How can merchants use the US vs Visa and MasterCard settlement to lower  costs and improve EBITDA? Most believe the most critical element to any solution is knowing exactly what merchant fees are for cards presented. Thus while the settlement is a huge win for merchants, The Federal Reserve Bank of Boston concludes merchants do not likely have the information or capability to fully take advantage of the new rules. IN this article I’ll review how merchants can use our CenPOS technology to leverage the new rules, without needing  to decipher the interchange rate for every transaction in real time.

Note that American Express did not participate in the settlement, thus any suggestions do not apply for their brand.

This is an excellent article and I recommend reading it. Federal Reserve Bank of Boston Public Policy Discussion: An Economic Analysis of the 2010 Proposed Settlement between the Department of Justice and Credit Card Networks. Excerpts:

In 2010, the Department of Justice (DOJ) filed a lawsuit against the credit card networks American Express, MasterCard, and Visa for alleged antitrust violations. We evaluate the extent to which the recently proposed settlement between the DOJ and Visa and MasterCard is likely to achieve its central objective: “…to allow Merchants to attempt to influence the General Purpose [Credit] Card or Form of Payment Customers select by providing choices and information in a competitive market.” In word and spirit, the Proposed Settlement represents a significant step toward promoting competition in the credit card market. However, we find that merchants are unlikely to be able to take full advantage of the Proposed Settlement’s new freedoms because they currently lack comprehensible and complete information on the full and exact merchant discount fees for their customers’ credit cards.

The basic problem is that merchants currently lack sufficient information to disclose fees or differentiate their prices according to the method of payment. In theory, the Proposed Settlement would allow merchants to try to steer consumers toward lower-cost payment instruments by disclosing the fees merchants incur in accepting payment cards, and by offering enhanced discounts. In practice, however, merchants may not be able to use these privileges effectively because they may not know the exact merchant fee on each credit card until long after the transaction has taken place, and even then merchants typically learn only their aggregate monthly fees and not the specific fee for accepting a given card. Interchange fees—which account for the bulk of merchant fees—range from below 1 percent to over 3 percent. Merchants may be aware of this range, but they currently do not have all of the information they need to enable them to match an individual credit card presented by a consumer to the corresponding merchant fee for that card. Therefore, merchants would not be able to disclose the relevant card fees to their customers or to completely and accurately differentiate prices across payment instruments.

If merchants had the necessary information in real time (that is, at or before the time of the transaction) to facilitate the mapping of cards and fees, under the Proposed Settlement they could attempt to steer customers toward lower-cost payment methods. However, merchants would still be restricted in the mechanisms they could use to this end because the Proposed Settlement did not challenge the Visa and MasterCard rule that prohibits merchants from imposing surcharges that reflect the costs they incur in processing payments.

End excerpts.

The new rules, together with Dodd–Frank Wall Street Reform and Consumer Protection Act, empower merchants with new flexibility to manage costs. The industry response is that only the biggest of merchants can benefit from the settlement. But that’s not true. Our technology enables merchants to provide discounts right now.

Ideas to reduce payment processing costs based on new rules:

1. Check your merchant agreement schedule A. Does it state anywhere on the agreement “pass through interchange”. If not, your options to reduce fees may be limited.
2. Put up a sign for a minimum charge amount. (Minimum cannot apply to debit cards.)
3. Put up a sign informing customers of really basic information. For example,  you could put up a sign “Please help us keep costs low by using your debit or check card. For every $100 sale our costs average: Cash $0, Debit/ check card $.90, credit card $1.85, rewards card $2.50.”
4. Implement our CenPOS technology and offer discounts based on rules you set. For example, do you want to offer a percent or a flat amount? Do you want to offer the rule only if they use one card brand such as Visa? Only over a certain amount? Only on certain days? The options are endless and can be remotely managed in real time, completely removing cashiers from any part of the discount process.
5. Identify your average ticket and average cost per transaction. Test and measure different incentives to customers using CenPOS.
6. Implement CenPOS technology in a retail setting and steer customers to enter their pin number, reducing risk of chargebacks. The 2010 national average for pin debit penetration was less than 29%; CenPOS users averaged 74%.

Considerations for offering incentives of any type or payment steering.

