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Transcript of Presented by: Barbara Fava, Managing Director PFM Asset Management LLC 1 Keystone Plaza, Suite 300...
Presented by:
Barbara Fava, Managing Director
PFM Asset Management LLC1 Keystone Plaza, Suite 300
N. Front and Market Streets
Harrisburg, PA 17101
(717) 232-2723
What You Don’t Know About
Merchant Card Processing Can Cost You
Treasurers’ Association of Virginia 85th Annual Conference, Harrisonburg, VA
June 24, 2015
2© 2015 The PFM Group
Merchant Card Process Summary
3© 2015 The PFM Group
Merchant Card Processors
Processing Fees and Rates
5© 2015 The PFM Group
Interchange Fees• Non-negotiable fee paid to the issuing bank
• Same for all issuing banks
• Two-part fee:
– Percentage of transaction volume
– Flat fee per transaction
– Example: 1.51% of volume plus $0.10 per transaction
• Interchange category is based on details of transaction:
– Card brand
– Card type
– Card category
– Processing method
– Business Type
6© 2015 The PFM Group
Merchant Category Codes
Code Type of Business
7542 Car Washes
8351 Child Care Services
8220 Colleges, Universities
5411 Grocery Stores
9399 Government Services
6300 Insurance Sales and Underwriting
8099 Medical Services
5812 Restaurants
5941 Sporting Goods Stores
0742 Veterinarian Services
7© 2015 The PFM Group
Interchange Examples
• $100 dollar transaction
• Visa Credit
• Card Not Present transaction
1.54% rate on volume$0.10 per transaction
Total Interchange: $1.64
8© 2015 The PFM Group
Interchange Examples• $100 dollar transaction
• Visa Credit Rewards
• Card Present transaction
1.65% rate on volume$0.10 per transaction
Total Interchange: $1.75
9© 2015 The PFM Group
Merit III: 1.58% rate$0.10 per transaction
Interchange: $1.68
Merit I: 1.89% rate$0.10 per transaction
Interchange: $1.99
Difference: $0.31
Interchange Examples• $100 dollar transaction
• MasterCard Credit
• Eligible for Interchange Merit III, Processed as Merit 1
10© 2015 The PFM Group
Processing Costs (Assessment Fees)
• Non-negotiable fee paid to the card associations (VISA, MasterCard, etc.)
• Same for all issuing banks
• Includes percentage, a transaction fee, and monthly fees*
Percent of Volume Transaction Fee Monthly Assessment Fee
Visa 0.13% credit0.11% debit
$0.0195 credit$0.0155 debit
Fixed Acquirer Network Fee
($2.00-$120.00)
MasterCard 0.125% $0.0195 N / A
Discover 0.105% $0.0185 N / A
American Express 0.15% N / A N / A
*Brands may also charge: Kilobyte Access fees, Cross Border or International Assessment fees, and other network and license fees
11© 2015 The PFM Group
Processing Costs (Markup Fees)• Negotiable fee paid to merchant card processor
• Inconsistencies make it difficult to compare credit card processors
• Differ significantly by:
– Transaction Amount
– Pricing model
12© 2015 The PFM Group
Interchange Fee
Assessment Fee
Transaction Fee
Assessment Fee (Markup)
Transaction Fee
(Markup) Total Fee
Receiving Party
Issuing Bank
Card Association
Card Association
Processor Processor
Processor A 1.65% +
$0.100.13% $0.0195 0.09% $0.00 $1.99
Processor B 1.65%+ $0.10
0.13% $0.0195 0.00% $0.15 $2.05
Processor C1.95% +
$0.100.13% $0.0195 0.05% $0.05 $2.30
Processing Costs (Summary)
• $100 dollar transaction
• Eligible for Interchange Category CPS Small Ticket (Swiped)
• Card Type: Visa Credit Reward
Processed as CPS/Retail Key Entered
13© 2015 The PFM Group
Pricing Models (Pass-Through)• Interchange and assessment fees are billed directly to the merchant at cost
• The same mark-up for every interchange category
• Advantages:
– Transparent
– Allows for interchange optimization
– Generally less expensive
• Issues to Consider
– Processors will add on fees
– Costs go up when interchange increases
– Best interchange category not always obtained
