Credit card processing can be one of the most confusing parts of ecommerce for many merchants. The rates fluctuate widely and the monthly statements are hard to follow. And yet, credit card processing is key to virtually every ecommerce business. To help us understand how merchants can save money on their processing costs, we spoke to credit-card processing pioneer Sloane Bouchever. He’s the co-founder of e-onlinedata, the large merchant account provider, and prior to that he was senior vice president of Authorize.Net, the payment gateway. His new firm is Interchange Plus Solutions. We talked with him about credit card payments and how merchants can reduce their processing costs.
Practical eCommerce: What is your view of the credit card processing business, especially from an ecommerce merchant’s perspective?
Sloane Bouchever: “Overall, I think the industry has been a great ally of ecommerce merchants. When I started focusing on ecommerce in the 1990s, very few processors would approve Internet accounts because they perceived the risk was too high. Merchant account providers and gateways like Authorize.Net that have embraced ecommerce have helped web merchants build their businesses for the past 15 years.”
PEC: What are some of the most common fee abuses that account providers are imposing on ecommerce merchants?
Bouchever: “There are a number of abuses that particularly stand out and most of them are inherent to the three-tier [i.e. “qualified,” “mid-qualified,” “non-qualified”] billing system that most small ecommerce merchants are set up on. Number one is downgrading rewards and corporate cards to nonqualified rates. The actual interchange cost for an ecommerce rewards card is just about 2.06 percent, but many merchant account providers are downgrading rewards cards and actually charging over 4 percent.
“Number two, the cost of processing a debit card is much, much lower than processing a credit card because the risk is much lower. But processors are charging debit cards on the Internet at about 2.25 percent where the rates are really much lower. They’re not passing through the lower risk on debit card transactions.
“Number three, a lot of processors are taking unfair advantage of the yearly increases in Visa and MasterCard rates and fees. Every April and October, Visa and MasterCard typically adjust their interchange rates. So, suppose Visa raises the interchange fees for, say, corporate cards by three basis points, which is 0.03 percent; many providers will take advantage of this and increase across the board all card types by 5 or 6 basis points. In my opinion, this padding of interchange is a serious violation of trust.
“And don’t get me started on termination fees that providers are charging to small merchants. They are really unjust and unfair. If you want to change your processor, you should be allowed to do that.”
PEC: Please tell us more about tier pricing and how it affects the fees charged by processors.
Bouchever: “Most account providers set up merchants on a three-tier billing of qualified, mid qualified and non-qualified. But ecommerce merchants are typically only seeing the mid and non-qualified. Qualified is typically reserved for swipe transactions [i.e. “card-present” transactions] for retail stores.
“So, now you’ve got the mid and the non-qual. The cost of a rewards card (like mileage cards or other cards with benefits) is slightly higher than the cost of a plain vanilla credit card. But what the processors are doing is actually forcing the rewards cards into the highest rate, which is called the non-qual rate. Oftentimes, it’s not even stated. I’ve seen non-qual rates as high as 4 or 5 percent, so a card that costs slightly more than a credit card is actually being charged at an additional 2 percent. These are profits that the processors are making on the merchants.”
PEC: Is that a deliberate move or a mistake by merchant account providers?
Bouchever: “It’s a deliberate profit center for the processors. I’ll try to give you some real world examples. Let’s say the interchange cost of a plain vanilla Visa credit card is 1.95 percent and the cost of a rewards Visa card is 2.05 percent. There’s not that much difference in the cost. When the processor quotes a rate of 2.25 percent as their mid qual rate on the Internet, both the plain vanilla and the rewards cards are underneath the mid qual rate and so there is some profit there for them; but they’re deliberately taking the rewards cards and forcing them into the non-qual category to make an additional 2 percent.
“So, on a plain vanilla card, they’re maybe making 0.3 percent or 30 basis points; on the rewards cards, they’re charging on the non-quals let’s say 4 percent and now they’re making 1.95 percent profit on a rewards card. It’s deliberate.”
PEC: Tell us more about interchange and why merchants need to understand the concept.
Bouchever: “Interchange is the fee paid by the merchants to their cardholder’s issuing bank to process their transactions through the system. It’s the single largest part of the rates and fees that merchants pay for their credit card processing.
“Envision that a consumer comes into your store or shops on your ecommerce website. Not only is that consumer who’s purchasing from the merchant potentially floating their credit at 18 percent to the bank that issued their card, but the bulk of what merchants pay in their rates and fees are these interchange fees. So, the issuing banks are making the interchange fees as well as the interest on providing credit to the consumer.
