2. Increase Margins by Negotiating Merchant Services Contracts
Mike Barnidge – Credit Manager
Kim Stegmeir – SR Credit Analyst
Laura Jenkins – JR Credit Analyst
Also starring… Megan Schultz – Wells Fargo Merchant Services

4. Merchant Services Agenda for Today Explain the Merchant Process
Explain the Fees
Identify What is Changing
Discuss Mobile Processing and Online Processing
Step Briefly into PCI Compliance
Present Negotiation Strategies and a Negotiated Offer
Merchant Services

5. Why is this important? 27% of all point of sales transactions are cash
This is expected to drop to 23% by 2017
66% of all point of sale transactions are completed with a card
31% By Debit
29% By Credit Cards
Remaining 6% by Gift Card
Finally – Checks bring up the caboose at 7%
Virtual Currency is coming as well…
* Report by Javelin Strategy and Research - June 2012

6. Before we get overwhelmed and confused…
Plastic is convenient
Plastic drives up the overall ticket more than cash alone
Plastic reduces your risk (theft)
Plastic reduces your trips to the bank
Plastic allows you to transact business in the way your customers want to
Plastic is easy

7. Explaining the Game Who are the Players?
What does the process look like?
Who gets paid?

8. Who are the Players?
Acquirer– Bank, Financial Institution or ind. Company that maintains a merchant’s credit card processing relationship, receives all transactions from merchant to be distributed to card issuers.
Processer – data processing company that contracts with the Acquirers to provide processing systems that connect with the interchange system for clearing and settlement on behalf of Acquirer. Possible that the acquirer is its own back end processor.
Credit Card Network – Visa, Mastercard, Amex, Discover, Diners…
Issuing Bank– The card association member that issued a payment card to an individual and maintains that cardholder relationship.

9. Oh, yeah, and…
Bike Shop

10. Buyer Presents Card for Purchase
Gateway

11. Swipe Machine/Internet Initiates Authorization
Gateway

12. Gateway Manages Information Traffic

13. Issuing Bank Approves or Declines
Gateway

14. Response Provided to Buyer/Seller
Gateway

15. Exchange of Goods
Gateway

16. Exchange of Funds
Gateway

17. Who wants to make some money?
Final Steps
Issuing Bank Sends funds to the Credit Card Network
Credit Card Network passes those funds, through the processor, to the Acquiring (Merchant’s) Bank.
Acquirer deposits or “settles” the transaction into the merchant’s bank account
Who wants to make some money?

18. Interchange + Assessments + Rate
Cost of Goods Sold
SG&A
Issuing
Bank
Interchange Rate and Per Item Fee (1.54% + $0.10 example)
Credit Card Network
Assessments ( .11% example)
Processor
Communication Fee
Batch Processing Fee
Acquirer
Setup Fee
Annual Fee
Monthly Fee
Statement Fee
Rate – Margin for Acquirer
$1.64
$0.13
$0.15
Profit $$$$
$1.25 Effective
Total Effective: $3.17

19. Interchange + Assessments + Rate
Issuing Bank
Interchange Rate and Per Item Fee (1.54% + $0.10 example)
Credit Card Network
Assessments ( .11% example)
Processor
Communication Fee
Batch Processing Fee
Acquirer
Setup Fee
Annual Fee
Monthly Fee
Statement Fee
Rate – Margin for Acquirer
$1.64
$0.13
$0.15
$1.25 Effective
Total Effective: $3.17

20. Varies based on card type. Percentage + per item fee.
Issuing Bank
Interchange Rate and Per Item Fee (1.54% + $0.10 example)
A fee paid between banks for the acceptance of card based transactions.
Varies based on card type.
Percentage + per item fee.
Interchange updated twice a year.