14© 2015 The PFM Group
Pass-Through Pricing (Interchange Plus)
$100 transactionCPS Retail
Interchange Rate Paid to the Issuing
Bank
Assessment Paid to the Card Association
Rate and Fee Paid to the Processor Total Cost
VisaConsumer Credit Card
1.51% + $0.10 0.13% + $0.0195 0.10% + $0.05 $1.91
VisaReward Credit Card
1.65% + $0.10 0.13% + $0.0195 0.10% + $0.05 $2.05
VisaDebit Signature Card
0.05% + $0.22 0.11% + $0.0155 0.10% + $0.05 $0.55
VisaBusiness Credit Card
2.25% + $0.10 0.13% + $0.0195 0.10% + $0.05 $2.56
15© 2015 The PFM Group
Pricing Models (Bundled Pricing)• Processor sets fixed fee by “tier”
• Example
– Qualified (1.69% + $0.25)
– Mid-qualified (2.25% + $0.31)
– Non-qualified (3.35% + $0.31)
• Qualification category based on transaction characteristics
• Interchange and assessment rates are not disclosed
• Issues to Consider
– Lack of transparency
– Generally results in highest processing costs
– No interchange optimization
– Allows processor to keep refunds
“Bundled Pricing has played a big role in building the
processing industry’s shady reputation”
www.cardfellow.com
16© 2015 The PFM Group
Bundled Pricing (Tiered Pricing)
$100 transaction Interchange
Rate Paid to the Issuing Bank
Assessment Paid to the Card Association
Rate and Fee Paid to the Processor Total Cost
VisaConsumer Credit Card
Not Disclosed Not Disclosed 1.69% + $0.25
(Qualified)$1.94
VisaReward Credit Card
Not Disclosed Not Disclosed 2.25% + $0.31 (Mid-Qualified)
$2.56
VisaDebit Signature Card
Not Disclosed Not Disclosed 1.69% +$0.25 (Qualified)
$1.94
VisaBusiness Credit Card
Not Disclosed Not Disclosed 3.35% + $0.31 (Non-Qualified)
$3.66
17© 2015 The PFM Group
Pass Through vs. Bundled Pricing
$100 transaction Pass Through
Total Cost Bundled Total
Cost Difference
VisaConsumer Credit Card
$1.91 $1.94 $0.03
VisaReward Credit Card
$2.05 $2.56 $0.51
VisaDebit Signature Card
$0.55 $1.94 $1.39
VisaBusiness Credit Card
$2.56 $3.66 $1.10
18© 2015 The PFM Group
Merchant Card Processing Fee Tips
• There is nothing standard about processing fees
• Pass-through pricing is usually the best option
• Contract terms do not guarantee that rates will remain constant
• Getting low rates is only the first step towards lowering credit card processing fees – keeping the rates low is the next step
• Continual review of monthly statements is critical
• Fees on returns should be refunded (pass-through pricing only)
• You get what you negotiate!
PCI Compliance
20© 2015 The PFM Group
PCI Data Security Standards (DSS)
• Guidelines for businesses that accept credit/debit cards
• To protect cardholder data when it is processed, stored or transmitted
• Enforced by the payment card associations (VISA, MasterCard etc.)
21© 2015 The PFM Group
VISA PCI Compliance Levels
Level / Tier
Merchant Criteria Validation Requirements
3Merchants processing 20,000 to 1 million e-commerce transactions annually
Annual Self-Assessment QuestionnaireQuarterly network scan by ASVAttestation of Compliance Form
Annual SAQ recommendedQuarterly network scan by ASV if applicableCompliance validation requirements set by merchant bank
Annual ROC by QSA or Internal AuditorQuarterly network scan by ASVAttestation of Compliance Form
1
2Annual Self-Assessment QuestionnaireQuarterly network scan by ASVAttestation of Compliance Form
Merchants processing 1 million to 6 million transactions annually
Merchants processing over 6 million transactions annually
Merchants processing less than 20,000 e-commerce transactions annually; all other merchants processing up to 1 million transactions annually
4
22© 2015 The PFM Group
PCI Terminology• Qualified Security Assessors (QSA) are data security firms that are
qualified by the PCI Security Standards Council to perform on-site PCI DSS assessments.
