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.

Demystifying Bank Transfers

Many people, trying to create payment systems at different levels, often face the question of how to transfer funds from one place to another. For example, one person needs to be able to get money from another person, or some online payment or e-wallet system needs to be able to remit (or charge) the funds or to some individual’s bank account.

Fundamentally, there are three ways, in which funds can be moved between bank accounts. In this article we are going to look at these three ways and list some advantages and disadvantages of each of them.

Bank wire (bank transfer)

The first (and, perhaps, the most familiar) way is a bank wire, sometimes, also called a bank transfer, although the term “wire” is more appropriate. Bank wire is commonly done through a SWIFT system. Bank wire allows to move the funds from one bank to another (including, internationally). Generally, bank wires are executed quickly. If banks are located in the same time zone (or in neighboring time zones), the wire takes up to a few hours to clear. Execution of a wire, generally, involves bank representatives at each end of the wire, however, more and more banks now introduce automated wire submission services.

The problem with bank wires is that there are still very few systems, allowing to do wires in batch, so they usually have to be performed one by one. Beside that, bank wires, usually, carry a significant cost (especially, international ones).

Bank draft

Bank draft (sometimes also called bank transfer) is a transfer of money between two banks, using a clearing house. Examples include ACH in the US, BACS in the UK, and SEPA in Europe.

The information on the transfer is sent from the bank to the clearing house, which is responsible for contacting other banks involved and giving them respective instructions. Bank drafts are not performed in real time. Depending on the country, they take from one to three days. In many cases, if the transaction is not successful (due to lack of funds, or due to mistakes in the input), returns information might not be immediately available (see the article on ACH returns).

On the other hand, the cost of such transactions is significantly lower than the cost of wires, and bank drafts can easily be done in batches (sometimes, including hundreds of thousands of transactions).

Transfers through debit cards

This approach has a particular appeal to the US market, where the Durbin amendment regulates the interchange cost of debit card transactions. It will not necessarily work for low-amount payments, such as micro-payments, primarily, because, there is still going to be a 0.5% cost.

On the other hand, on high-ticket transactions (especially, in those cases when eventual profit margins allow it), this technique can successfully be used, limiting the selection of cards to Durbin-regulated ones, and using PIN-less debit networks.

Emerging technology

There are also initiatives, by various companies (such as Dwolla), to introduce “real-time ACH payments” (payments which will cost closer to ACH, but work as wires).

The problem with many of such systems is that the coverage of financial institutions by these systems is still very low, while a real-time transfer can be performed only if both accounts are at the banks, participating in the service.

Conclusion

Before deciding on your money-moving strategy, you should consider your specific use-cases and costs, and then – make your choices accordingly.

Optimizing Recurring Billing with BIN-files

As the importance of recurring billing increases, new needs emerge at merchant services market. More and more recurring billing companies turn to BIN-files in order to get vital information for optimizing their recurring billing process. In this article, we are going to explain, how usage of BIN-files can enhance recurring billing process. Some information on card intelligence can be found in our respective article.

One of the key problems faced by companies in recurring billing context is that customers can use pre-paid and gift cards while subscribing for some memberships or services. The “trick” is often used by those who want to get a free trial period, and know that (due to the low membership cost) they are not going to deal with collections agencies when the company finds out that the membership is no longer paid for (see article on collections).

Example

A person subscribes for a pay-as-you-go membership costing $15 a month, using a pre-paid card. When the card is depleted, the member can just through it away and have the membership get cancelled, therefore relieving himself from the responsibility for canceling the service properly.

Often such cases create problems for merchants. One of the ways to avoid these problems is to use BIN-files to identify these cards and block them at the time when the accounts are initially setup.

Another advantage of BIN-files is that they can be used to identify transactions, whose processing cost is too high (too low). In subscription-based services industry the issue is even more important than in retail space. The reason is that while in retail business the card, causing money losses on transaction processing, is used just once, in recurring billing it is used regularly, and the potential losses from high processing fees are, consequently, larger. For example, if you don’t want to pay high processing costs, associated with rewards cards, you can identify them through BIN and decline them, thus, avoiding expensive processing fees.

Consequently, BIN-files, can help you in several ways:

  • You can identify expensive rewards cards and avoid processing them
  • If BIN-file indicates, that many of the cards used by a merchant, could be processed at lower rate through some specific debit network, it might be reasonable for the merchant to sign a separate agreement with the network and process the cards through this particular network (and not through Visa and MasterCard), saving on processing.
  • In our previous articles we also mentioned, that, using BIN-files, you can identify the bank that issued a given card. Therefore, you can use BIN files while conducting decline analysis to detect problems, that might be associated with a specific issuing bank. Working through this issue with one of your customers will automatically provide a solution for everybody else, carrying cards, issued by this bank.

Conclusion

Card intelligence through BIN-files can help you to save on processing costs, as well as detect abusive practices during recurring billing and common credit card transaction decline reasons. If you are not using BIN-files today, it may be the right time to start.

