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.
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:
- 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.
- Put up a sign for a minimum charge amount. (Minimum cannot apply to debit cards.)
- 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.”
- 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.
- Identify your average ticket and average cost per transaction. Test and measure different incentives to customers using CenPOS.
- 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.