• Network Security Scans remotely checks an entity’s systems for vulnerabilities. For large merchants, PCI DSS requires network security scans on a quarterly basis.
• Approved Scanning Vendors (ASV) are data security firms that use scanning solutions to determine whether or not a merchant meets the PCI DSS external vulnerability scanning requirement.
• QSAs prepare the annual Report on Compliance (ROC), which documents detailed results from an entity’s PCI DSS assessment.
23© 2015 The PFM Group
Common PCI DSS Violations• Storage of magnetic stripe data (never allowed)
• Improperly installed merchant point-of-sale (POS) systems
• Default system settings and passwords not changed
• Poorly coded web applications that allow access to cardholder data through the web site
• Missing and outdated security patches and updates
• Lack of monitoring
• Poorly implemented networks
24© 2015 The PFM Group
Processor Approaches to PCI Compliance
• Card Associations assess fees when non-compliance leads to a security issue or breach.
• Processors often charge PCI non-compliance fees to merchants.
• Merchant card processors have different approaches to validating PCI compliance
– Require all businesses to validate PCI compliance.
– Charge a fee for providing PCI support programs to help businesses become compliant.
– Allow an organization to maintain its own in-house compliance validation programs
This may be mandatory.
25© 2015 The PFM Group
EMV (Chip and PIN) Cards• Fraud liability shifts in October 2015
• EMV technology requires two layers of security – the EMV “chip” along with a PIN or a signature.
• EMV technology is not foolproof.
• Three-pronged approach to data security should be used
• EMV technology
• Point-to-Point Encryption (P2PE)
• Tokenization
Hardware and Technology
27© 2015 The PFM Group
28© 2015 The PFM Group
Types of Terminals
Swipe and Sign Terminals
Handheld and Wireless Terminals
EMV Chip and PIN Terminals
Near Field Communication (NFC) Terminals
29© 2015 The PFM Group
Credit Card Issuers
• There are 1.2 billion payment cards in circulation in the U.S.
• Only 20 million of those are EMV cards1
Merchant Card Terminal Suppliers
• There are 12 million point-of-sale terminals in the U.S.
• Only half of them are expected to be EMV ready by October 20151
Merchants / Vendors
• Target alone has budgeted $100 million for its EMV rollout
• The total card conversion cost in the U.S. is estimated to be $4.2 billion2
Will the United States be Ready for the Shift?
1. Source: www.EMVCo.com As of December 2014.2. Javelin Strategy & Research
30© 2015 The PFM Group
Merchant Card Questions to Ask
Transaction Classifications:
• Are transactions are being categorized correctly so that they are qualifying for the best interchange rate?
Customer Payments:
• How can we encourage customers to choose lower-cost debit/PIN transactions as opposed to more expensive credit transactions?
Services vs. Costs:
• Are you receiving bundled or pass-through pricing?
• Are the fees competitive?
• Would a third-party processor be more cost effective?
PCI Compliance:
• What level of PCI compliance support does the bank provide?
• What is the bank’s non-compliance fee?
• How does the bank utilize encryption and tokenization to ensure data security?
31© 2015 The PFM Group
Disclaimer
This material is based on information obtained from sources generally believed to be reliable and
available to the public, however PFM Asset Management LLC cannot guarantee its accuracy,
completeness or suitability. This material is for general information purposes only and is not
intended to provide specific advice or a specific recommendation. All statements as to what will
or may happen under certain circumstances are based on assumptions, some but not all of which
are noted in the presentation. Assumptions may or may not be proven correct as actual events
occur, and results may depend on events outside of your or our control. Changes in assumptions
may have a material effect on results. Past performance does not necessarily reflect and is not a
guaranty of future results. The information contained in this presentation is not an offer to
purchase or sell any securities.
Credit Card Association (Card Brand) – The company that creates the credit cards and set the rules.
Issuing Bank – Financial institution that issues the cards to business and consumers
Merchant – The organization that accepts a credit or debit card for payment.
Acquiring Banks/Acquirers/Processors – Institutions that act as messengers between merchants and credit card associations.
ISO – An independent sales organization; provides certain marketing or servicing functions.
Member Bank – A bank that issues and/or processes merchant cards.
Payment Gateway – Special portals that route transactions to an acquirer, usually in the case of an online shopping cart.
Merchant Card Processing Overview