INCREASE MARGINS BY NEGOTIATING
MERCHANT SERVICES CONTRACTS
Mike Barnidge – Credit Manager
Kim Stegmeir – SR Credit Analyst
Laura Jenkins – JR Credit Analyst
Also starring… Megan Schultz – Wells Fargo Merchant Services
Agenda for Today
• Explain the Merchant Process
• Explain the Fees
• Identify What is Changing
• Discuss Mobile Processing and Online Processing
• Step Briefly into PCI Compliance
• Present Negotiation Strategies and a Negotiated Offer
Merchant Services
Why is this important?
• 27% of all point of sales transactions are cash
• This is expected to drop to 23% by 2017
• 66% of all point of sale transactions are completed with a card
• 31% By Debit
• 29% By Credit Cards
• Remaining 6% by Gift Card
• Finally – Checks bring up the caboose at 7%
Virtual Currency is coming as well…
* Report by Javelin Strategy and Research - June 2012
Before we get overwhelmed and confused…
• Plastic is convenient
• Plastic drives up the overall ticket more than cash alone
• Plastic reduces your risk (theft)
• Plastic reduces your trips to the bank
• Plastic allows you to transact business in the way your customers want to
• Plastic is easy
Explaining the Game
• Who are the Players?
• What does the process look like?
• Who gets paid?
Who are the Players?
• Acquirer– Bank, Financial Institution or ind. Company that maintains a
merchant’s credit card processing relationship, receives all transactions from
merchant to be distributed to card issuers.
• Processer – data processing company that contracts with the Acquirers to
provide processing systems that connect with the interchange system for
clearing and settlement on behalf of Acquirer. Possible that the acquirer is its
own back end processor.
•Credit Card Network – Visa, Mastercard, Amex, Discover, Diners…
• Issuing Bank– The card association member that issued a payment card to
an individual and maintains that cardholder relationship.
Oh, yeah, and…
Buyer Presents Card for Purchase
Gateway
Swipe Machine/Internet Initiates Authorization
Gateway
Gateway Manages Information Traffic
Gateway
Issuing Bank Approves or Declines
Gateway
Response Provided to Buyer/Seller
Gateway
Exchange of Goods
Gateway
Exchange of Funds
Gateway
Final Steps
• Issuing Bank Sends funds to the Credit Card Network
• Credit Card Network passes those funds, through the processor, to the
Acquiring (Merchant’s) Bank.
• Acquirer deposits or “settles” the transaction into the merchant’s bank
account
Who wants to make some money?
Interchange + Assessments + Rate
Issuing
Bank
•Interchange Rate and Per Item Fee (1.54% + $0.10 example)
Cost of
Goods Sold
•Assessments ( .11% + 0.0185 example)
Credit Card
Network
Processor
Acquirer
•Communication Fee
•Batch Processing Fee
•Setup Fee
•Annual Fee
•Monthly Fee
•Statement Fee
$1.64
SG&A$0.13
$0.15
Profit $$$$
• Rate – Margin for Acquirer
$1.25
Effective
Total Effective: $3.17
Interchange + Assessments + Rate
Issuing
Bank
•Interchange Rate and Per Item Fee (1.54% + $0.10 example)
$1.64
•Assessments ( .11% + 0.0185 example)
$0.13
•Communication Fee
•Batch Processing Fee
$0.15
Credit Card
Network
Processor
Acquirer
•Setup Fee
•Annual Fee
•Monthly Fee
•Statement Fee
• Rate – Margin for Acquirer
$1.25
Effective
Total Effective: $3.17
Issuing
Bank
Interchange Rate and Per Item Fee (1.54% + $0.10 example)
• A fee paid between banks for the acceptance of card based transactions.
• Varies based on card type.
• Percentage + per item fee.
• Interchange updated twice a year.
Credit Card
Network
•
Assessments ( .11% + 0.0185 example)
• Charged by Visa, MasterCard, Amex, etc.
• Primary source of V/MC revenue (costs and margin)
• Basis Points on volume plus a per item fee for network access and brand usage
Process
or
•Network Communication Fee
•Batch Processing Fee
• Communication fees are the cost related to moving a sales transaction from
one point to another.
• Batching refers to settling the charges to your terminal by sending the
completed transactions for the day to the acquiring bank for payment.
• Make sure you “batch out” within 24 hours.
•Setup Fee
•Annual Fee
•Monthly Fee
Acquirer •Statement Fee
• Rate – Margin for Acquirer (0.15%)
• These fees vary significantly depending on the offer on hand. Make sure you
calculate these items on each offer to find the true effective rate!
• It’s a volume game. It also depends on the types of cards you accept.
• Make sure you are in the ballpark. Look at your Total Fees / your Total
Volume Processed.
Where Do I Negotiate?
Issuing
Bank
•Interchange Rate and Per Item Fee (1.54% + $0.10 example)
•Assessments ( .11% + 0.0185 example)
Credit Card
Network
Processor
Acquirer
•Communication Fee
•Batch Processing Fee
•Setup Fee
•Annual Fee
•Monthly Fee
•Statement Fee
•Rate – Margin for Acquirer
Focus Negotiations Here
Credit Card vs. Debit Card
CREDIT CARD
DEBIT CARD
•Buy now, pay later
•Transfers funds directly
•Higher interchange fees
•More risk
•Lower interchange fees
•Less risk
•In person transactions
•Pin-based (on-line)
•Online/over the phone
transactions
•Signature based (off-line)
The Durbin Amendment
•Went into effect October 1, 2011
•‘Reasonable and proportional’ debit card rates
•Introduce competition to the debit processing network
Senator Richard Durbin
What does this mean for YOU?
