A complex matrix of actions and players interact between the swipe of a card and the deposit of funds into the merchant’s bank account. By using payments analytics tools, merchants can reduce many of the transaction costs.
The overall cost per transaction is a percentage of the value of the transaction and ranges typically from 1.5 to 3.5 percent of the purchase. This cost is referred to as the effective cost and is deducted by the acquirer from the total transaction before the merchant gets its net credit in its bank account upon settlement. There are three primary components to effective cost:
- The interchange fee paid to card issuers
- Dues and assessments paid to major card networks (e.g. Visa, MasterCard, Discover)
- Acquirer fees paid to the merchant’s bank or payment processor.
Interchange fees typically account for 85 to 90 percent of the fees applied to a transaction, and are set by the different card networks. Visa, MasterCard and Discover have set up a complex matrix of over 700 possible interchange rates in the United States. This complexity is due to macro and micro forces—macro forces at the market level and micro forces at the individual merchant level.
Obtaining ideal interchange rates
What can a merchant do to make sure they are achieving optimal interchange rates?
First, verify with your merchant acquiring bank that your MCC is correctly assigned.
Next, merchants should employ tools to actively monitor their interchange costs on a monthly basis and be able to easily investigate the sources of significant variances and take action—e.g., streamline authorization and settlement systems.
What, if anything, is the merchant doing with its merchant statements? Are there increasing numbers of transactions that do not qualify for the best rates? Are these downgrades being analyzed for root causes? The top reasons for downgrades include:
- Delayed settlement or stale authorizations
- No AVS (Address Verification System) for key entered or CNP Visa cards
- No Level 2 or Level 3 data for commercial cards
- Mismatch of authorized and settlement amounts (e.g., split shipments for e-commerce merchants).
Is the merchant optimizing point-of-sale and payment systems for AVS prompts? PIN prompting or least-cost routing? Level 2/3 data transmission for commercial cards?
Although the assessments and dues portion of the merchant discount cost is significantly less than the interchange fee component, these fees still account for an average of 0.17 percent of gross sales. And the effective cost of these fees has increased over the last decade by 55 percent. There exists some complexity, as there are over 30 unique fees assessed by the three card networks, based on different transaction characteristics.
Some of these dues can be optimized. For example, if you ensure that every authorization is either settled or reversed, you can reduce transaction integrity fees, misuse of authorization fees, and processing integrity fees.
The last component of the merchant fees is acquiring fees. They are certainly the smallest cost component but often get the most attention since they are easiest to analyze. From your acquiring relationship, here are some best-practices to consider:
- Request interchange pass-through pricing.
- Consolidate as much of your U.S. volume with a single acquirer.
- If you anticipate your card volume will increase, build fee tiers into a contract so that as transaction volume grows, the acquiring fees automatically decrease.
As there likely is very high visibility and importance given to the effectiveness of your merchant acquirer relationship(s), you will want to schedule regular reviews (quarterly or semi-annually at the least). At these reviews, request the acquirer’s view of processing effectiveness, gain industry and regulatory updates, receive helpful industry segment best practices to improve processing and reduce risk of fraud, and lower acceptance costs. Be sure to be transparent in communicating any expected changes in your sales volumes, challenges you are experiencing, and any new initiatives planned.
Applying payments analytics
If your activity level warrants a closer look at your card payments, you may need tools to assist you in performing a detailed analysis. Using payments analytics tools can provide powerful insights and clear justification for taking certain actions that can rapidly help improve effectiveness and reduce interchange and acquiring costs. Like anything, if you can’t measure it, you likely cannot improve it.
For any payment type, you can build a repeatable, sustainable payments analytics program. You should follow these five steps:
- Identify desired key metrics or performance indicators for each payment type.
- Gather data from your merchant and bank statements over each desired period (monthly, quarterly, etc.).
- Input and organize the data in Excel or another database.
- Segment the details of the card interchange data into relational tables.
- Analyze the data on a regular basis to determine trends and actionable items.
Due to the complexity and high cost of interchange fees in the U.S., there is a critical need to focus on and optimize what may be a merchant’s highest expense in actualizing revenue. Payments analytics can make the task of understanding and reducing card fees easier and faster.
Michael D. Lenihan is senior advisor for Optimized Payments Consulting.