PittGlobal - The Basics of Bankcards

	Bankcard Services
Bankcard Basics

Four Factors in Selecting a Bankcard Processing Plan
If You Currently Accept Bankcards	If You Might Want to Accept Bankcards
Rates and Fees
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"Tiered" vs. "Interchange Plus” Rates
What are Interchange Plus rates? Are they less costly than tiered or bundled rates?	If all rate plans are based on Interchange, what's the difference?
Equipment and Technology Options
Change or upgrade equipment? Go wire-less? Remote and website sales? Online bill payment?	Which equipment? Is it free? Transmit via phone, wired/wireless terminals, software, website?
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The following information explains many basic aspects that persons new to the bankcard industry should know. Veterans may find some useful tips as well. Your comments and suggestions will be appreciated.

Below we use the terms “merchant” and “business” very broadly, to include any business, organization, or person that accepts bankcard payments. We similarly extend the word “rate” to cover the combined payment of a percentage and a flat fee. We address these topics:

1. Why use bankcards?
2. How bankcards work
3. Rates, fees, service, and you
4. Cautionary notes on transactions
5. Comparing Card Processors

1. Why Use Bankcards?

Bankcards are useful to the consumer and profitable to the merchant: They simplify doing business, speed up checkout procedures, encourage shopper spontaneity, and increase sales significantly. By reducing the need to carry and hold cash and to write and deposit checks, card transactions also increase security for card users and merchants alike. For transactions in virtually every sector of the economy, in all types of businesses, professional practices, residential services, etc., and in all sorts of venues bankcards have become commonplace. They are both accepted and expected.

2. How Bankcards Work

When a consumer or merchant swipes a bankcard, data travels quickly to and fro, via telephone or internet:

The swiping action sends the card number and transaction data to the merchant’s “acquiring bank” for approval.
The acquiring bank forwards the information to the cardholder’s “issuing bank” for verification of the card’s authenticity and the bank’s approval of the transaction.
The issuing bank sends a “payment guarantee” to the merchant’s bank, completing the authorization of the transaction. Now the merchant can confidently release the purchase to the customer.
The issuing bank remits the purchase price, less the applicable Interchange rate to the merchant’s acquiring bank.
The acquiring bank or its processing company then transmits payment to the merchant’s bank account, less the sum of the applicable processing fees. These deductions from the transaction amount include the Merchant Discount (also called the Merchant Service Fee), the applicable Interchange rate, and the processor’s charges. The original transaction total payable to the merchant is “discounted” by the amount of the fees.
Authorization occurs quickly, but the electronic movement of funds usually awaits the end of day when the merchant submits a batch transmission of the day’s transactions.

Elapsed time from transaction until money reaches the merchant’s account is usually less than 24 hours. Financial clearinghouses settle vast transaction amounts daily, except when there are bank holidays. If, for reasons explained below, a transaction is “downgraded,” the resulting increase in transaction costs is included in the settlement process.

Processors and Banks. Processing companies are associated with banks and are authorized to perform card transaction activities on behalf of their respective banks. There is no functional difference between a bank’s in-house card-processing unit and an independent company that performs the same activities. A bank department that processes bankcards is a profit center for its bank with the same priorities and raw costs that independent processors have. There consequently is no cost advantage to a merchant in dealing directly with a bank for Visa, MasterCard, or other bankcard services.

Credit Cards. When a merchant accepts a credit card during a sale, the buyer’s issuing bank fronts the payment to the merchant and collects later from the cardholder. If the cardholder pays the issuing bank within a specified period after the bank has presented a periodic statement to the cardholder, there is no interest payable by the cardholder. The bank in this case will have provided credit at no cost to the cardholder. Any unpaid portion of the statement remains due, accruing daily interest charges until the balance is paid in full.

Debit Cards. For a debit card transaction, the bank that issued the card draws funds, usually overnight, from the cardholder’s bank account and directs the corresponding electronic payment to the merchant through a national clearing system.

Bankcard System Links Customers, Merchants, and Banks. There are numerous players in the bankcard system beyond the banks, merchants, and card-using customers. The latter include electronic clearinghouses, gateway services for internet card use, the processing companies, and third-party companies that offer special services such as gift and loyalty (or reward) cards. Mega banks such as Wells Fargo, Bank of America, Chase, Wachovia, and HSBC are the major forces within the two largest card brand names, Visa and MasterCard. Although Visa and MasterCard now operate as publicly traded companies, until recently they were organized as associations of banks, in which each association had over 20,000 member banks.

