A Florida distributor of advanced industrial automation equipment, including SMC pneumatics, reduced the effective rate of credit card processing to under 2%, including all merchant account and gateway fees. While a small part of the overall revenue stream, it was a growing cost center, impacting profit margins.
How did the distributor reduce costs? Two changes were required. First a change in the credit card processing price plan, and second technology to automate qualified interchange rate optimization. Interchange rates include a percentage of the transaction and a per transaction fee, and comprise the bulk of all credit card processing costs. The same card can process at different rates, depending on which rules the merchant complies with.
The example business was using Bank of America First Data Merchant Services with an enhanced bill-back price plan. Most credit cards accepted were and are corporate, business, or purchasing cards. All transactions are card not present, also known as card absent, and some are international transactions. On the existing price plan, the merchant paid a flat rate percent of sales for all qualified transactions, plus an additional percentage fee for non-qualified sales. The non-qualified penalty was very high, resulting in an effective rate over 4%. (Total fees divided by net sales, minus American Express, equals effective rate.)
The best price plan for merchants, commonly available for $1,000,000 in annual processing, is called wholesale interchange plus or interchange pass through. With pass-through pricing, merchants pay all costs, plus a merchant discount, which is identified as a separate line item for billing. Costs and gross profits to the merchant service provider become transparent. Even better is for the merchant account to support level 3 processing, whereby a merchant that sends enhanced level 3 data may qualify for even lower rates on business, corporate and purchasing cards.
A Bank of America representative offered the merchant an additional agreement for a new interchange plus merchant account solely for their largest corporate customer. I recommended the merchant either renegotiate all of their business with my input or go with another vendor. It made no financial sense that the merchant solve the cost concern for only one client and not all of them. To reduce credit card processing fees, first the merchant needed a new interchange plus merchant account for all customers.
Interchange is the largest component of credit card processing fees. There are many rules to achieving the lowest qualified interchange rate. For business to business companies, it’s infinitely more difficult to qualify for the lowest rate for any given card type due to the high prevalence of business, corporate and purchasing cards, and their many rules. Because it’s virtually impossible for employees to learn all the nuances of those rules, as well as even know what kind of cards their remote customers are presenting, cloud payment technology is the break-through that merchants have needed to achieve lower effective costs while also increasing efficiencies.
The three most challenging rules merchants have trouble complying with for business, corporate and purchasing cards:
- authorization and settlement within 72 hours for all card not present sales
- authorization amount and settlement amount equal
- sending correct level 3 data, enhanced data that applies only to certain cards
Without all three of the rules met, fees can run one percent or more extra vs. when all rules were complied with. The merchant needed software that would help them meet all requirements, yet there are few market choices, including among cloud payment / virtual terminal solutions.
Bank of America offered a reasonably priced desktop software solution that would support level 3 processing. The reason it was presented to use for one customer only, is because all the information needed to be sent with each transaction creates an extra burden for accounts receivable. If the merchant used it for all customers, then they’d have to enter a lot of extra information on every sale to be safe, because users would have no idea whether the card would benefit from level 3 data or not. Additionally, the one customer was on 30 day terms, so at the time the invoices were paid, the other criteria would be met. But that wasn’t true for new and other customers who were not on terms. An authorization was obtained for those customers on order, and weeks later, the final amount would often be different. This meant the merchant would not meet all three minimum rules for the other accounts to qualify for the best rates.
I recommended the merchant implement CenPOS, an intelligent rules-based cloud payment technology that mitigates risk of employees making decisions that impacted fees paid. It automatically determines when level 3 data is required for the lowest qualified rate. Additionally, it automatically forces proper settlement rules are complied with, including authorization.
Compared to the Bank of America First Data solution, my recommendation solved these problems:
- Increased access: Anyone authorized can process transactions via the virtual terminal because it’s in the cloud, not desktop software.
- Lower fees: All transactions optimized for lowest qualified interchange rate, not just one customer
- Eliminate mistakes: Intelligent rules-based solution forces proper employee actions to mitigate risk and reduce fees
- PCI Compliance: stored tokens replaced full card data- no employee access to card data. PCI compliant custom credit card authorization forms automatically generated for customer signature.
- Operational Efficiencies: Quick and easy to charge repeat customer accounts using stored tokens. One reporting hub to retrieve all payments, including resending receipts to merchants. Custom Level 3 data template(s) significantly reduce burden of adding level 3 data when prompted.
The merchant chose to open a new interchange plus merchant account as well as implement CenPOS. Within 30 days, the merchant streamlined payment processing and reduced card acceptance costs over 50%, as evidenced by comparing before and after merchant statements. Additionally, PCI compliance burden and financial risks were reduced, providing peace of mind for the family business owners.
ARTICLE DISCLAIMER: The details of the third party offer are based on my recollection of verbal statements by the merchant. It’s possible not all information was shared with me, or that my recollection is imperfect. Before making any financial decisions for your company, speak with a qualified representative familiar with the nuances of business to business interchange rules and PCI compliance rules.
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