What Every Merchant Needs to Know About Managing Credit Costs

By: Steve Shollenberger and Robert Fifield

There is no need to accept credit card fees anymore that include frustrating, confusing or mystifying expense line items that are NOT understandable or controllable…

If you are like most merchants, upon receiving their processing statement, you skip directly to the total fees section, shrug your shoulders or shake of your head, and then proceed to record an entry for the fees. Have you ever asked yourself….What makes up all these fees? For those of you who are curious, and are financially responsible for your organization, there are two main components to this pricing equation, both of which are separate and distinct as far as pricing to a merchant. Plus, unless you have expertise in reading processing statements, you will most likely not be able to understand or separate the various fees, which is a huge advantage to the credit card industry! Have you ever asked yourself..… How can I get my fees under control?  Good question and the answer is fairly simple.  But, first you need to know there are 2-sides to the pricing equation and your understanding of each impacts an optimized price program.  The following bullets are the components of the pricing equation:

Merchant Pricing from Acquirer (Processor)

• Various pricing programs sold by acquirers to merchants in the market; you need to understand your program
• The Preferred price program for merchants is an Interchange at Pass-Through program
• Acquirer pricing could include fees for a payment gateway; i.e. Authorize.net or PayFlow Pro

Visa & MasterCard (MC) System of Interchange Pricing

• Managing Interchange helps to ensure transactions qualify for the lowest rate
• Merchants should have a general understanding of "basic industry best practices" for processing
• Your best bet in managing interchanges costs is to work with an industry advisor, who has this expertise

This article will focus on the Interchange Component of the pricing equation, specifically for ”Visa and MC.” What is the system of interchange pricing? What do you need to know about interchange to control your costs? Why do your fees vary? What is a transaction downgrade? Our goal is to help answer some of these questions and paint a picture of the impact to the bottom line if you do not keep Interchange under a tight leash! 

To effectively manage interchange, a merchant first needs a basic understanding of what interchange is, and how it impacts their costs when accepting credit cards as a form of payment.  Simply stated, interchange is the single largest cost driver in the processing of credit card transactions. This fee can range from 70 to 95% of the total card processing fees, based on the percentage taken by the acquirer over the wholesale interchange rates. Interchange pricing is a complex set of rules that determine how much revenue the issuing bank (the bank that issued the customer’s credit card) is paid.  Visa & MC are paid a flat percentage based on the transaction amount, which is now set at .11%.  The credit card associations, such as Visa and MC set interchange fees for transactions between members of the association according to some of the following rules: merchant’s category code; the type of card (consumer credit/debit, rewards, commercial etc.); and method of authorization (card swiped, key-entered, eCommerce etc.).  Merchants are assessed these fees in order to compensate for the risk and operating expenses involved in processing a transaction. 

Now, let’s spend some time focusing on interchange side of the equation.  Specifically, a look at some of the more toxic scenarios that make good transactions downgrade to a higher interchange category for pricing. Failing to meet any of the qualifications will cause a transaction to be charged at a higher rate.  If you don’t know what these requirements are, you may be wasting a lot of money!  Different types of merchant accounts have different requirements. If the transaction does not qualify for the lowest rate, it is downgraded to a higher rate for pricing. This is called a transaction downgrade.

What is a Downgrade? If a transaction does not fulfill one or more of the qualification requirements, the transaction will be downgraded to a higher rate.  Although not all downgrades can be avoided, the two most common downgrades for merchants are the EIRF (Electronic Interchange Reimbursement Fee) for Visa and, the very onerous, Standard, for both Visa and MC.  If you are on a tiered price plan these downgrade categories will be tossed into a higher priced bucket called “Non-Qualified” without explanation.  

Here are a few scenarios that will cause a transaction downgrade to EIRF:

• Transaction is not settled within 48hours
• The authorization and settlement do not match
• The authorization is obtained by voice, manually or “forced” authorization
• No address verification obtained (AVS)
• Software applications that do not pass the required data specific to an industry type and/or card product mix (i.e. commercial cards)

 Here are a few scenarios that will cause a transaction downgrade to Standard:

• Transaction does not settle with 48 hours.
• Business cards that require certain information to be transmitted to qualify for the lowest rate (Level II and Level II data)
• Software applications that do not pass the required data specific to an industry type and/or card product mix (i.e. commercial cards)

To manage interchange costs in achieving optimized pricing, the price program from your acquirer/processorMUST BE an “Interchange Pass-through Program.”  With an interchange program you get the benefit of seeing all Visa and MC wholesale interchange rates with full transparency.  There is absolutely nothing to hide, no malicious markups, and that is what helps to eliminate much of the markup merchants see with traditional “tiered” rate plans. Your will know you are on a tiered price program from your acquirer if your plan provides you with rates for processing. 

In conclusion, the industry approach to the sale and support of these services to merchants continues to be somewhat lopsided and is definitely, not in favor of the merchant in managing interchange costs on an on-going basis to ensure lowest rates. When was the last time your sales rep contacted you regarding your credit card processing services and fees, or better yet, do you even know the name of this person? The standard industry approach for the sale of merchant services is normally a sales rep who lacks the in-depth knowledge of interchange and brings pricing to you in a black box that rarely considers your needs - once the sale is complete you never see or hear from this individual again. This is not a “one size fits all” industry for pricing merchants. This approach simply does not work for merchants, especially when you consider the complexities in pricing that have occurred over the last several years with Visa & MC.  Now, more than ever, merchants need a trusted advisor who will be there to help them through this maze of pricing to ensure lowest rates for processing across all payment channels and payment methods.  The more than 400 Interchange pricing categories for Visa & MC speaks loudly here. 

Considering the historical focus on this topic, you have a unique opportunity to create an electronic payment solution that not only meets your organization’s business needs for today and tomorrow, but also fosters an opportunity to have a lasting financial impact that will carry your organization forward. 

The next time you receive your processing statement, review it and if you have questions, either contact your processor or a trusted advisor for guidance.  In the long run, it may save you time investigating and money spent on unnecessary fees - what company wouldn’t want that?

Steve Shollenberger, CPA, is Managing Partner at Avalon Professional Services in the DC area –sshollenberger@avalonprofessionalservices.com 

Robert Fifield is Managing Partner at Avalon Professional Services in the New York area –rfifield@avalonprofessionalservices.com

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