Terminal Solution Components

This year support of EMV standard becomes a mandatory component of payment systems of US-based businesses. Consequently, more and more merchants ask themselves how they are going to implement their terminal solutions in view of the need EMV support.

The purpose of this article is to describe the components of a modern terminal solution in order to help those who are trying to define their strategy of payment terminal usage. The subject is especially relevant for large-size merchants and payment facilitators, who have to deal with a large number of terminal deployments.

A modern terminal solution has to incorporate three key modules, which will address three aspects:

  • Fulfillment management – for ordering, injection, and operation of terminals
  • Terminal application – for transaction processing
  • Terminal support and management system (TMS) – for configuration and updates of terminal applications

Let us address each of these aspects in detail.

Payment Terminal Fulfillment

During fulfillment process the merchant orders a certain number of terminals of specific models with specific injection keys, while the respective fulfillment center (which works directly with the manufacturer) handles the order and supplies the terminals to specific locations (points of sale).

In many cases large payment facilitators and gateways have to work with more than one terminal fulfillment center. The reasons are as follows. First, a fulfillment center may be out of stock for a particular terminal model, so you have to order this model from some other supplier. Second, not every fulfillment center can inject every processor’s key (usually, fulfillment centers have agreements with limited numbers of processors). This is particularly difficult when processing crosses borders, because fulfillment centers tend to specialize within a specific country of operation. Consequently, companies, dealing with merchants in different countries, or doing international processing, may require special tools to manage the entire process and ensure that proper terminals with appropriate keys are ordered from appropriate suppliers.

Another important fulfillment-related issue is injection of third-party keys. It should be noted that lately implementation of end-to-end encryption solutions has become a common practice. In these solutions, PAN data is encrypted with a key. Most payment facilitators and payment gateways prefer to use their own encryption keys. However, not all providers of fulfillment services are equipped to handle the third-party key injection. In order to have the right to inject third-party keys, a company needs to be equipped with special procedures and have special certifications. Beside that, a special agreement is needed by a company to be authorized to inject encryption keys on behalf of a specific third party.

When you consider your terminal solution, all these issues need to be taken into account (even if not all of them are will be handled by your in-house system).

Terminal application

There are several terminal manufacturers and numerous terminal models. Similarly, there are many different terminal solutions. However, from a global perspective, all terminal solutions can be divided into two categories.

  • Terminal applications which have local footprint
  • Terminal applications with no local footprint

A terminal application “with a local footprint” requires installation of some special components on a workstation it is connected to. Usually, these components are DLL libraries, which represent one of the most common approaches nowadays.

A terminal application “with no local footprint” does not require installation of any native libraries or drivers on a workstation that is going to manage the terminal.

The second solution is, naturally, the preferable one, as it allows you to access the terminal and work with it in a unified manner from different web or desktop applications, under different operating systems, using different mobile devices (such as smart-phones and tablets\pads).

Terminal management system

Once the terminals are deployed, they need to be supported and maintained. In this regard several issues need to be addressed.

First, a terminal may break. Some plan of action must be developed for a case when something goes wrong with a terminal (i.e. how the malfunctioning terminal is going to be replaced).

Second, from time to time the terminal logic might need to be updated. Both embedded terminal content and DLL applications have to be updated from time to time.

Finally, the advertisement content of the terminal needs to be updated as well.

A terminal management system must be capable of supporting all the listed functions and updates.

Conclusion

We’ve presented a brief overview of a terminal solution at the high level. In our subsequent installments we are going to address specific terminal solution components and aspects in greater detail. We encourage you to study the topic carefully before making decisions about your preferred terminal solution strategies. In our future articles we will cover more related topics.

Saving on Merchant Services Fees (Part 2)

In this article we are going to explain how large-size merchants, PSPs, and MSPs can reduce and save on merchant services fees.

Merchant services fees: merchant perspective

Transaction processing industry is organized in such a way, that there are several parties in between the cardholder, holding the card at the point of sale, and the issuing bank, that approves or declines the transaction. These parties include software companies, providing POS software, payment gateways, acquirers that issued merchant accounts to respective merchants, and others.
Each of these parties represents an intermediary link in the process, and makes something of every transaction processed, and you as a merchant pay for it.

The closer to the network you are, and the fewer middlemen and intermediary links there are in the “food chain”, the greater your savings are. Consequently, to save on merchant services fees you need to get as close to the processing network as possible.

It should be noted, that often, in addition to merchant services fees, merchants are surcharged gateway fees by the gateway service providers that they use.

One of the ways to reduce the total fees amount is to use your own payment gateway, or negotiate the possibility of subscription-based pricing (as opposed to transaction-based pricing) with your current (or new) payment gateway provider. In such an arrangement a certain monthly fee is paid for the use of gateway software and hardware, as well as network bandwidth for an unlimited or capped transaction volume (as opposed to transaction-based fees, depending on the number of transactions being processed).

The tendency of moving from per-transaction fees to subscription-based fees is already manifesting itself on the gateway services market. A similar trend was once witnessed in telecommunication industry, where subscription model replaced the one, in which every call was separately paid for.

