This article appears in the March 12, 2009, edition of ISO&Agent Weekly.
Retailers coping with economic turmoil are asking their ISOs for help in controlling costs. ISOs responding to those inquiries are finding themselves in the enviable position of merchants viewing them as a resource.
"Retailers are being asked to do more with less," John Mayleben, vice president of technology and product development at the Michigan Retailers Association, tells ISO&Agent Weekly. Part of the ISO response is not just to look at the number of merchant transactions the ISO can help convert from credit to less-expensive debit card transactions, but also to examine the merchant's behavior, he says.The Lansing, Mich.-based association operates an ISO for its members and merchants in 20 states.
"We ask merchants how they do business today and make sure that description matches the interchange categories they are paying," Mayleben says.
When a significant number of transactions fail to get the optimal interchange rate, such as when a clerk keys in a card number instead of swiping the card through a reader, the conversation with the merchant will focus on clerk behavior, he says. "How do we help the merchant train its staff to modify their behavior so transactions qualify at a better interchange rate?" Mayleben says.
At 888QuikRate.com, a Dallas-based ISO, owner Jon Perry says the ISO changed most of the contracts for merchants that generate most of its revenue to the pass-through model, which is interchange plus a fee. Many merchants otherwise are on a tiered pricing model that has set rates for qualified, mid-qualified and non-qualified transactions. Instead of assigning a rate specifically for a type of transaction, the tiered model tends to lump types of transactions into one of the three categories, which may make some individual transactions more expensive than in the pass-through model.
Qualified transactions typically have the lowest rates of the three. Once the issuer authorizes the transaction, the acquiring bank determines which category into which it falls. For example, Perry says, a qualified rate might be 1.59% of the sale, but as a pass-through transaction that rate could be 1.03% plus a fee. The pass-through model helps reduce the potential for an acquirer to assess an interchange rate in the higher tiered-pricing model, he says.
Just about every ISO is evaluating how its services fit merchant needs. Consumers decidedly are shopping less, and merchants are facing constraining cash flow coupled with increasing costs.
888Quikrate.com's Perry says he is fighting for his merchants. While concerned, he is not about to acquiesce to the prospect of this downturn becoming permanent.
"There are two things this year that are going to make an ISO successful," Perry says. The first attribute is having a sense of integrity, which establishes credibility with merchants. The second is to realize an ISO cannot succeed alone.
Cost Also May Be A Factor
According to an article in the February issue of Cards&Payments, an ISO&Agent Weekly sister publication, merchant acquirers generally pay about 50 cents for a typical PIN-debit transaction, while a signature-debit transaction yields interchange fees ranging between 1.2% to 1.5% of the sale, plus about 10 cents. PIN-debit networks typically cap their fees at about 65 cents, while signature debit has no cap. Credit card interchange rates can range between 1.8% and 2.2% of the sale.
For some lower-cost purchases in certain retail categories, a merchant could pay less to accept a signature-debit transaction, according to Adil Moussa, an analyst with Aite Group LLC.
On a $40 general-category retail transaction, for example, a PIN-debit transaction could cost a merchant between 50 cents and 60 cents, whereas a signature-debit transaction based on a 1.2% interchange fee could cost about 58 cents. On a $100 transaction at the same retailer, the PIN-debit fee may max out at 65 cents, while the signature-debit fee would be about $1.30.
Part of Mayleben's strategy is to examine each merchant's card-acceptance procedures. Some simple clerk training, such as how to swipe the card at the right speed to ensure the terminal reads the track data, may suffice to improve the number of transactions that go through at the lowest possible rate, he says.
"If a retailer can use a transaction to qualify at a better rate, in most cases the only entity harmed is the issuing bank," Mayleben says. "I analogize interchange expense to paying income taxes. It's illegal not to pay income taxes, and it may be considered immoral to pay more than you should."