The Merchant’s Role. For each transaction, the merchant pays rates and fees to compensate the issuing bank, the processing company, and other intermediary parties. The merchant has three options to cover the resulting charges.

Price Increases: Merchants usually build into their prices a percentage equivalent to the average percentage on sales imposed by the card payment system. Merchants properly view bankcard costs as part of their overhead or operating expense.
Increased Sales Volume: A higher sales volume, generated by acceptance of cards, usually increases profits to more than cover the merchant’s added costs from accepting card payments.
Lower Rates: For every dollar that a merchant saves by having low processing rates and fees, that is one dollar less that the merchant has to obtain by increasing prices or sales volume. Even small percentage decreases in processing rates and fees can save large sums.

The Cardholder’s Role. Consumers typically are unaware that several percent of each credit card sale cover transaction costs. Few members of the public are conscious of the even greater added cost burden of reward cards, whose “points,” frequent flyer miles, and the like are linked to credit card usage. Some critics assert that such “issuer rewards” represent 44% of Interchange costs.

The customer nonetheless values the convenience of card use and typically spends more because purchases are easier with card-based payments. Consumers respond to sale offers, point-of-sale specials, and reward incentives. Card users are less likely to require store credit.

In some cases a merchant invoices a customer directly. Customers who can then pay online at the merchant’s website, are less likely to pay late.

The Bankcard System’s Role. Despite its complexity, the bankcard system operates remarkably smoothly, thanks to electronic communications. Each constituent element of the system has a claim on remuneration for its unique services, but Interchange rates form the largest part of a merchant’s monthly bankcard statement. Payment for Interchange charges go principally to the banks involved in the transactions, although the banks’ names may not even appear on the statement.

The Processor's Role. The processor works as a service provider to the merchant on behalf of the acquiring bank. Each monthly statement reports to the merchant the preceding month’s transactions and the payments allocated to processing. The processor influences the bottom line of each statement by the way it translates Interchange into payable charges. This influence applies both to the Interchange Plus method and the three-tiered method of charging merchants. Processors compete by packaging their retail rates in a variety of ways that affect a merchant’s costs. It behooves a merchant to understand this packaging in deciding which processor to use.

3. Rates, Fees, Service, and YOU

Because accepting credit cards incurs expenses, we recommend that you learn enough about the following points to feel comfortable with your rates, fees, and processor. You need to understand the purpose of each type of cost (rate and fee), why it is charged, its amount, its relative importance to you, and its frequency (per transaction, monthly, annually, or other). If you want a fresh look at your costs, PittGlobal would be pleased to help you. Email us at cards@pittglobal.com or call us at 888-PITT-USA.

The following paragraphs discuss what affects your processing rates, both directly and indirectly.

Interchange Rate Tables. Visa and MasterCard have long used tables they compile periodically to provide a single basis of wholesale costs to processing companies. Several years ago, the two companies yielded to pressure from merchants and the government and began publishing these rate tables for all to see. The information in the tables is complex but not totally obscure. There are about 350 separate rates and very many rules and qualifiers, some of which are apparently unpublished. Retail merchants, government agencies, and Congressional committees continue to press, through protests, litigation, and investigation for more openness about Interchange rates and rule-setting, which could eventually lead to lower rates.

To download recent versions of the Interchange Rate tables, click one of these:

Visa Interchange Rates
MasterCard Interchange Rates

In these tables, cards are differentiated by their relative risk, use, merchant volume, and other factors. Although tiered rate plans commonly ascribe relative value to cards by identifying them as “Qualified,” “Mid-Qualified,” or Non-Qualified,” it is worth noting that these terms are totally absent from the Interchange tables, which are the basis for tiered and IC+ rates.

The transformation of wholesale Interchange rates into retail Interchange Plus rate plans is relatively straightforward. There are however many ways to create tiered rate plans, because each processing company is free to define its own set of tiers and to designate the respective rate for each tier.

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for Bankcards

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bankcards@pittglobal.com

Consider The PittGlobal Group

PittGlobal will perform a professional analysis of your current statements to determine not only what you can save with our rates, but also to show ways in which we present your data so it is as transparent as possible—without gimmicks or tricks or hidden charges.

