By Robert Unger
Credit and debit card payments are surging. The “2016 Federal Reserve Payments Study,” which has been tracking longitudinal trends in consumer and business payments, cites that:
Payments made with general-purpose credit cards and with non-prepaid debit cards each grew faster than other payment types from 2012 to 2015, in terms of both percentage growth and growth by number.
The growth of card payments is typically associated with increasing costs related to payment acceptance. Yet, companies are often challenged when it comes to tracking related cost metrics.
In this blog we are chatting with Anand Goel, founder of Optimized Payments Consulting (OPC). OPC helps companies understand and manage payment acceptance costs. Based on his experience, and questions we’ve received at the Payments Help Desk, we want to explain and de-mystify the components of card acceptance costs and key metrics to track for billers, merchants, suppliers and any organization that accepts cards for payments.
Rob: Credit, debit and pre-paid card payments offer convenience, adjudication and other features perhaps not available in other payment types. Oftentimes, payers are driving payment choice, and they have incentives to use cards such as rewards programs for consumers, and “rebate” programs for businesses. What are the implications regarding increasing card usage for billers, merchants, suppliers, etc. that accept cards?
Anand: The immediate implication is that cards are a significant part of the tender mix, as much as 80% in grocery and retail, and are growing at the expense of checks and cash. As card payments increase, the absolute fees to accept card payments will increase. The onus is on treasury managers to manage the increased fees related to accepting payments.
Rob: It likely seems obvious, but is it important for companies to track card payment acceptance costs?
Anand: Absolutely! Card payment acceptance is a service and process like other processes in organizations. Costs can get out of control if not monitored; companies may be leaving money on the table. Knowing your costs is very important to the bottom line.
The difficulty is that there is no single card acceptance rate. There are lots of variables that impact card costs. Importantly, though, these variables can be influenced. Sometimes corporations can get into the mentality that card acceptance is like a utility, meaning that the rate is pretty much set for everyone and can’t be changed. But the card processing fees corporations pay is not like that. At one time, there were a handful of interchange rates; now there are hundreds. Corporations can affect many variables to impact payment acceptance costs.
Rob: Understood – it’s important to know your payment acceptance costs as this impacts the bottom line, and that companies can influence their rates. So, first off to level set, what are the key components that comprise a company’s “all-in” card acceptance cost?
Anand: There are three core components to card acceptance costs:
- The first is interchange, which makes up 70-85% of the total cost of card acceptance. Interchange pays for the incentives (e.g. cash back, miles, points) provided to customers to use cards.
- Another is assessments and dues, comprising 10-15% of total costs. These fees go to the card networks: Visa, MasterCard, Discover and American Express.
- Acquiring fees are the final component. About 15-20% of card acceptance costs go to the payment processor, or the organization that provides authorization, settlement and reporting services to a merchant.
There are other ancillary costs, but these are the three core costs in order of importance.
Rob: I’m assuming that most companies know the “big three.” Is it safe to assume as well that companies typically have standard metrics and processes for tracking their costs? How do companies typically track their card acceptance costs?
Anand: Oversight of card acceptance costs in most medium-to-large corporations is managed by the treasury group. They have a hundred other things to worry about, and this means that you rarely find teams that really know the ins and outs of card acceptance. Sometimes, yes, but the majority don’t. Many build their own process by downloading summary data from the acquirer’s website and importing this into an Excel spreadsheet. Or, tracking is done by looking at the general ledger. There is wide disparity in what organizations do here.
Rob: Despite the importance of knowing and tracking your costs, it seems like the disparity in processes – or really not even doing anything – maybe indicates that it’s a pretty difficult task. Why is it so challenging to know your costs when we know the costs will mostly be based on the “big three” components?
Anand: There’s lots of complexity in the card acceptance landscape. The three key reasons are:
- Companies may have relationships with multiple payment providers, and each having different language and codes to describe fees. Also, some acquirers bill at the end of the month, and some bill in arrears. This means that invoices could have fees for the previous months – some for two months ago – and the fees will need be allocated to the right month.
- And, any business that does more than $1 million in transactions needs to have a direct relationship with American Express.
- Finally, businesses need to figure out what to include in their “effective cost.” Should chargebacks and gateway fees be included? Yes, this can be done but you need to maintain consistent definitions. The best practices advice is to exclude chargebacks because they are a different animal, and could relate to fraud and other issues.
Rob: Can you elaborate on “effective cost” and how to calculate it?
Anand: “Effective cost” is a weighted average expression of card acceptance costs. It is the single most important metric with respect to understanding your card acceptance costs, and will tell you more about the effectiveness of your payment operations than any other metric. Effective cost is calculated by adding the total card processing fees, and then dividing that total by the net sales revenue, excluding refunds. Effective cost is expressed as a percentage, so an effective cost of “2.15%” means that a company has $2.15 in card fees for every $100 in revenue.
Rob: Anand, you’ve been involved with card payments and tracking related costs for some time. Is there anything that still surprises you; are there any prevailing myths that you still encounter?
Anand: Two things still surprise me. One is that corporations still ask if fees can really be reduced. As I mentioned, many typically think that the card fees are similar to a utility service, and that rates are pretty much locked in. They have to get over the hump that you can influence your card fees. The second thing that surprises me is that a lot of corporations do not know their effective cost for card payments. That’s really surprising, especially for large corporations.
Rob: We’ve talked about the importance of knowing your effective cost rate. And I’m sure companies would like to lower their acceptance costs, and move on from the “utility” mode of thinking. What is one key recommendation for doing so?
Anand: Negotiate and analyze interchange. Companies need to negotiate with their acquirer to get the most competitive processing fees. And they need to analyze interchange to ensure they are receiving the lowest interchange rates available for their transactions.
Rob: Makes sense for companies that accept card payments. What is the advice for companies that are just now considering whether or not to offer card payments?
Anand: Most companies new to card acceptance start with customers in mind, or, the decision can be very market driven. Cards offer convenience for customers, maybe provide a competitive advantage, or can perhaps lower DSO (days sales outstanding). They just have to keep in mind that with card acceptance, 2-3% of revenue will go to fees. There are certain industries where margins may or may not be able to support this option.
Rob: Card acceptance cost is a big topic, and we’ve scratched the surface in this blog. Optimized Payments Consulting and Elevation, the consulting arm of NACHA, have collaborated on a white paper, and are also are offering a free webinar on Sept. 19, 1-2 p.m. Eastern Time. What additional things are covered in the white paper and the webinar?
Anand: We’ll do a deeper dive into the three components of card processing: interchange, assessments/dues and acquiring fees. We’ll walk through an example of how to calculate effective cost. And the webinar will be very interactive, with an opportunity to ask specific questions.
Rob: Thanks Anand. Great info! I encourage folks to download the free white paper and sign up for the free webinar to learn more.