Get more out of processing

Third in an occasional series on the increasingly complex world of merchant processing.

If someone asked you how much accepting a credit card transaction costs your business, chances are you wouldn't be able to give them an accurate figure.

While some merchants try hard to understand the fees they are charged for accepting credit card transactions, many others don't look closely at the details but suspect the cost is beyond their control.

The plain truth, according to payment processing expert John Mayleben, MRA's vice president of sales and marketing, is that interchange rates—set by Visa and Mastercard and accounting for 80-90 percent of the discount rate charged by processors—have become increasingly complex, and few merchants have the time or inclination to grasp all the subtleties.

Some processing costs are controllable and others are not, Mayleben points out. Understanding and addressing the controllable costs can help business owners shave extra costs off their monthly bills.

As discussed in last month's Retailer, one way to control processing costs is to use a processor with the best combination of low rates and good service, one that does not hide fees or charge for "extras" that are standard with other processors and is accessible and responsive.

Another important way to control processing costs is to use procedures that ensure the lowest rate (the "qualified" rate) for each transaction. Most retailers are getting the qualified rate for most transactions, but it makes sense to review processing charges occasionally to see if improvements can be made.

The discount rate charged for each transaction varies depending on the interchange fee, which is set by the card associations—Visa and Mastercard. When a transaction doesn't meet standards set by the card associations, the interchange fee rises. The processor passes that increased rate to the merchant in the form of a "downgrade."

Higher interchange fees are designed, among other things, to cover the increased risk associated with transactions that don't meet the standards and to encourage merchants to handle transactions in ways that deter fraud. For example, a "card not present" transaction, such as a telephone order, is charged a higher rate than a swiped-card transaction.

Reasons for downgrades include hand-keyed transactions, missing or corrupt swiped data from the magnetic stripe on the card, transactions not being settled within a day of initial authorization, or a mismatch between the amount authorized and the final amount submitted for settlement.

Ideally, all transactions would earn the best rate available. In practice, however, every business will have some downgrades, either due to occasional minor glitches at the store or uncontrollable factors like the customer's choice of card. When downgrades become routine or increase noticeably, it's time to act.

Michael Shatz, of Boston-based payment processor Litle & Co., suggests that merchants figure out their "effective rate" and compare it to the discount rate. A merchant's effective rate is calculated by summing all fees and charges assessed in a given month and dividing that figure by the total dollar amount processed.

Expect this rate to be higher than your discount rate, since it includes one or more monthly fees for services provided by your processor, such as a statement fee. But if it is surprisingly higher, or if it has increased over time, look for possible reasons and address them.

Part of a good processor's customer service is working with merchants whose effective rate is higher than expected to identify the source and reduce these unnecessary expenses. MRA's customer service department is happy to help a merchant find ways to reduce downgrades whenever possible.

Even with procedures in place, downgrades may not drop significantly unless every employee is following them for every transaction, within reason. In many cases, it's a matter of training all staff to follow procedures that the owners or managers already follow.

Mayleben provided the following tips for avoiding downgrades. They apply to most merchant accounts, not just those who use MRA for processing.

Hand-keyed headaches

Do you or your staff hand-key many transactions? The interchange system treats every hand-keyed transaction as a downgrade. It's true that magstripes on cards do wear down and terminals do sometimes fail to read cards when swiped. The occasional hand-keyed transactions are to be expected.

Sometimes, for whatever reason, an employee will hand-key many or most transactions, without even trying to swipe first or giving up after one attempted swipe. Observe how your staff handles cards; train them when and how to hand-key and why it's important to swipe as many transactions as possible.

Staff may also fail to let a manager know that a terminal is not working properly, or a busy store owner may put off contacting the vendor about a problem terminal.

If a terminal is acting up often, it probably needs to be cleaned. Call your terminal vendor or processor. If MRA is your processor, call customer service (800.366.3699) for a cleaning card.

Get the terminal working well and you'll have far fewer hand-keyed—and therefore downgraded—transactions.

Eventually, terminals will wear out and need replacing. Since this cost is inevitable, it makes sense not to put off the replacement. The sooner it is replaced, the sooner those transactions will be processed at the best rate available.

All in the timing

Transactions also downgrade when there is a long gap between when the transaction occurs and when the batch is released to the processor. Many retailers opt to have their terminal software configured to release the batch automatically every day, to receive funds faster and avoid downgrades.

Others prefer to handle batch release manually. Some older terminals are not capable of automatic batch processing.

Merchants who process batch releases manually should make sure it's getting done at the end of each business day or as regularly as possible.

Transactions in batches that aren't released within one or two days are downgraded, and the rate gets worse as more time passes. If a batch is not released for a week, those funds are delayed from being deposited into the merchant's account and the interchange rates go up as time passes.

Most retailers understand batch releases, but they may overlook such factors as a change in a key employee.

For example, an MRA member called to ask why funds weren't being deposited in his account. It was discovered the store hadn't released a batch in several weeks.

The member then realized that the timing coincided with a manager being let go. The manager had been in charge of batch releases, and no one had taken over that task.

Such errors can happen easily in a busy store and can cost in extra processing fees. Batch processing is a key task that must be overseen carefully.

No match

Any business other than restaurants that deal with gratuities will have downgrades due to the typical way of presenting the bill and adding the tip. Typically, the customer's card is swiped to get approval for the bill total, then a higher amount is entered after the customer has added a tip. Changing that amount is cause for downgrading the transaction.

Businesses that do this frequently are paying more than they need to because of those downgrades. To avoid this problem, get the total amount before swiping the card for authorization. Various businesses have devised ways of handling it.

One solution is to write up or print up a receipt with a line for the tip, have the consumer add the tip and total it before the card is swiped, then present a final transaction receipt for signature that reflects the actual total.

Tech solutions

In a few instances, upgrading equipment may be a wise investment because of the savings in processing charges. The discount rate for debit cards is lower than for credit cards, but the lowest rate is reserved for PIN-based debit transactions, which are considered less risky than signature-based debit transactions (in which a customer uses a debit card but signs the receipt rather than entering a PIN).

Mayleben estimates that for the typical MRA member, if the average ticket is near $50 the store can save money by adding a PIN-pad to its terminal(s). Staff should also be trained to watch for debit cards and offer the PIN-pad to the customer rather than just presenting the receipt for a signature.

Some stores use a POS cash register with out-of-date software that results in downgrades for many transactions. Make certain your POS system is using current software, or consider switching to a POS system or terminal that does, to eliminate these downgrades.

Businesses that do many transactions away from a store—at festivals or trade shows, for example—have resigned themselves to paying high rates for transactions because until recently they couldn't easily swipe cards at the time of the transaction. Although the customers' cards are present during the transactions and the merchant is checking signatures, interchange rules require that they are charged for the riskier "card not present" transactions.

Investing in a mobile transaction terminal that allows on-site card swiping through a wireless device might make sense in the long run for these merchants. The devices have dropped in price over the past two years.

In addition to saving on processing, merchants report many other benefits to their businesses in terms of professional image, improved bookkeeping and saved time.

Most merchants recognize that payment processing is a cost of doing business, just like heating the building and paying staff. Like other costs, processing costs have risen over the years. But unlike other costs, the complexity of the credit card payment industry has increased tremendously over the past decade as well.

This complexity can lead merchants to feel as though they have no control over this cost. The more a merchant understands how the charges are generated, the more he or she can manage this cost.

This article was written by Amy Buttery, Michigan Retailer staff writer.