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

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

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

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

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

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.

Oh, yeah, and… Bike Shop

Buyer Presents Card for Purchase Gateway

Swipe Machine/Internet Initiates Authorization Gateway

Gateway Manages Information Traffic

Issuing Bank Approves or Declines Gateway

Response Provided to Buyer/Seller Gateway

Exchange of Goods Gateway

Exchange of Funds Gateway

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?

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% + 0.0185 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

Interchange + Assessments + Rate Issuing Bank Interchange Rate and Per Item Fee (1.54% + $0.10 example) Credit Card Network Assessments ( .11% + 0.0185 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

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.

Charged by Visa, MasterCard, Amex, etc. Credit Card Network Assessments ( .11% + 0.0185 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

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.

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.

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% + 0.0185 example) Processor Communication Fee Batch Processing Fee Acquirer Setup Fee Annual Fee Monthly Fee Statement Fee Rate – Margin for Acquirer Focus Negotiations Here

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.

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.

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

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) + $0.21 + $0.01 = $0.24

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.

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.

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

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.

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.

“Apple is trying to kill the cash register”

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

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

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?

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

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

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

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

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

“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

“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

“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

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

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

Pricing Options Terminal Account – NO POS Interchange + Assessments + Rate = IC + 0.15% $5 Monthly Service Fee POS System Account – POS Integration Interchange + Assessments + Rate = IC + 0.17% Gateway/Virtual Terminal Account - Internet $31 Monthly service/gateway fee

Dedicated Merchant Contact Megan Schultz 612-655-8146 Megan.E.Schultz@wellsfargo.com

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

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.