American Express (AMEX) has a three party system. AMEX approves its own transactions. They issue their own credit cards.
Visa
and MasterCard have a four party system. They do not issue any credit
cards. Rather, they license their payment brands to Issuers and
Acquirers. Issuing banks are the entities that provide you, the
consumer, with the credit cards in your pocket. Acquirers are the
entities that process the transactions. We are part of the acquiring
side. As a registered Independent Sales Organization (ISO) of Visa and
MasterCard, we pay them thousands of dollars a year for the privilege of
using those brands.
Transaction Process
As shown in the Transaction Process above, unlike
the three party system, Visa and MasterCard do not approve
transactions. The bank that issued your credit card approves the
transaction. The issuing bank takes on the risk that you as the
consumer will pay them back for the items you purchase. In turn, the
issuing bank get paid Interchange.
The cost of interchange
depends on the card type that is presented. A debit card, which is tied
to your checking account, is a low risk, low cost interchange. If you
don’t have money in your checking account, the transaction is declined.
Corporate,
government and foreign credit cards are high risk. They have the
highest interchange rates. You may ask why. Simply, if someone from a
foreign country buys an item here but refuses to pay for it later,
perhaps because of a dispute, it is very difficult, sometimes almost
impossible to get that money back. Also, people in corporations and
government make purchases that are not authorized by higher management.
If they quit or are terminated, these entities will often dispute the
charges as unauthorized. This makes these three card types high risk.
Interchange
is not voodoo or secretive. Interchange is clearly posted and updated
on the internet (Visa Interchange rates and MasterCard’s Interchange
Rates).
Why is Interchange Important?
According to the Board
of Governors of the Federal Reserve System in their June 2009 Report to
the Congress on the Profitability of Credit Card Operations of
Depository Institutions, there are 565 million general purpose credit
cards labeled Visa or MasterCard. There are another 111 million general
purpose credit cards provided by American Express and Discover.
The
population of the United States approximates 300 million (
307,047,313). That means every infant, child, adult or infirmed, would
possess 2.34 credit cards per person.
Five years ago, the average
male, 35 years of age an under, carried less than $20 cash. They used
their debit cards. These males are now 40 and have taught their
children by using debit cards instead of cash. It is estimated that the
vast majority of transactions between $5 and $60 are paid with debit
cards.
For the first time in Visa’s history, debit card use
surpassed Credit Cards in the fourth quarter 2008. U.S. debit card
volume was $206 billion, versus a credit card volume of $203 billion.
The growth of debit cards was up 5.5%, while credit cards were down
6.9%.
So, what does all this mean? It means the market,
specifically consumers, have chosen plastic over cash and checks to pay
for their purchases. They have voted on it with over 600 million credit
cards issued to a population of 300 million.
Efficiency and Total Costs
Businesses
that accept only cash payments do not have costs associated with credit
card processing. However, they often lose more money than they would
have through credit card processing because of employee skimming and
theft. A cash only business is serious temptation to an employee
earning minimum wage.
When you take into account your bank
charges and fees, trips to the bank to deposit cash and checks, and
ancillary overhead such as bookkeeping, ACH rejects and cash management,
the cost to a merchant for a grocery store transaction of $54.24 is:
$0.72 if paid by credit card
$1.11 if paid by cash
$1.21 if paid by check
According
to MasterCard, in 2008 their average interchange rate was 1.85%, which
is paid to the banks that issued the credit card. On the flip side,
issuing banks had credit losses as a percentage of transaction volume of
4%. This indicates that issuing banks lost more money than they made
in interchange. As the economy continues to struggle, these issuing
banks will continue to see their losses climb.
Bottom line: The merchant gets paid, even if the issuing bank does not.
Three Parts of Merchant Fees
Interchange
is paid to the issuing bank. There are approximately 200 Interchange
rates, depending on the card type (e.g. debit card, corporate card).
This is a variable that changes.
Dues and Assessment. A question
often presented is, “How does Visa and MasterCard make money if they
don’t issue credit cards?” Visa and MasterCard has Dues and
Assessments, which is 11 basis points (.0011) they receive per
transaction.
The acquiring bank charges a small fee for the
processing of the transaction, ensuring the merchant gets their money,
as well as providing monthly statements, 24/7 support and terminal
troubleshooting. This fee gets locked into your agreement. For
example, let’s use 30 basis points.
For a debit card merchant fees would be:
Issuing bank: 1.03%
Dues and Assessments .11% (Assessed by Visa or MasterCard)
Acquiring Bank: .30%
Your total percentage fees for a $100 transaction would be $100 x (1.03%+.11%+.30%) or $100 x 1.43%, which equals $1.43.
The
Dues and Assessment along with the Acquiring Bank fee would not change
if you are using Interchange Plus pricing. The only variable that
changes is Interchange to the issuing bank.
Conclusion
Interchange
is the lubricant to the gears in the transaction process. Interchange
rates are based on risk. Debit cards have lower risk, corporate cards
have higher risk.
Not accepting credit cards will have your customers buy from your competitors that do accept multiple forms of payment.
Consumers using credit cards buy more than customers with cash. With cash, you can only buy with what you have in your pocket.
Merchants
accepting cash only have a higher risk of pilferage by employees.
There are some merchants that do NOT accept cash, simply for that
reason.
The cost of managing cash and checks, which include bank
fees, trips to the bank, etceteras, all have implicit costs attached to
them. Consider if you would an office manager that makes $16 per hour.
Each day the office manager puts together the cash and checks along
with the deposit slips. It takes them 15 minutes a day to accomplish
this task. Each day they drive to the bank. It takes another 15 minutes
in round trip drive time and dropping off the bank deposit. If your
employee does this task three days a week, 30 minutes per day, 50 weeks
per year, they are spending 75 hours per year on non-value added work.
At $16 per hour, that’s $1,200 per year. What else could they work on
if they didn’t need to do these tasks? Even if you still had to make
trips to the bank, but could reduce the preparation time from 15 minutes
to 5 minutes, that save you $400.
Understanding interchange
makes you a more savvy merchant. It helps you understand when you are
negotiating your merchant account what fees can be adjusted and which
cannot. Learn how to get a 25% Cash Rebate Monthly at:
http://mrprebate.com Use Agent ID: 17382 for more information.