Merchant services fees: PSP perspective

The concepts of a “food chain”, including many intermediaries, and subscription fees, as opposed to per-transaction fees apply to PSPs as well as to large-size merchants. However, in case of a PSP there is an additional dimension to the problem.

At the high level there are three things that a PSP needs to facilitate for its sub-merchants:

  • Underwriting and on-boarding
  • Processing
  • Remittance (merchant funding)

Traditionally, all three functions could be delegated to an underlying processor. In this case, the processor does most of the work, and, usually, charges additional premium for that.

Processing function, one way or the other, always remains with the processor, unless you go directly into the network (but that is a complicated scenario, which will only save you money if you process really huge transaction volumes).

As for remittance and underwriting, these two processes can be handled by a PSP on its own. If you, as a PSP, handle underwriting (and, therefore, assume more risk) and merchant funding as well, then you not only get more control over the entire process, but you can also negotiate better pricing with the processor, since less work is now done on the processor’s end. Another advantage of handling of merchant funding is that your processor will not be able to see your profit margins, and you will be able to negotiate still better pricing with the processor.

You can also optimize the process and save more if you optimize transaction routing, i.e., if you send specific transactions to specific entities for processing. For example, debit card transactions can be routed to a PIN-less debit network, while American Express cards can be processed directly through Amex (and not through your current processor).

Conclusion

As your business grows, the fees, that seemed reasonable and acceptable yesterday, might feel overbearing in your today’s business scenario. It never hurts to review your current merchant arrangement and the fees you are paying on a periodic basis to see if it can be optimized to save some money for your business.

How to Save on Merchant Services Fees

In this article we are going to address the question of how merchants can, potentially, reduce their costs by optimizing the size of merchant services fees they pay. In order to save on merchant services fees you need to know their structure and understand where specific fees come from.

Structure of merchant services fees

Merchant services fees include the following groups:

  • interchange fees (or, so-called processing fees)
  • flat fees (or base costs)
  • subscription fees

Processing fees, in their turn, consist of the interchange itself and per-item fees. As we explained in an article on pricing models, there are three common models being used: blended rate, tiered pricing, and cost plus. These three models, one way or the other, are incorporated in the processing fees with respected markup, charged by the processor.

Flat fees are additional surcharges (not dependant on transaction amount) for various transaction types. Flat fees are charged in addition to processing fees. In some cases, specific transaction types (such as chargebacks) actually carry the cost for the processor from the association, which is passed on to the merchant. In some other cases, the flat fees are just a fixed amount, charged by your processor. Beside chargebacks, the most common types of transactions, on which flat fees are charged (in addition to processing fees) are declines and ACH returns.

Subscription fees are recurring fees charged on a monthly basis. Subscription fees can represent a payment for specific services, for PCI compliance, or simply for merchant account usage.

Why merchant services fees are charged

In order to effectively negotiate pricing, it is crucial to understand, where the fees are, because, in some cases, merchants actually have excellent deals, given their processing volume, and still think that they are being ripped-off. We encourage you to carefully assess your situation, as you might already have a great deal with your current processor.

Processing fees represent the basis of your processor’s revenue. It is important to understand that average profit margin of a processor amounts to 1% of the total processed transaction volume. On smaller accounts this amount might be insufficient to compensate the costs, associated with support of the customer when handling certain transaction types, requiring some additional efforts from the processor. Examples of such efforts are chargeback resolution, decline recycling, or some settlement-related actions. In order to cover such costs, flat fees are charged on top of processing fees for processing of the more “labor-intensive” transaction types.

Subscription fees also represent a form of additional revenue for the processor. However, their primary purpose is to compensate for low processing volume on behalf of a merchant. The reason is because support of a merchant account requires some effort from the processor, independently of transaction volumes processed. For example, a merchant, processing $1000 a month can consume as many support hours, as the one, processing $1,000,000.

As we can see, on large-size merchants, the basis of the processor revenue is formed by processing fees.

Example

A merchant processes $1,000,000 worth of transactions on a monthly basis, and pays 1% of this amount to the processor as processing fees, while subscription fees amount to $100 only; these subscription fees are really insignificant in comparison to processing fees, representing only about 1% of the processor’s total revenue of about $10,100.

On the other hand, on small-size accounts the processor’s revenue mostly comes from subscription fees.

Example

Every month a merchant processes $10,000 worth of transactions, and pays 1% of this amount to the processor as processing fees, while subscription fees amount to $100. In this case subscription fees represent 50% of the processor’s total revenue of about $200.

Finally, flat fees allow a processor to handle the situations when a merchant has a large percentage of certain “labor-intensive” transaction types that require special efforts.

Conclusion

Before you start pricing negotiations, you need to understand the needs or your business, particularly, which category of the fees you pay generates the most significant share of your processor’s profit. If you see, that the amount you are paying to the processor could be reduced, because some other processors have better deals on respective categories of fees, you can try switching to another processor.
Keep in mind, that you might run into situations when you are approached by a competitor of you current processor, offering reduction in certain types of fees; however, before accepting the offer and switching to a new processor, analyze the potential profitability (for your business) of the deal you are offered, and the cost of the conversion. Make sure that the conversion costs do not exceed your savings (check our article on migrations). Only after these considerations you can make a really balanced decision.