• Do you know what percent of your transactions are debit right now?
• Do you know what percent of your transactions are any type of card right now?
• Do you know your average cost per transaction on debit? On other card types?
• Do you know if card type usage is cyclical by time of day, day of week, location of your facility, or how payment is accepted (retail, online etc)

CenPOS technology provides real time information about all of the above so you can manage how and what type of discounts to offer. Merchants can use integrated check and ACH services with CenPOS.

CENPOS SALES: Call the credit card processing hotline at the top of the page for direct merchant sales, ISO sales, and other 3rd party reseller sales.

JUSTICE DEPARTMENT SUES AMERICAN EXPRESS, MASTERCARD AND VISA TO ELIMINATE RULES RESTRICTING PRICE COMPETITION; REACHES SETTLEMENT WITH VISA AND MASTERCARD

Department to Litigate Against American Express to Promote Competition Among Credit
Card Networks Enabling Merchants to Benefit Consumers

MONDAY, OCTOBER 4, 2010 WWW.JUSTICE.GOV

WASHINGTON — The Department of Justice announced today that it filed a civil antitrust lawsuit in U.S. District Court for the Eastern District of New York challenging rules that American Express, MasterCard and Visa have in place that prevent merchants from offering consumers discounts, rewards and information about card costs, ultimately resulting in consumers paying more for their purchases. The department also said that the rules increase merchants’ costs of doing business. Joining the department in its lawsuit are the states of Connecticut, Iowa, Maryland, Michigan, Missouri, Ohio and Texas.

At the same time, the department announced that it has filed a proposed settlement with Visa and MasterCard, that, if approved by the court, would require the two companies to allow merchants to offer discounts, incentives, and information to consumers to encourage the use of payment methods that are less costly.

According to the complaint, American Express, MasterCard and Visa maintain rules that prohibit merchants from encouraging consumers to use lower-cost payment methods when making purchases. For example, the rules prohibit merchants from offering discounts or other incentives to consumers in order to encourage them to pay with credit cards that cost the merchant less to accept.

“With today’s lawsuit we are sending a clear message: We will not tolerate anticompetitive practices,” said Attorney General Eric Holder. “We want to put more money in consumers’ pockets, and by eliminating credit card companies’ anticompetitive rules, we will accomplish that.”

“These restrictive rules restrain competition among credit card networks for merchant acceptance and distort the competitive process,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “The proposed settlement with MasterCard and Visa is an important step in bringing more credit card competition to the point of sale. The department’s lawsuit against American Express will continue that effort and, if successful, allow merchants more freedom to benefit their customers.”

Credit card acceptance costs U.S. merchants approximately $35 billion each year. Those costs are collected from merchants in the form of a “swipe fee” they pay every time a credit card is used. American Express has the highest merchant fees of any credit card network. Merchants pass on these billions of dollars in fees to all their consumers in the form of higher retail prices. By preventing merchants from rewarding consumers when they use less expensive credit cards to make a purchase, American Express, MasterCard and Visa have inhibited merchants’ ability to reduce card acceptance costs, and therefore their retail prices to consumers.

The proposed settlement requires MasterCard and Visa to allow their merchants to:

Offer consumers an immediate discount or rebate or a free or discounted product or service for using a particular credit card network, low-cost card within that network or other form of payment;
Express a preference for the use of a particular credit card network, low-cost card within that network or other form of payment;
Promote a particular credit card network, low-cost card within that network or other form of payment through posted information or other communications to consumers; and
Communicate to consumers the cost incurred by the merchant when a consumer uses a particular credit card network, type of card within that network, or other form of payment.
The proposed settlement allows any merchant that only accepts Visa and MasterCard to take advantage of the relief immediately.

The ongoing litigation against American Express seeks to allow merchants that accept American Express to engage in the same kind of discounting and encouragement that the proposed settlement with MasterCard and Visa allows. Until American Express’s restraints on merchants are lifted, the many merchants that accept American Express, as well as Visa and MasterCard, will not be able to take full advantage of their new options under the proposed settlement, the department said.