Credit Card BIN Files

Most modern-time credit card fraud protection tools are based on geo-location principles, IP-address filtering, and cardholder data verification. In addition to these methods a merchant can enhance the security of its business, and improve card processing strategy by adding another filtering mechanism. The filtering can be based on various attributes of a card, identifiable through credit card BIN.

The first 6 digits of a bank card number allow a merchant (and any business which processes bank card transactions) to learn additional information about the card by using pre-defined Bin ranges, that can be obtained from the acquirers. Based on the range the card number falls into, a merchant can understand additional information about the card.

Information which can be obtained from BIN file includes the following elements:

  • The maximal length of PAN (primary account number)
  • Name of the issuing bank and the country of origin of the issuing bank (country of issue)
  • Card type (credit, debit, prepaid, charge etc.) and PIN capability (such as credit with no PIN, debit with PIN only, hybrid card etc.)
  • The list of debit networks (for debit cards) that can be used to process the card outside Visa and MasterCard networks.
  • Information on whether the issuer is Durbin-regulated or not. In case of a PIN-less debit the BIN range allows you to determine if the issuing bank is regulated by Durbin amendment or not. It might be cheaper to partner with regulated debit networks (especially if you are processing million-dollar worth of transactions).
  • Information on card’s usage for healthcare transactions (FSA/HSA)
  • Ways to identify pre-paid and gift cards
  • Card class (purchase card, business card, consumer card, personal card, corporate card)

If you are a merchant, dealing with payment cards, the information, learned from card BIN is a useful component of your fraud protection strategy. Beside fraud protection, you can also use this information for interchange optimization, and to lower your processing costs.

Examples

The most typical example would be a US-based online retailer that only wants to accept US-issued cards.
Another example could be a pharmacy that wants to force HAS cards on certain types of purchases.

Conclusion

If you are a merchant, you should ensure that your payment system includes the logic for verification and, if necessary, filtering of payment cards, based on their BIN ranges. This will protect you from consumer fraud and unreasonably high processing fees.

PINless Debit Card Networks

The purpose of this article is to familiarize the key merchant services industry players with the advantages of integrating with PINless debit card networks.

The largest credit card associations, such as Visa and MasterCard, maintain large card networks through which payment card transactions can be processed. When a card transaction is processed, card network charges a certain interchange fee for handling of the transaction (more detailed information on transaction processing cost models and structure can be found in our respective article).

Some banks also created their own card networks called debit networks. For instance, every US-issued card, including those, carrying Visa or MasterCard logo, can be processed through at least two debit networks. Generally, a logo of a debit network, which can be used with a given card (for example, Plus, Interlink, etc.), can be found on the reverse side of the card. ATMs often work through debit networks as well, and usually, logos of supported debit networks are shown on the ATM.

Traditionally, there was an advantage for a merchant to integrate with PINless debit card networks, for several reasons, including funding delays. The primary reason, however, was considerable saving on the interchange cost as compared to the cost of equivalent transaction processed through Visa or MasterCard network.

In 2011, after Durbin Amendment (initially designed to reduce the burden of fees imposed by processors on merchants) was adopted, Visa and other associations were required by law to reduce the maximal interchange rate which they were allowed to charge for debit card processing.

If previously Visa could charge 2.5 to 3 % of transaction’s amount for debit card processing, after the Amendment the maximum interchange amounted to 0.95 %. After the Durbin Amendment was adopted the price difference for merchants integrating with PINless debit card networks versus regular card networks would only represent 10 to 20 basis points. As a result, some merchants, who were previously interested in and considered the prospect of PINless debit card network integration, changed their minds and lost their interest, because potential savings of 10 to 20 basis points could not provide a sufficient incentive (especially, for small and medium-sized merchants).

Although for small and medium-size merchants the advantage of PINless debit card network integration became really insignificant, on large processing volumes even 10 basis points still make a difference, especially in view of pricing wars, witnessed by modern merchant services industry.

Another advantage of debit networks, which still remains relevant, is that there is no policy around chargeback handling in PINless debit networks. If the transaction is processed, the funds cannot be charged back and the transaction cannot be disputed. Consequently, many companies (of all sizes), experiencing problems with high chargeback rates can still find integrations with PINless debit card networks. Even if transaction processing through PINless debit networks does not yield significant additional revenues, the option is still more relevant than processing through Visa and MasterCard networks. As we mentioned in some previous articles, 1 % of chargebacks can put the merchant into the Terminated Merchant File (TMF), and out of business. If some of the cards are processed through a PINless debit network, chargeback rates (as well as percentage of chargebacks resulting from transactions processed through regular Visa and MasterCard networks) decrease.

Conclusion

In spite of the limitations, imposed by the Durbin amendment, if you are a merchant, experiencing problems with high chargeback rates, and\or if you process significant dollar volume, PINless debit card network integration might still be a good solution for you.