21. Charged by Visa, MasterCard, Amex, etc.
Credit Card Network
Assessments ( .11% example)
Charged by Visa, MasterCard, Amex, etc.
Primary source of V/MC revenue (costs and margin)
Basis Points on volume plus a per item fee for network access and brand usage

22. Make sure you “batch out” within 24 hours.
Processor
Network Communication Fee
Batch Processing Fee
Communication fees are the cost related to moving a sales transaction from one point to another.
Batching refers to settling the charges to your terminal by sending the completed transactions for the day to the acquiring bank for payment.
Make sure you “batch out” within 24 hours.

23. It’s a volume game. It also depends on the types of cards you accept.
Setup Fee
Annual Fee
Monthly Fee
Statement Fee
Rate – Margin for Acquirer (0.15%)
Acquirer
These fees vary significantly depending on the offer on hand. Make sure you calculate these items on each offer to find the true effective rate!
It’s a volume game. It also depends on the types of cards you accept.
Make sure you are in the ballpark. Look at your Total Fees / your Total Volume Processed.

24. Focus Negotiations Here
Where Do I Negotiate?
Issuing Bank
Interchange Rate and Per Item Fee (1.54% + $0.10 example)
Credit Card Network
Assessments ( .11% example)
Processor
Communication Fee
Batch Processing Fee
Acquirer
Setup Fee
Annual Fee
Monthly Fee
Statement Fee
Rate – Margin for Acquirer
Focus Negotiations Here

25. Credit Card
-Credit cards give the customer the option to buy now and pay for it later.
-Credit card transactions have higher merchant fees because there is more risk involved. Certain lines of business are considered riskier than others, and the merchant’s credit history is also considered.
-Transactions that are made in person cost less for the merchant to process than payments made online or over the phone, since they are more easily verified. -
Debit Card
-Transfers funds directly from your customer’s bank account to pay for their purchase so you’ll know immediately if they have sufficient funds to cover the cost of the purchase.
-This makes it a lower-risk transaction and for this reason debit card transactions have lower merchant fees.
-Another thing to keep in mind with debit card transactions is whether they are PIN based or signature-based. PIN based transactions have lower interchange fees than signature based transactions.
Now we’re going to look at some recent changes that affect the use of debit and credit cards in your shops.

26. Credit Card vs. Debit Card
Buy now, pay later
Transfers funds directly
Higher interchange fees
More risk
Lower interchange fees
Less risk
In person transactions
Online/over the phone transactions
Pin-based (on-line)
Signature based (off-line)
Credit Card
-Credit cards give the customer the option to buy now and pay for it later.
-Transactions that are made in person cost less for the merchant to process than payments made online or over the phone, since they are more easily verified.
Debit Card
-Transfers funds directly from your customer’s bank account to pay for their purchase so you’ll know immediately if they have sufficient funds to cover the cost of the purchase.
-This makes it a lower-risk transaction and for this reason debit card transactions have lower merchant fees.
-Another thing to keep in mind with debit card transactions is whether they are PIN based or signature-based. PIN based transactions have lower interchange fees than signature based transactions.
Now we’re going to look at some recent changes that affect the use of debit and credit cards in your shops.

27. The Durbin Amendment Went into effect October 1, 2011
‘Reasonable and proportional’ debit card rates
Introduce competition to the debit processing network
-The Durbin Amendment went into effect on October 1, 2011 as part of a broader financial regulation reform act.
-It requires the Federal Reserve to set reasonable and proportional rates and fees for the debit interchange rate.
-It is also meant to drive competition within the debit processing network.
Senator Richard Durbin