“As processors are the ones who have the relationship with the merchants, it’s their responsibility in the rates and fees that they charge to the merchants to collect the interchange plus their markup. They now have to pay that interchange back to the issuing bank that issued the customer’s card.
“There are many different interchange categories. The main reason is risk. For example, debit cards — where funds are taken directly from the consumer’s checking account — are very low risk transactions because the funds are in there. An ecommerce card-not-present transaction poses a higher risk than, for example, a swipe transaction. So, all ecommerce interchange is charged at a higher cost of interchange.”
PEC: Do all banks pay the same interchange rates?
Bouchever: “Yes. All banks have the same interchange income, and pay the same rates. So, the issuing banks are making the interchange. What’s great about our industry is that everyone is on a level playing field. Whether you’re a processor with 30,000 or 40,000 merchants or the largest processor with hundreds of thousands or millions of merchants, everyone pays the exact same interchange.”
PEC: What can ecommerce merchants do to save some money on credit card rates?
Bouchever: “Given that interchange fees are determined by Visa and MasterCard, and neither the processor nor the merchant has any influence over it, the only the place merchants can save money is in the processor’s markup. So, merchants have to figure out what is the actual cost of their transactions. They really need to understand the cost structure behind the rates and fees they’re paying and then go back to their processor and negotiate based on this knowledge.
“Ecommerce merchants may understand that they’re being overcharged on things like rewards cards and corporate cards, but without knowing the cost structure it’s very hard to go back and negotiate. Any merchant that is set up on the three-tier billing — qualified, mid-qualified and non-qualified —really needs to understand what the cost structure is. Then either look for a new processor or go back to their existing processor and renegotiate.
“What they really need to know is what they are paying for debit cards, for rewards cards, and for corporate cards because, under three-tier billing, they have no visibility in what they’re paying for those card types.”
PEC: Are the interchange rates published anywhere so merchants can better understand what their account providers or banks are paying?
Bouchever: “Both Visa and MasterCard publish interchange. Simply go to Visa Interchange Reimbursement Fees or MasterCard Interchange Rates & Fees and you can open up a PDF and see exactly what the costs are of each type of transaction. The Visa PDF has about six or seven pages; the MasterCard PDF is over 100 pages. So, you might want to focus on Visa because 70 percent of all merchant’s transactions are Visa cards.
“Now, it is complicated, but it is really worth doing because once the merchant understands what interchange is, they can start to manage their own costs and that goes right to the bottom line. We really encourage all merchants to understand interchange and the cost of the transactions that they’re accepting.”
PEC: Tell us about the new company you’ve just launched, Interchange Plus Solutions.
Bouchever: “We founded Interchange Plus Solutions on the principle that every merchant deserves full transparency in their rates and fees. Until recently, only the largest merchants have been able to obtain interchange plus pricing.
“The concept is actually very simple. We just add a small markup or margin across the board on top of the actual cost of processing and pass through the exact interchange fees. So, the merchants will actually see the interchange cost of the transactions that they’re accepting and they’ll see the small markup that we add on top. In that way, if it’s a debit card, rewards card, credit, corporate — whatever it is — they only pay that small margin that we’ve agreed to.
“In addition, on our merchant statements we show the costs and the demographics of the cardholders that are purchasing on their websites. So, merchants have full transparency in the types of cards that their customers are using at their businesses. That visibility into the preference of the cardholders who are shopping on their websites is really important data for merchants to have.”
PEC: Anything else on your mind for our readers?
Bouchever: “Yes. There are two things that I think merchants should be aware of. Number one, as part of the new Dodd-Frank Wall Street Reform and Consumer Protection Act that’s set to go into effect this summer, Congress has voted to regulate debit card fees. If that goes into effect, the cost of debit cards is going to go down considerably for all merchants that are on interchange plus pricing. Unfortunately, merchant account providers are not being forced by law to pass on the savings to their merchants. So, that’s something that merchants should be aware of.
“In addition, the high rate of unemployment currently is spurring a new crop of ecommerce businesses, and there’s always opportunity for merchants who do their homework and are focused and innovative. It’s my belief that small to midsize merchants can compete effectively against the very largest corporations if they manage their costs and offer outstanding service. I feel really positive about the future of ecommerce.”