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Creating a Tools Culture
Help Your Sales Force Survive Tax Time
Legal Issues Affecting Promotions and Sweepstakes
What Every Online Merchant Needs to Know About Payment Processing
Getting Back on the Growth Track

What Every Online Merchant Needs
to Know About Payment Processing
by Scott Fitzpatrick

As we approach a cashless society, the technical and logistical components of payment processing become more complex and costly. Cardholders benefit more and more from rewards programs, and in most cases, the consumer does not absorb the cost of the increasingly sophisticated infrastructure required to accept all of these payment cards.

The merchants, however, may not be as enthusiastic about all of these new "purchasing incentives"! In fact, payment processing is the third highest cost for some point-of-sale merchants in the United States.

The highest payment-processing fees are typically paid by merchants operating in the card-not-present environment-where fraud and charge-backs are rampant and difficult to control. However, there are other, more easily controlled factors that contribute to the rising cost of payment processing for merchants in the card-not-present environment. Here are three tips that can help merchants keep processing costs at a minimum:

• Educate oneself on the industry in general and the parties involved.
• Learn about the truth behind the fees.
• Understand and reduce risk.

Who Are the Players?

Keeping abreast of the rules and regulations in the industry can help merchants avoid paying unnecessary fees. Working closely with a savvy and professional merchant services provider (MSP) can help merchants stay in touch with the industry changes and operate efficiently. Identifying the "players" and their roles is pivotal to understanding how the process works.

Visa and Master Card: Are associations that offer qualified banks memberships as an issuer and/or acquirer. Visa and MasterCard set the rules of interchange, and they provide the infrastructure to exchange data and funds.

The Issuer: A bank and a Visa/MasterCard member who issues debit and credit cards to consumers and businesses. Typically, the card holder has a direct relationship with the member bank. The issuer is responsible for coding the cards, which determines the interchange rate for which the card is eligible.

The Acquirer: Is a bank and a Visa/MasterCard member who provides merchants the ability to accept Visa/MasterCard branded cards through access to the interchange system. Although the acquirer normally does not own the contract with the merchant, the acquirer bills fees to the merchant and can terminate the relationship with the merchant. However, most acquirers will not deal directly with the merchant. In many cases, a number of necessary intermediaries may separate the bank from the merchant in the chain of supply.

Merchant Services Provider (MPS): Upon acceptance of this sponsorship by Visa/MasterCard, the MSP is authorized to sell merchant accounts that will allow the merchant access to the interchange system. The MSP will typically manage the relationship with the merchant and bear some or all of the risks associated with the merchant account.

Interchange: A revenue model developed by Visa/MasterCard that dictates the amount of the fee paid by acquirers to card issuers for each transaction. Dues and

Assessments: All transactions are subject to dues and assessments at a uniform rate collected by the acquiring bank on behalf of Visa/MasterCard.

The Gateway: Acts as an interface between the card-not-present merchant and the front-end processor.

The Terminal: Connects retail merchants with the front-end processor.

The Processor: There are two kinds of processors: front-end and back-end. The front-end processor is responsible for authorization data only. The back-end processor is responsible for receiving the authorization data from the front-end, processing it, and passing it on in order for monies to be paid out accordingly.

Other Payment Cards (Amex, Discover, JCB, etc.): American Express, JCB, Diners Club, etc. are independent, publicly traded corporations operating on a closed loop system in which they act as both issuer of the card brand and acquirer of the merchant account.

Who Gets Those Fees?

Very few merchants actually know who is taking what portion of their fees. If one looks at the actual flow of a transaction, it becomes clear that there are a number of parties involved, which means many mouths to be fed.

The bulk of the rates and fees is interchange, but there are multiple processor fees, gateway fees and downgrade costs to pay. At the end of the day, when all is said and done, the MSP is left with one of the smallest portions and most of the risk. Furthermore, most merchants don't know that interchange is a fixed fee set by Visa/MasterCard. The interchange rate for each transaction is determined directly by Visa/MasterCard, and depends on the card code designated by the issuer of the card.

What's the Risk Factor?

Most merchants realize that card-not-present transactions are considered of higher risk; however, the other factors that determine risk are not always obvious. Some of the risk factors include, but are not limited to, the following:

• Product: Is the type of product explained, and is its description clearly stated?
• Claims: Are claims about the product accurate?
• Shipping: How much time does it take to ship the product?
• Return Policy: How clearly stated and how readily available is the return policy?

Taking these factors into account can help reduce the risk and lower the rates. However, the merchant will still get the lowest possible rates-in most cases-from the MSP as opposed to a bank. Banks want to share risks, so they partner with MSPs who specialize in merchant services and who are willing to take on part or all of the liability involved in acquiring merchant accounts. Speak to a merchant services provider about these and other factors that can have an effect on the risk-and consequently the rates!

Scott Fitzpatrick is the National Account Executive for Pivotal Payments. He is a frequent speaker on risk management issues and is also a member of the DSA. Scott can be reached at sfitzpatrick@pivotalpayments.com.