An Education in Merchant Processing

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An Education in

Merchant Processing

Presented by: Michael Mintz COO - AMG Payment Solutions

Today’s Agenda

Introduction and Background Important Industry Terms The Electronic Payment Process Interchange – The Pure Facts Common Pricing Strategies Pricing Example

Keeping Your Processing Costs Down

What To Be Aware of When Choosing a Merchant Processor Parking Industry Best Practices

PCI Overview

Financial Reform Bill / Durbin Amendment What is at Stake

Q&A

Introduction and Background

Michael Mintz – Partner / COO at AMG Payment Solutions

16 years with Deloitte & Touche LLP (New York)

Opportunity to bring a much needed level of

INTEGRITY,

TRUST AND TRANSPARENCY

to merchant processing

“Trusted advisor” relationships and educating the

merchant

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Important Industry Terms

Card Association / Brands - Visa, MasterCard,

American Express, Discover, Diner’s Club and JCB

Acquiring bank (acquirer or processor)

Issuing bank (or issuer)

Merchant account

Payment gateway

Electronic Payment Process

Parking Station / Swipe Terminal / Online / Mail / Phone

Payment Gateway / Merchant Account

Approval in Seconds / Funds Put on Reserve Interchange Category

Determined / Next Day Funding

Interchange – The Pure Facts

Interchange fee - fee paid to Issuing bank for participating in the Visa / MasterCard network.

– Merchant pays all interchange fees

– Interchange rates and per transaction fees set by Visa / MasterCard – Reviewed 2x a year (April and October)

– The LARGEST fee component of accepting credit cards Interchange pricing structure

– Card brand (Visa vs MasterCard) – Type of credit or debit card – Type and size of the accepting merchant – Type of transaction (swipe or card not present)

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Interchange Pricing – The Pure Facts (cont’d)

RISK based pricing - Debit less risky (lower cost) / Credit more risk (higher cost) Credit Cards – Merchant pays for REWARDS PROGRAMS

Over 300 Visa / MasterCard Interchange Categories

Dues and Assessments (Applicable to ALL transactions) –Visa and MasterCard Assessment – 0.11% –Visa Network Fee - $0.0195 (per transaction) –MasterCard Network Fee - $0.0185 (per transaction) – International / Cross Border Fees (when applicable)

• Visa – 0.40% (International Service Assessment) plus 0.45% (International Acquirer)

• MasterCard – 0.40% (Cross Border Assessment)

Common Pricing Strategies

Interchange Fee is the TRUE COST of processing

Merchant NEEDS to know how much above interchange they are paying

Not always clear / made more complicated by the processor –Unreadable monthly statements

The less the merchant knows = the more the processor makes !!

3 Main Pricing Strategies –Fixed Rate Pricing –Multi Tier Pricing

–Interchange Pass Through Pricing

Fixed Rate Pricing

ONE LOW RATE (ie: 1.50%)– Very attractive –Be Careful

All transactions are applied 1.50% on the dollar volume of the transaction

Downgrades will ALWAYS apply

Downgrades = an additional % charged when the card used by the customer has a higher interchange rate than the “low fixed rate.” An additional percentage is also added on as profit to the processor.

1.50% becomes 3.00% with a 1.50% downgrade

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Multi Tier Pricing

Most common pricing

Easier to understand but Be Careful

Hundreds of interchange categories are merged into two or three “buckets”

Merchant is never told what bucket an interchange category falls into.

Three Tier

–Qualified Rate (1.80%) –Mid Qualified Rate (2.20%) –Non Qualified Rate (3.20%)

Multi Tier Pricing (cont’d)

Rate set by processor for each “bucket”

Cards grouped into each “bucket” are also set by processor

No card type in a “bucket” will have an interchange rate

higher than the rate set by the processor.

Processors, NEVER

LOSE MONEY!

“Bucket” rate MINUS True Interchange Rate is

ALL PROFIT

to

processor.

Interchange Pass Through Pricing

TOTALLY TRANSPARENT PRICING

Interchange cost is “passed through” to the merchant

Processor adds their “margin” on top of interchange cost

Margin is fully disclosed to merchant

Same margin on EACH AND EVERY transaction regardless of the type of card used for payment

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Pricing Example

Transaction Amount = $100

Card Type = Visa Signature Preferred Retail

Interchange Rates

–

Discount Rate = 2.10%

–

Per Item Fee = $0.10

Cost Comparison to Follow

–

Fixed Rate

–

Three Tier

–

Interchange plus

Pricing Example (cont’d)

Fixed Rate Three Tier Interchange Plus

Fixed Rate Discretionary Rate

Qualified Rate Mid Qual Rate Non Qual Rate Margin over Interchange Per Trans over Interchange

