Merchant Warehouse Inc., a Boston-based ISO that offers software designed to help small retailers find the lowest-cost processing for card transactions, could benefit from Congress’ approval July 15 of the Dodd-Frank Act, says Henry Helgeson, the company’s co-CEO.
Under the legislation, which President Obama is expected to sign into law, the Federal Reserve Board would set the interchange rates for most debit card products.
The software, called BINsmart Cost Manager, combines information from a card’s bank identification number, or BIN, with information about the retailer to choose the least expensive processing option for each transaction while the customer is still at the point of sale, Helgeson says. A “couple hundred” retailers are using the product, he estimates.
“The nice thing about BINsmart is it uses the merchant’s actual rates versus just using a ‘guess’ rate,” says Helgeson. Debit networks base rates partly on volume and type of merchant, which the product takes into account.
The software identifies the type of card from the BIN and applies the merchant’s ID, standard industrial classification and ZIP code while noting the amount of the sale to estimate the lowest-cost processing method, Helgeson says. It automatically prompts for PIN or signature, whichever is less expensive for a particular debit transaction.
Big Box Edge
A similar approach, called least-cost routing, and PIN prompting have been available to larger retailers for years, says Chuck Fillinger, a senior associate of Omaha, Neb.-based The Strawhecker Group and formerly vice president for product and business development at First Data Corp.
Wal-Mart Stores Inc. and other large retailers have been deciphering BIN data to determine whether a debit card works with either a signature or PIN and then prompting consumers to use the less-expensive PIN if applicable, Fillinger says. Larger retail chains were capable of storing the extensive BIN information on their computers, he says.
“Big box retailers really have an edge on the small merchants,” agrees Helgeson. “BINsmart brings that technology down to the small mom-and-pop restaurant on Main Street and gives them better technology than the big box retailers have.”
Regardless of a retailer’s size, the software’s effectiveness had been dwindling because debit networks have been raising rates for PIN transactions, which now cost merchants nearly as much as signature transactions, Helgeson says. Card issuers have been routing transactions to the highest-priced networks, which are more profitable, he says.
Shave 15% Off Cost?
Under the amendment to the Dodd-Frank Act added by Sen. Richard Durbin, D-Ill., debit cards will operate on at least two networks and will complete transactions on the one with a lower fee, Helgeson says. That will bring more traffic to the less expensive networks and thus create competition that will push down prices “naturally,” he predicts.
That interpretation of the legislation’s effects makes sense, according to a spokesperson for the National Small Business Association, a Washington D.C.-based trade group that has advocated lower fees for merchants.
Before the recent increases in debit-network fees, Merchant Warehouse had estimated BINsmart would save most retailers about 15% on debit transactions. The increases made the amount of the potential savings uncertain and favored retailers with bigger-ticket businesses that are likely to see debit transactions, such as college bookstores and auto mechanics, Helgeson says.
After the Dodd-Frank Act takes effect and prices begin to decline, the software once again will tend to shave 15% from debit transactions, while bringing benefits to all businesses, including lower-ticket operations, he says.
Besides bringing savings in debit transactions, BINsmart helps merchants lower the cost of processing corporate credit cards by using prompts to ask for a customer code or tax amount, says Helgeson. Address verification also can lower interchange, he says.
Retail employees simply swipe the card at the point of sale, and the software “tells them what to do next” through the prompts, Helgeson says.
Merchant Warehouse can host the software as a service or incorporate it into a standalone terminal, he notes. The company considers the product a loss leader and charges nothing for the service.
So far, BINsmart has been available to merchants only through Merchant Warehouse and its sub-ISOs, but the company is contemplating making the product more broadly available through other ISOs, processors and technology partners, Helgeson says.
BINsmart represents Merchant Warehouse’s latest effort to differentiate itself from competing ISOs, he continues. Other efforts include operating a gateway called MerchantWare since 2006 and maintaining a software-development shop to create proprietary products, he says.
Differentiation helps sales agents sign up merchants, Helgeson says. Agents can also charge setup fees for BINsmart or charge a higher upfront cost for terminals equipped with the software, he says.
Others charge a monthly subscription fee, Helgeson says. Agents who used to have to beat competitors on price can now match a price while offering the additional software as an incentive to sign up, he notes.