For tiered rates, see our offerings. You can sign up online for a wide range of services. Do not hesitate to contact PittGlobal to discuss your needs and our ability to help you.

For Interchange Plus rates, please contact us:

1-888-PITT-USA
cards@pittglobal.com

If you already accept bankcards
and would like to
LOWER YOUR RATES? then . . .

We'll give you $500,* if we can't beat
your current credit card processing rate.

*Some restrictions apply. Contact PittGlobal for details.
Email: bankcards@pittglobal.com Tel: 1-888-PITT-USA

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Interchange Plus Plans. The “IC+” plans begin, as their name suggests, with the wholesale Interchange rates. The processor adds a uniform “Plus” amount to all the Interchange rates to cover bank charges, third party charges, direct processing costs, and a profit. This add-on usually takes the form of a small percentage and a small flat fee. In Interchange Plus, cards do not belong to prescribed tiers, because the same add-on value is applied equally to all accepted Visa cards and MasterCards.

The “Plus” increment is usually a fixed number of cents and a percentage expressed in “basis points”. A basis point is one-hundredth of a percent (0.01%). For instance, an increment might be “10 basis points + 12 cents,” expressed briefly as “10 bp + 12¢.” With this increment, a wholesale Interchange rate of 1.39% + 10¢ becomes a retail rate of 1.49% + 22¢.

A merchant can compare the processing charge for a particular transaction listed in the processor’s monthly statement to the corresponding charge for the relevant card shown in the Visa or MasterCard Interchange table. For this reason, Interchange Plus rates are more transparent than tiered rates. Many merchants prefer IC+ for this reason, but there is another, more compelling reason as well. As a rule, the IC+ rate structure is more likely to result in lower overall transaction costs.

Three-Tiered Plans. Tiered plans remain the more popular type of plan among merchants. The processing industry offers most merchants and professionals a rate structure with a different retail rate for each of three groups of Interchange rates. If the rates for check processing and check cards are included, one could speak of even more than three rate tiers. To all rates in a given tier, the processor adds the same percentage and flat fee, but these values differ from one tier to the next. Usually the flat fee remains the same from tier to tier, but the assigned percentage is low, mid-range, or high, according to the tier: so-called Qualified cards have low rates, Mid-Qualified cards receive middling rates, and Non-Qualified rates are assigned the highest rates.

Personal bankcards are most likely to be rated in the Qualified range, reward cards typically are considered Mid-Qualified, and corporate cards are likely to rank in the Non-Qualified category.

For a single rate-fee combination to cover diversely valued cards within a given tier, a processor derives a “weighted average” for each tier. In a three-tiered structure, a tier’s single rate covers all the bankcards in that tier, despite that fact that the cards may have many different underlying IC rates. Processors describe these bundled rates as being simple for customers to understand, but “rounding up” in computing weighted averages invariably favors the processor.

Things are not always as they seem. If for a particular credit card, the Interchange rate is 1.40% + 10¢ and the processor assigns the card to the Qualified tier with a so-called “Qualified rate” of 1.65% + 22¢, the casual observer would think that the Qualified rate in Interchange is 1.65% and that the processor added 12¢. However, processors often convert both parts of an Interchange rate (the percentage and the added cents) into a single, higher percentage. If the retail percentage of 1.65% subsumes the entire Interchange rate and fee, the added 22¢ could be a dedicated fee needed to cover a processing cost or it might simply be for profit. Processors do not usually explain the math behind their rates, even though they all start from the same Interchange tables.

4. Cautionary Notes on Transactions

There is one more step to consider in determining retail rates: how a transaction is completed and transmitted. Although Interchange Plus rates are relatively easy to analyze and tiered rates may seem clear, unless transaction data is recorded and transmitted according to certain criteria, the transaction may be “downgraded”. That is, its rate moves to a higher tier, costing you an additional one or two percent. Below we offer some observations on what causes downgrades and tips on how to avoid them.

Card-swiping: As far as possible, every transaction should be face-to-face. The processor is unlikely to downgrade a card transaction, if the card is swiped and the cardholder signs the charge receipt. (Some special programs, however, exempt transactions below a certain amount from the signature requirement.) Transactions compliant with these and other rules receive the lowest rate applicable to their designated tier.
Consistent pinpad usage: If a debit card is used, the cardholder must enter his or her PIN (personal identification number) on an electronic pinpad during the transaction. Cardholders have little incentive to enter their PIN, but merchants have a monetary incentive to encourage pinpad use. The merchant is liable for a higher rate if the pinpad is not used, if an incorrect PIN is entered, the card is not presented, or it is not swiped.