28. What does this mean for YOU?
Maximum interchange fee: 0.05% of the transaction value plus $0.21 plus $0.01 for fraud prevention
Maximum interchange fee:
-Only applies to Visa and MasterCard debit cards, no credit cards.
-If the card issuer meets specific fraud prevention standards, the fee can go up a penny.
-In order for this fee cap to be imposed, the card issuing bank must have more than $10 billion in assets. Banks with less than $10 billion in assets (most credit unions and community and state banks) are exempt from this cap.
Discounts to customers:
-You can offer a discount or another incentive for using a certain method of payment.
Two-tiered network option:
-This theory will drive competition by giving merchants a choice as to which debit network they process transactions over. For example, before the Durbin Amendment, merchants were forced to process Visa transactions over the STAR network, even if competitors like PULSE and NYCE offer to conduct the same transaction at a lower processing price. After the Durbin Amendment, you must be given a choice of processing debit card payments through at least two different networks.
(.0005 x $38.00) + $ $0.01 = $0.24

29. What does this mean for YOU?
Minimum dollar amount on credit card transactions
Discounts to customers
Two-tiered network option
Minimum $ amount:
-You can impose a $10 minimum on credit card transactions.
Discounts to customers:
-You can offer a discount or another incentive for using a certain method of payment.
Two-tiered network option:
-This theory will drive competition by giving merchants a choice as to which debit network they process transactions over. For example, before the Durbin Amendment, merchants were forced to process Visa transactions over the STAR network, even if competitors like PULSE and NYCE offer to conduct the same transaction at a lower processing price. After the Durbin Amendment, you must be given a choice of processing debit card payments through at least two different networks.

30. CHECKOUT FEE As of January 21, 2013
Surcharge on purchases made with Visa or MasterCard credit cards
Post a notice!!
Amex and Discover?
-If you accept credit cards issued by Visa and MasterCard, you are now allowed to add a surcharge, or “checkout fee”, to the purchase price and pass it along to your customer.
-This is a result of a settlement of an antitrust lawsuit against Visa and MasterCard. Retailers sued them for collaborating to set interchange fees artificially high.
-Surcharge is supposed to equal the actual cost of processing the credit card transaction, and can’t be higher than what you actually pay.
-If you decide to apply the credit card surcharge, you must post a notice at the store’s entrance and at the register. The exact percentage of the surcharge does not need to be disclosed until the point of sale, and it must be listed on the receipt.
-American Express and Discover were not part of the lawsuit. Their merchant agreements state that a retailer can not charge extra to use their cards if they don’t charge for using competitor’s cards. Now that Visa and MasterCard allow it, merchants are free to tack on the surcharge for Amex and Discover purchases as well.

31. States that prohibit surcharges
Surcharges are banned by the states highlighted in green.
California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas

32. Things to Consider Surcharge could cover the swipe fees
Additional expense for customers
Consumers spend more $$$ with credit cards
Your environment
-From a customer’s standpoint, a checkout fee is an additional expense, and could be a deal breaker when it comes to finalizing a purchase.
-Studies show that customers tend to spend more when they use credit cards.
-Could be a benefit to merchants because the surcharge could cover the swipe fee that they pay every time a customer uses a credit card.
-Should I say that most businesses are saying they aren’t going to charge the checkout fee.

33. Re-Cap The Durbin Amendment $10 minimum for credit card transactions
Offer incentives
THESE ARE BOTH LEGAL
Checkout Fee
Add surcharge for Visa/MasterCard
10 States
CREDIT CARD COMPANIES ARE NOT READY
-From a customer’s standpoint, a checkout fee is an additional expense, and could be a deal breaker when it comes to finalizing a purchase.
-Studies show that customers tend to spend more when they use credit cards.
-Could be a benefit to merchants because the surcharge could cover the swipe fee that they pay every time a customer uses a credit card.
-Should I say that most businesses are saying they aren’t going to charge the checkout fee.

35. “Apple is trying to kill the cash register”

36. Mobile Processing – Square
Square - $275 Monthly
Under $400
Monthly Limit of $21,000
Manually Entered – 3.5% + $0.15
Square - No Monthly
2.75% per transaction
Next day deposits
Transaction business with proper tax from anywhere.
Owner of Square created Twitter

37. Mobile Processing – Ebay/Paypal
2.7% Per Swipe
Accept echecks
Next day deposits
Transaction business with proper tax from anywhere.

