement review or to start a testing Qualpay.
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This content was originally published here.