It is a good practice to ask every customer whether the card presented is a debit card. Some merchants instruct their cashiers to move the pinpad towards the customer as a polite reminder. A merchant can also ask a customer to consider using a different card to complete the transaction.
Practice compliance and instruct staff: A compliance or equipment failure results in a transaction downgrade. Consumers are generally unaware of this effect, probably because the burden falls on the merchant. Each merchant therefore should protect his or her bottom line by being sure that the transaction requirements are met every time. Review with your staff the rules imposed by your card processor!
Avoid “card not present:” When a card is not present, it cannot be swiped, so a downgrade results. Keyed entries inherently imply that the card is not present. The same is true if a swiping device is present but not used or not used successfully. When possible, merchants should avoid keying the transaction data into a terminal or any other device that has a card-swiper.
Website transactions: If website sales are important to your business, you should look carefully for a low rate for such transactions. You must also use tools for security against fraud on each transaction. You have to use SSL technology on your website (Secure Sockets Layer), which encrypts all transaction data on the internet. Useful guides are available online from Visa and MasterCard. Both companies offer numerous documents and case studies, so explore their resources carefully. The major bankcard organizations provide added verification steps for telephone and internet sales, but the ultimate responsibility still rests with the merchant. We recommend that you also discuss internet security issues with your processing company.
Address verification: Failed attempts at address verification are regarded as raising risk and accordingly receive downgrades.
Mail orders and telephone orders (referred to as MOTO transactions), as well as website orders, are card-not-present transactions, so their higher transaction rates are to be expected by merchants and website operators. If a large portion or all of your business uses MOTO sales, you should have a dedicated processing account. When looking for a low MOTO rate, be sure to compare Interchange Plus against tiered rate options.
Voice authorizations via telephone also trigger automatic downgrades.

5. Comparing Card Processors

Ultimately you will want to compare one card processing company with another to decide which offers the best fit with your business. Here are some of the factors to consider:

Low-rate advertisements: Processors typically advertise the lowest of their tiered rates or their check card or debit card rate, which may obscure the larger set of rates they apply to transactions. Merchants should review the full spectrum of rates and be compare the increments from Qualified to Mid-Qualified and Non-Qualified. Without such knowledge, a merchant may overpay considerably on transactions that involve the higher-priced tiers.
Malleability of tiered rate structures: Individual processing companies may customize their tier definitions to increase the number of cards subject to higher rates.
The level playing field: Basic rates are not set at the local level, but in Interchange by Visa and MasterCard. Independent (non-bank) processing companies deal with the same underlying wholesale Interchange rates that local and regional banks must use. As a result, the playing field among the card processors is virtually level. Banks that sell card-processing services have no actual rate-setting advantage over independent companies.
Special plans for certain types of business: There are a number of special plans for businesses with heavy card use, such as various kinds of restaurants, small-ticket businesses, groceries and supermarkets, gas stations, utilities, and more. PittGlobal will try to match your business to the most suitable plan.
Level of Service: The level of a processor’s service can be critical. If your bankcard equipment fails, you could lose sales. If you use telephone authorizations while your terminal is broken, you necessarily pay higher rates. Be sure that your processor provides rapid repair service and readily provides answers to questions. A good processor should be willing to analyze your statements and help you with needed adjustments over time.
Statements: There is no standard format for processing companies' monthly statements. The level of detail in statements varies considerably across the industry. Which charges are mandatory and which are actually discretionary may remain foggy. How a statement treats downgrades and how it aggregates certain charges may obscure costs applied to individual transactions. As a merchant, you can always ask for more detail in search for transparency and fairness. When picking a processing company, you can look for one that clearly states all charges and presents statement data in an easy-to-understand format.
Professional Statement Analysis: If the annual dollar volume of your bankcard transactions is large, you should consider hiring a professional analyst to examine your bankcard statements periodically. The expert will look for irregularities, hidden and unnecessary charges, as well as excessive rates. Proper analysts avoid even the appearance of a conflict of interest, they do not sell processing services. PittGlobal can nonetheless recommend qualified companies.

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