•Maximum interchange fee: 0.05% of the transaction value plus
$0.21 plus $0.01 for fraud prevention
(.0005 x $38.00) + $0.21 + $0.01 = $0.24
What does this mean for YOU?
•Minimum dollar amount on
credit card transactions
•Discounts to customers
•Two-tiered network option
CHECKOUT FEE
•As of January 21, 2013
•Surcharge on purchases made with Visa or MasterCard
credit cards
•Post a notice!!
•Amex and Discover?
STATES THAT PROHIBIT SURCHARGES
Things to Consider
•Surcharge could cover the swipe fees
•Additional expense for customers
•Consumers spend more $$$ with credit cards
•Your environment
Re-Cap
•The Durbin Amendment
•$10 minimum for credit card transactions
•Offer incentives
•THESE ARE BOTH LEGAL
•Checkout Fee
•Add surcharge for Visa/MasterCard
•10 States
•CREDIT CARD COMPANIES ARE NOT
READY
“Apple is trying to kill the cash register”
Mobile Processing – Square
•Square - $275 Monthly
•Under $400
• Monthly Limit of $21,000
• Manually Entered – 3.5% + $0.15
• Square - No Monthly
• 2.75% per transaction
• Next day deposits
• Transaction business with proper tax from
anywhere.
• Owner of Square created Twitter
Mobile Processing – Ebay/Paypal
• 2.7% Per Swipe
• Accept echecks
• Next day deposits
• Transaction business with proper tax from
anywhere.
Those Look Easy, Why Wouldn’t I Do That?
• The
larger the transaction, the more costly it is.
• Another vendor and signon?
• How are you going to update your POS?
Merchant OS
• Utilizes Innerfence Credit Card Terminal
• Updates root sales data
• Monthly fee based on plans
Quickbooks
• Utilizes Intuit GoPayment
• Connects to Quickbooks Financial
software
• Monthly fee based on plans
PCI Compliance
• Payment Card Industry Data Security Standards
• All companies that process, store, or transmit cc data information must maintain a
secure environment.
• Simple “No, No’s”
• “Just run the card you have on file.”
• Check your receipt
• Secure environment
• Every employee get’s a login to critical data
History’s Greatest Negotiator
“These aren’t the droids you are looking for”
Where Do I Negotiate?
•Authorization Request Fee
Issuing/Consumer
Bank
•Interchange Rate + Interchange Per Item Fee based on card type
Credit Card
Network
•Communication Fee
•Batch Processing Fee
Processor
Acquirer
•Setup Fee
•Annual Fee
•Monthly Fee
•Statement Fee
•Rate – Margin for Acquirer
Focus Negotiations Here
“Brand new to the business”
• Start by requesting 3 offers
• Drill down the offers to sniff out differences – where is money being made?
• Prove your numbers, don’t agree to goals. Sign up conservatively.
• Make customer service a priority because you will need help
“Just Completed My Rookie Contract”
• Analyze the most cost prohibitive items
• Analyze the convenience, address your concerns i.e. “This STUPID MACHINE!”
• Forecast your growth
• Be patient with the process
“You should be paying ME to put your machine
in my store”
• Know exactly what you need. Multi location? Online? Mobile?
• Shop your whole relationship.
• Spend your time wisely on negotiations.
• Ask for more…then ask again…then ask one more time. Is that your best
offer? Is that your lowest price? How do I get your lowest price?
The Unassuming
Negotiator
QBP Association Pricing Benefits
• Special Pricing achieved by leveraging the QBP Relationship
• Full range of processing options
• Partnership benefits – 24/7 support, next day funding with Wells Account
Pricing Summary
• No Set Up Fee
• No Annual Fee
• No Annual Compliance Support Fee
• No Monthly Minimum Processing Fee
Pricing Options
• Terminal Account – NO POS
• Interchange + Assessments + Rate = IC + 0.15%
•$5 Monthly Service Fee
• POS System Account – POS Integration
• Interchange + Assessments + Rate = IC + 0.17%
• $5 Monthly Service Fee
• Gateway/Virtual Terminal Account - Internet
• Interchange + Assessments + Rate = IC + 0.17%
• $31 Monthly service/gateway fee
Dedicated Merchant Contact
• Megan Schultz
• 612-655-8146
• Megan.E.Schultz@wellsfargo.com
If you only remember 3 things…
• Know exactly what you need by establishing “must haves” and “nice to haves”
• Focus your time on what you can negotiate - large dollar items assessed by
Acquirer. Establish your Effective Rate.
• Help your team understand the impact of their actions. Card not present
transactions, credit card #s on a post it note, failing to settle nightly.
• Ok, one more – Identify your own per transaction goal based on effective rate
Fee Distribution
Issuing
Bank
Gateway
Credit Card
Network
Processor
Acquirer
Do This When Get Back to the Shop
• Focus Negotiations on the fees of the Acquirer (Annual, Monthly, Per
Location, Statement, POS Connectivity)
1. Calculate your rate – how concerned should you be?
2. Compare effective rate to what you were sold on in the first place.
• Be aware of the language, but don’t get worked up about it
3. Seek out two more offers (We already got you one).
• Interchange Fee = Interchange + Per item fee
• BPs (bips) – basis points; 1 BP is = to .01%
• Batch and/or Settlement – nightly process to finalize transaction 4. Determine your needs – Online? 3 Locations? POS Connection?
• Total Effective Rate = Total Merchant Fees/ Total Card Volume
Processed
• $425 / $10,000 = 4.25%
• Establish communication around effective rate
5. Set a goal for your effective rate.
6. Negotiate better pricing that incorporates your needs and desired
effective rate.
7. Track results.