American Express Company, the parent of American Express Travel Related Services Company Inc., is a New York corporation, with its principal place of business in New York City. Cardholders used American Express credit and charge cards for $419.8 billion in purchases in 2009. MasterCard is a Delaware corporation with its principal place of business in Purchase, New York. Cardholders used MasterCard credit and charge cards for $476.9 billion in purchases in 2009. Visa is a Delaware corporation with its principal place of business in San Francisco. Cardholders used Visa credit and charge cards for $764.2 billion in purchases in 2009.

The proposed settlement, along with the department’s competitive impact statement, will be published in The Federal Register, as required by the Antitrust Procedures and Penalties Act. Any person may submit written comments concerning the proposed settlement within 60 days of its publication to John R. Read, Chief, Litigation III Section, Antitrust Division, U.S. Department of Justice, 450 Fifth Street N.W., Suite 4000, Washington D.C. 20530. At the conclusion of the 60-day comment period, the court may enter the final judgment as to MasterCard and Visa only upon a finding that it serves the public interest.

The court will determine a pretrial schedule for the case against American Express once American Express files its response to the government’s lawsuit.

# # #

American Express sent changes in terms for accepting the American Express credit card, dated October 2010. “If you issue a credit, we will not refund the Discount or any other fees or assessments previously applied on the corresponding charge.”

Let’s use the example that the merchant is paying 3.5% for accepting American Express. That’s the discount fee. On a $100 charge, the merchant pays a $3.50 discount fee. If the customer requests a refund, the merchant is now still out the $3.50 fee.

Effective July, 2011, the merchant can choose an alternative to the above. Instead of paying 3.5% in my example, you could pay 3.9%. Then whenever you have refunds, you’ll get the discount refunded too.

You’ll need to do some math with respect to your refund volume to see whether it makes sense to pay more on every order.

EXAMPLE:

$100,000 in sales

At 3.5% the merchant pays $3500 in fees.

At 3.9%, which includes the 40 basis points upcharge to receive Discount refunds,  the merchant pays $3900 in fees.

If returns are 1% of orders  = $1,000 gross sales, merchant is refunded $1000 X 4.1% or $41 in discounts. Since the merchant paid $400 extra, this is a bad deal.

If 10% of sales are returns (credits)= $10,000, the discount refunded is $390.

If your American Express discount is even lower than 3.5% you can see that you’d have to have a very high return rate to make opting in for 40 basis extra on every charge you accept.

Did you think you had a flat rate fee for your American Express merchant account? I did too. But, there are circumstances where they can charge you more. Key entering a transaction at the point of sale is probably the most common.

Per the American Express April 2010 merchant guidelines PDF, “there are instances when Merchants will need to key-enter an In-Person Transaction. This occurs most often when the POS System cannot read the Magnetic Stripe. There may be a fee assessed for Charges that are key-entered. See subsection 12.2.2, authorization fees.
Transaction fee – A fee applied to any Charge for which we did not receive the full Magnetic Stripe from the Card and the indicator as to whether the Card was swiped.
0.30% of the face amount of the Charge.

This should not come as a surprise. Visa and MasterCard have long had a different rate for key entered transactions on a RETAIL or swipe merchant account.

” One of the requirements of a key-entered Transaction is to validate the Card’s presence. Failure to validate the Card’s presence can render the Merchant liable for Chargebacks if the Cardmember disputes the Charge. This doesn’t change for any type of card and we’ve reported on this before.

AMERICAN EXPRESS COMPANY CONTRIBUTES $250,000 TO HAITI EARTHQUAKE RELIEF AND WAIVES DISCOUNT RATE FOR CHARITABLE CONTRIBUTIONS

NEW YORK, January 14, 2010 — In response to the devastation caused by Tuesday’s massive earthquake in Haiti, American Express Company today announced that it will donate $250,000 to assist the following organizations with their relief efforts: the American Red Cross, Doctors Without Borders, International Rescue Committee and the United Nations’ Friends of the World Food program. American Express will also match employee donations for relief efforts.

In addition, American Express will rebate the merchant discount rate for charitable contributions made on the American Express Card directly to any of the non-profit organizations listed on the USAID website in support of Haiti relief. The rebate is effective retroactively from January 12 through February 28, 2010.

American Express Company (www.americanexpress.com) is a leading global payments, network and travel company founded in 1850.

Podcast on the high cost of American Express for both American Express cardholders and the merchants that accept them. What is the impact on the cost of goods and services we buy? [display_podcast].