By Robert Unger
According to Mercator Advisory Group analysis, U.S. commercial card payments grew at a compound annual rate of 9 percent from 2013 to 2015.1 In 2015, commercial card volume reached $428 billion. This figure only represents about 1 percent of the B2B payments market (including check, ACH, wire transfer and cards) that totals $23 trillion (USD).
Hence, continued strong growth is expected from commercial card payments (e.g. purchasing, corporate, fleet). Key drivers for this growth include:
- Commercial cards can generate revenue for the payables groups in the form of issuer rebates ranging from 150 to 200 basis points of charged volume;
- Commercial cards help corporates generate more insight into their purchasing payment transactions with the provision of greater payment detail information (Level 2 and Level 3 data – read on for details); and
- Commercial cards help corporates manage cash and vendors more effectively through the detailed reporting on purchases.
The costs of commercial card usage are typically borne by corporates accepting commercial card payments. Our analysis shows that issuers earned $7 to $8 billion in interchange revenue from processing $428 billion in commercial card payments in 2015. As noted earlier, about 80 percent+ of this interchange revenue is shared back with corporates using commercial cards. Clearly, there are strong financial incentives for businesses to adopt and grow vendor payments with cards.
The economics for commercial card acceptors isn’t as compelling, as they will pay anywhere from 1.5 percent to over 3 percent for processing these cards. Some vendors value getting paid faster with card payments compared to traditional check, but reducing DSO doesn’t typically offset the processing costs.
Based on our experience, most vendors accept commercial card payments to:
- Maintain competitiveness, as competitors are accepting card payments.
- Appease customer requests. Many businesses are willing to spend 2 percent to 3 percent of sales to keep a business account or to keep a client happy.
Regardless of the reason for accepting commercial card payments, the key question for card acceptors is the following: “Why aren’t your card processing fees closer to 1.5 percent than 3 percent?”
Reducing Credit Card Processing Fees
There are two key strategies to get your effective cost of card payments closer to 1.5 percent. You need to do the following:
- Negotiate interchange pass-through pricing with your processor with competitive fees; and
- Optimize interchange by submitting Level 2 and Level 3 “enhanced” data for commercial cards.
The first recommendation, negotiating pass-through pricing, focuses on effective negotiation with card processors/acquirers and understanding pricing models in the card processing industry. (See “Understanding and Tracking Card Payment Acceptance Costs” blog and accompanying white paper for further information on “effective cost” and “pass-through pricing.”)
The second and more impactful recommendation is internally focused on the card acceptor’s technical ability to submit additional enhanced data in the settlement file provided to the processor/acquirer. In accepting B2B card payments, the card acceptor has the opportunity to provide three levels of payment data detail back to the customer. Submitting more detail in the settlement file will help reduce card acceptance costs.
Level 1 data is submitted with all credit/debit card transactions and is mainly intended for consumer cards. Level 2 and Level 3 data elements are specific to commercial cards. Most commercial cards (e.g. purchasing, corporate, fleet) are eligible for Level 3 data submission. A transaction passed with the least amount of data is Level 1, and a transaction passed with the greatest amount of data is Level 3. The table below illustrates the specific data included in each level.
|Data Type||Level 1||Level 2||Level 3|
|Merchant DBA Name||X||X||X|
|Transaction Amount Total||X||X||X|
|Merchant Postal Code||X||X|
|Merchant Minority Code||X||X|
|Merchant State Code||X||X|
|Ship From Postal Code||X|
|Destination Postal Code||X|
|Item Product Code||X|
|Item Commodity Code||X|
|Item Unit of Measure||X|
|Item Extended Amount||X|
The greater the data type passed with a transaction, the lower the interchange cost for that transaction. Since merchants can save up to 150 basis points by submitting Level 3 data, it is incumbent upon businesses to understand and implement this cost saving measure. The savings are not immaterial.
Here’s a check list to determine if you can or should send Level 2 / 3 data to your processor:
|Evaluation for Submitting Level 2 and Level 3 Data||Response|
|1||Can your gateway, if applicable, and processor accept Level 2 / 3 data?|
|2||What are your total commercial card sales per year?|
|3||What is the annual savings potential if you submitted Level 2 / 3 data? As a conservative measure, multiply answer from #2 (total commercial card sales) by conservative savings measure of 0.75 percent.|
|4||What is the organizational cost for implementing Level 2 / 3 data submission? This cost could be zero if this functionality is handled by your gateway. However, if this functionality is handled by your IT Department then there could be internal development and testing costs.|
|5||Is the ROI (Return on Investment) positive and/or does it meet your hurdle rate for a new project to implement submission of Level 2 / 3 data?|
To illustrate further, consider these three real-world scenarios for evaluating cost savings for submitting Level 3 data.
First, let’s assume a sample card has a 2.81 percent interchange fee, plus a cost of $0.10 per transaction for submitting Level 1 data for a transaction under $25,000. That same sample card cost for submitting the same transaction with Level 3 data is 1.91 percent for interchange and $0.10 per transaction. The difference in submitting Level 1 and Level 3 data is 0.90 percent (2.81 percent - 1.91percent) savings on interchange.
In the same example, for a transaction over $25,000, the interchange is now 1.36 percent + $40 per transaction. The merchant/card acceptor in this case will save 1.29 percent on interchange for submitting Level 3 data compared to submitting Level 1 data (2.81 percent - 1.36 percent = 1.45 percent). Note that there is also a difference in the per transaction cost that should be calculated as well ($40/$25,000 = 16 basis points), so the total savings in this example is 1.29 percent.
While savings on interchange of 0.90 to1.29 percent are certainly achievable per the above examples, even at a more conservative measure of 0.75 percent, there can be significant savings for submitting Level 3 data. The chart below illustrates the potential dollars saved for given annual commercial card sales volumes:
|Annual Commercial Card Sales||Annual Savings Potential @ 0.75%|
The Level 2/3 data submitted by merchants (card acceptors) is provided to the purchasing company using the commercial card. This data helps businesses analyze their spend and manage their vendors more effectively. The card networks and issuers use this benefit along with interchange rebates to market commercial cards to corporates. The discounted interchange drives more Level 2/3 data submission which drives more spend data back to card users. Given this framework and incentive system, there is no reason why card acceptors shouldn’t be submitting Level 2/3 data, especially if they accept a significant volume of commercial cards.
Learn more about card payment acceptance costs and tracking related cost metrics by attending our free webinar, “Understanding and Tracking Card Payment Acceptance Costs,” scheduled for Tuesday, Sept. 19, from 1-2 p.m. Eastern Time.