Dues & Assessments Network Fee Cost to Merchant Effective Rate Profit to Processor 1.50% 1.00% NA NA NA NA NA 0.11% $0.0195 $3.10 3.10% 0.77% NA NA 1.80% 2.20% 3.20% NA NA NA NA $3.20 3.20% 0.87% NA NA NA NA NA 0.20% $0.10 0.11% $0.0195 $2.63 2.63% 0.30%

Keeping Your Processing Costs Down

Correct SIC code

– Visa “small ticket” debit and credit rates / MasterCard “small ticket” debit rates (transactions less than $15)

Swipe whenever possible

If “card is present”, but unable to swipe,

– obtain “cvv2” or “security number” / customer’s zip code and manually imprint the card

If “card not present” (mail or phone orders)

– obtain “cvv2” / customer house number and zip code. Also input invoice number

Run your batch EVERY DAY

Understand your merchant processing statement – If unclear, ask your provider

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What To Be Aware of When Choosing a Merchant Processor

Early termination fee?

Monthly or annual minimum?

Offered a Terminal Lease or Rental? Free terminal?

Offered INTERCHANGE PLUS pricing?

24/7 live support?

Referrals?

Who is actual processor and banking organization?

Parking Industry Best Practices

Parking SIC code to obtain “small ticket” pricing for Visa Debit and Credit and MasterCard

Debit

– Visa Credit = 1.65% / 4 cents Visa Debit = 1.55% / 4 cents – MasterCard Debit = 1.55% / 4 cents

Dial back up to primary IP (internet) communication

It’s all about the per transaction fee

Online reporting system from processor

Check Processing options to reduce expenses – RDC (remote deposit capture)

– Convenience / automation / reduce bank fees / eliminate copying – Increase staff productivity

Work with someone you trust

PCI Overview

The Payment Card Industry (PCI) Data Security Standard (DSS)

–worldwide information security standard defined by the Payment Card Industry Security Standards Council.

–Help payment card industry organizations prevent credit card fraud through increased data controls and its exposure to compromise.

Standard applies to ALL organizations that hold, process, or exchange cardholder information from any card branded

Regardless of size, organization compliance must be assessed ANNUALLY

Large volumes of transactions - Qualified Security Assessor (QSA) Smaller volumes of transactions - Self-Assessment Questionnaire (SAQ)

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PCI Overview (cont’d)

6 Objectives and 12 Requirements of PCI DSS

–

Go to

www.amgpay.com

in the “Learning Center” for more

detail

Do not neglect PCI compliance requirements

Non compliance fee will be assessed ($19.95 per month)

Processor will have an agreement with 3

rd

_{party provider}

Certification process should take no more than 30 minutes

PCI Overview (cont’d)

Vendor Requirements (PA-DSS) – Payment Application Data Security Standard

–Payment applications should facilitate merchants PCI DSS compliance

–Implementation guide specific to each application –Educate customers / resellers / integrators

–Ensure applications meet PA-DSS requirements and pass review

PA-QSA (Qualified Security Assessor) –Qualified and trained by PCI

–Performs assessment, provides opinion and documentation regarding vendor compliance

–Submits attestation of validation signed by PA-QSA and vendor

Financial Reform Bill – Durbin Amendment

–Federal Reserve will regulate interchange fees for debit cards to ensure they are “reasonable and proportional”.

–Does not restrict debit card network fees. Prepaid Cards are exempt. –Discounts for payment method (cash, check, debit cards, credit cards and

prepaid cards) but NOT be permitted to offer discounts for payment network brands

–Apply minimum dollar amounts (no greater than $10.00) for credit card usage. Currently not allowed.

–Issuers and networks cannot limit debit card transactions to only one network and cannot restrict a merchant’s ability to route transactions to any payment card network that processes their transactions

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What is at Stake

Interchange Fees Paid by Merchants to Large Banks

$23.6 billion

Maximum Potential Amount Affected by Durbin Amendment

$18.8 billion Fed drops fees by 20% Interchange fees decrease by $3.8 billion

Decrease per card: $7.20 Fed drops fees by 50% Interchange fees decrease by $9.4 billion

Decrease per card: $18.12 Fed drops fees by 75% ** Interchange fees decrease by $14.1 billion

Decrease per card: $27.19

Current average debit fee - $0.44 Proposed debit fee cap - $0.12 (73% decline)

Sources: The Nilson Report, annual reports from Visa and MasterCard, information from Visa / MasterCard assessments

What is at Stake (cont’d)

New economics will lead to:

–

Fewer rewards programs

–

More consumer fees (checking, credit cards, etc)

Benefit to merchant / lower cost to accept debit cards

Higher costs to ultimate consumer

Big $$ at stake for large operators

Small ticket transaction cost as a percentage of sale amount

significantly reduced

Intense lobbying from both sides (Retail / Banks)

Proposed July 2011 implementation date in question

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