Confronting the complex math of energy marketers' payment fees
Interchange rates on payments in the fuel and energy sectors can be so complicated that energy marketers can lose thousands of dollars a year because of mistakes they make in coding their authorized credit card transactions.
Expenses run high when the largest portion of a card transaction, the interchange rate, suddenly gets higher because the merchant or ISO failed to add specific information to the transaction in proper order or did not submit it with the proper merchant classification code.
"Not having a data set right can cause all kinds of problems that result in fines or warnings from the card networks," said Brian Riley, director of card services for Mercator Advisory Group. "A lot of specialization goes into this, and I would certainly buy into the fact that many of the transactions are not coded correctly."
What merchants must avoid is to pass through transactions that are missing details the card networks are expecting — such as sales tax, customer code, address verification and CVV2 codes — and that suddenly fall into the dreaded Electronic Interchange Reimbursement Fee category for surcharges. That often means, depending on what type of retailer is involved, the interchange will increase between 0.45 and 0.75%.
It's the type of dilemma that multichannel payments processor Qualpay feels it was created to solve when making its cloud-based integrated platform available for businesses, developers, independent software vendors and independent sales organizations.
As such, the service Qualpay is offering "could be a nice targeted solution for the industry," Riley added. "If the merchant is off on one transaction, there are probably some percent that are consistently flawed throughout, and if you don't have it classified right, and you go to charge it back, everything gets messy."
Qualpay was formed in 2014, after starting as a technology company called Merchant E-Solutions. When Merchant E-Solutions was sold to a group of Brazilian investors in 2012, the wheels were in motion to create Qualpay and share the company's extensive knowledge about how interchange rates are classified and how merchants should be coding those transactions to get the lowest rates.
And it was in the fuel and energy business that San Mateo, Calif.-based Qualpay has seen the most striking need to address something that legacy payments systems cannot handle for merchants — the ability to assure transactions are getting the best interchange classifications and merchants are not being penalized for mistakes that create "downgrades," or being dropped to a more expensive interchange category.
Qualpay embarks on that mission this week, as it integrates its payments platform with Energy Engine LLC and Destwin, companies involved in the delivery of propane, fuel and oil tanks to homes, farms and businesses that use the products to heat buildings or operate equipment. Qualpay will help assure the customers of those companies are not paying more interchange than is necessary on a card payment.
"Interchange rates have hundreds of different price points for different transactions," said Qualpay CEO Craig Gass. "We looked at different markets and the problems they were encountering, and one of the first we looked at was oil and propane home delivery. It's not a huge space, maybe $35 billion in size, but that is meaningful."
It also proved to be an industry plagued by higher interchange that wasn't necessary, from Qualpay's viewpoint. Oil and propane are commodities, so companies dealing with these products operate on thin margins, Gass added. "A big part of operating a business for those in commodities is to manage the expense factor."
Merchants can also stumble when pre-authorizing a card to assure the customer has the money to make a payment, much in the same manner a gas station authorizes a card before the customer is finished pumping gas.
"The same thing occurs in delivery of energy products in that you want to capture the transaction at the end of the delivery," said Penny Townsend, chief product officer for Qualpay. "But the problem is if the transaction comes under what you initially authorized, and you don't reverse that amount on the cardholder statement or with the issuer, you will get fined for not doing it."
In transaction processing, the fuel industry qualifies for certain types of rates with Mastercard and Visa, but the merchant qualifies by remembering to run those transactions through different merchant classification codes, Townsend said.
"Traditionally, only one classification code is assigned to a merchant, but in the fuel space you can split them, but it is very hard for merchants to remember to do this," she added.
If a provider gets the classification codes mixed up for each card brand, the merchant would end up with the worst interchange rates available, Townsend said.
Essentially, Qualpay is operating as the payments knowledge base for its partners and their merchants. "They don't have to know all of these complex things," Townsend said. "Send your payments to us and we are going to make sure the transaction does not have mistakes and that they qualify for what will cost the least amount."
While Qualpay provides the type of multichannel payments platform that merchants are increasingly expecting — one that handles all payment methods through all devices and one merchant account — the company feels it is the only one providing a safety net for those in the fuel and propane businesses.
"We are looking to work with more ISVs on this and see how many merchants we can provide processing for," Gass said. "It's a $35 billion market and we have a product unique in the market and, over time, we could command a significant portion of it."
The early feedback has been positive for Qualpay.
"We can verify that the new, updated technology used by Qualpay is resulting in significant savings to our energy dealers," John Vrabel, president of Energy Engine, said in an announcement about the integration. "Upgrades to our Energy Engine e-commerce platform were also required to accommodate Qualpay's new technology, but considering the high dollar value for fuel transactions, it was worth our investment for the resulting savings to our clients."
And Qualpay is addressing a business that is likely to remain steady for some time, Mercator's Riley said.
"Every business has its nuances and this is definitely not one that people are charging into, but it's like toothpaste — it is a good, steady flow of business," Riley added. "Fuel delivery affects small businesses as well as homes and farms, and it's a highly sensitized area, so there is a need for a service like Qualpay."