38. Those Look Easy, Why Wouldn’t I Do That?
The larger the transaction, the more costly it is.
Another vendor and signon?
How are you going to update your POS?

39. Merchant OS Utilizes Innerfence Credit Card Terminal
Updates root sales data
Monthly fee based on plans

40. Quickbooks Utilizes Intuit GoPayment
Connects to Quickbooks Financial software
Monthly fee based on plans

41. PCI Compliance Payment Card Industry Data Security Standards
All companies that process, store, or transmit cc data information must maintain a secure environment.
Simple “No, No’s”
“Just run the card you have on file.”
Check your receipt
Secure environment
Every employee get’s a login to critical data

42. History’s Greatest Negotiator
“These aren’t the droids you are looking for”

43. Focus Negotiations Here
Where Do I Negotiate?
Issuing/Consumer
Bank
Authorization Request Fee
Credit Card Network
Interchange Rate + Interchange Per Item Fee based on card type
Processor
Communication Fee
Batch Processing Fee
Acquirer
Setup Fee
Annual Fee
Monthly Fee
Statement Fee
Rate – Margin for Acquirer
Focus Negotiations Here

44. “Brand new to the business”
Start by requesting 3 offers
Drill down the offers to sniff out differences – where is money being made?
Prove your numbers, don’t agree to goals. Sign up conservatively.
Make customer service a priority because you will need help

45. “Just Completed My Rookie Contract”
Analyze the most cost prohibitive items
Analyze the convenience, address your concerns i.e. “This STUPID MACHINE!”
Forecast your growth
Be patient with the process

46. “You should be paying ME to put your machine in my store”
Know exactly what you need. Multi location? Online? Mobile?
Shop your whole relationship.
Spend your time wisely on negotiations.
Ask for more…then ask again…then ask one more time. Is that your best offer? Is that your lowest price? How do I get your lowest price?
The Unassuming Negotiator

47. QBP Association Pricing Benefits
Special Pricing achieved by leveraging the QBP Relationship
Full range of processing options
Partnership benefits – 24/7 support, next day funding with Wells Account

48. Pricing Summary No Set Up Fee No Annual Fee
No Annual Compliance Support Fee
No Monthly Minimum Processing Fee

49. Pricing Options Terminal Account – NO POS
Interchange + Assessments + Rate = IC %
$5 Monthly Service Fee
POS System Account – POS Integration
Interchange + Assessments + Rate = IC %
Gateway/Virtual Terminal Account - Internet
$31 Monthly service/gateway fee

50. Dedicated Merchant Contact
Megan Schultz

51. If you only remember 3 things…
Know exactly what you need by establishing “must haves” and “nice to haves”
Focus your time on what you can negotiate - large dollar items assessed by Acquirer. Establish your Effective Rate.
Help your team understand the impact of their actions. Card not present transactions, credit card #s on a post it note, failing to settle nightly.
Ok, one more – Identify your own per transaction goal based on effective rate

52. Do This When Get Back to the Shop
Gateway
Do This When Get Back to the Shop
Focus Negotiations on the fees of the Acquirer (Annual, Monthly, Per Location, Statement, POS Connectivity)
Be aware of the language, but don’t get worked up about it
Interchange Fee = Interchange + Per item fee
BPs (bips) – basis points; 1 BP is = to .01%
Batch and/or Settlement – nightly process to finalize transaction
Total Effective Rate = Total Merchant Fees/ Total Card Volume Processed
$425 / $10,000 = 4.25%
Establish communication around effective rate
Calculate your rate – how concerned should you be?
Compare effective rate to what you were sold on in the first place.
Seek out two more offers (We already got you one).
Determine your needs – Online? 3 Locations? POS Connection?
Set a goal for your effective rate.
Negotiate better pricing that incorporates your needs and desired effective rate.
Track results.