Many IMARK members across the United States are dealing with increasing numbers of customers who want to pay their invoices using credit cards.
In today’s environment, more and more people are paying with credit cards to take advantage of rewards programs, cash flow restrictions, better business payment management and convenience. Some even want to pay their monthly statement via a credit card.
For your consideration…
These days taking credit cards is viewed as a cost of doing business. Keeping your credit card processing costs as low as possible is just prudent business. After all, every dollar you save magnifies the return on investment and protects you against inevitable business downturns. One of the hallmarks of the wholesale distribution industry is net profit margins that are historically in the 3-5 percent range and sometimes even lower. Thus, when you consider that the average cost of taking a credit card as payment is anywhere from 1.8-2.7 percent, a big chunk of your net profit on that transaction goes away. This, of course, depends on the mix of card types that you take—debit versus credit and retail versus commercial, business and purchasing cards—and the data that you provide the card companies through your processor.
Now asked the people at Clarus Merchant Services, an IMARK member service provider, to share their perspectives on the challenges IMARK members face related to credit card acceptance.
“What we’ve outlined here are ways that IMARK members who accept credit cards can do so in ways that add to their profit margin with just a few tweaks and changes in thinking,” said CEO Randy Tillim.
Here are some alternatives to consider:
- Raise prices to cover the credit card fees incurred.
- Implement a program that allows you to pass credit card acceptance fees on to customers insisting on paying by credit card.
- Ensure that you are paying the lowest fees by credit card type.
The first option is self-explanatory and by all accounts viewed as a last resort to fight the margin compression game.
The second and third options are proven solutions that are becoming more and more commonplace in the industry.
Due to regulatory changes in 2013, businesses are now allowed to charge a fee to offset the costs of processing credit cards. New cost-neutral processing technology automatically applies a fee whenever a credit card is swiped or entered so that merchants receive 100 percent of the amount of the sale. It works for all credit card types, so merchants can enjoy the benefits of cost-neutral processing, whether processing payments via terminals, point of sale, web, mobile or mail order/telephone order. Enterprise Resource Planning integration is possible too.
This technology ensures regulatory compliance by determining whether a given card is a credit card or a debit card before the transaction is processed. Merchants are not permitted to add a fee for the use of debit cards. It also complies with all card brand rules and regulations to ensure businesses can confidently process all transactions in any environment.
Wholesale distribution businesses have benefited by using this technology with accounts receivable payments to improve margins and expedite cash flow on potentially lagging payment terms. If customers choose not to pay by credit card because of the incurred fee, they can simply pay by any other form of payment the same way they do today. The other way to reduce processing expenses is by ensuring that you are paying the lowest fees by credit card type.
For every credit/debit card that exists, there is a pre-set rate that the merchant pays to the issuing bank. This is often referred to as the interchange rate, credit card interchange rate or interchange pricing. You will discover interchange rates correlate with the cost that each bank has for these cards. Typically, cards with rewards, miles or other perks will have higher associated interchange rates because the card-issuing bank has additional costs to recoup.
Other cards are very cheap to process and thus have lower interchange rates (debit cards take money from a checking account, which is a low-risk transaction for a bank).
Interchange rates will also vary based on how the card is physically accepted. There are lower rates for swiped/ chip sales and higher interchange rates for keyed/online sales. These interchange rates apply to all merchant service providers from the largest providers to the smallest. We all incur the same interchange costs.
Thus, the merchant’s final cost will be the interchange rate plus whatever their processor charges.
Credit card processing methods fit into three levels: Level I, Level II and Level III. Each level is defined by the amount of information that is required or passed to complete a payment with Level I having the lowest requirements and potentially the highest costs.
Level II and Level III card data is a set of additional information that can be passed during a credit card transaction. Level II and Level III card data provides more information for business, commercial, corporate, purchasing and government cardholders.
Credit card transactions submitted with Level II and Level III card data can obtain lower interchange rates and provide merchants with a lower processing cost. Therefore, it is in the best interest of merchants to submit Level II and Level III card data whenever possible.
Each card type that supports Level II maintains its own standards for the additional field information that is accepted. Potential fields include:
- Purchase order number
- Destination zip code
- Tax indicator
- Tax amount
- Requestor name
- Destination address
- Destination city
- Destination state
Level III payments require all of the information required for Level II and will need to include additional information to complete the payment to reduce transaction costs. These additional fields may include:
- Item ID or SKU
- Item description
- Unit price
- Extended price
- Unit of measure (each)
- Commodity code
- Line discount
Most merchants do not have the opportunity to accept Level III cards, but if you’re processing in a business-to-businessheavy industry or if you accept a lot of government cards, having Level III data acceptance may help reduce your interchange costs significantly. Level III interchange rates are up to a full 1 percent lower than their standard counterparts. But, to gain access to Level III data, you’ll be required to input a fair amount of information on each transaction. In addition, only certain gateways can accommodate Level III data.
To get the best rate in a card category/type requires providing all the data the major card companies require. The major card companies penalize you when this information is not provided or, in other terms, downgrade the transaction to cost you more than it would otherwise. Avoiding these costs can save your business anywhere from five to 50 basis points for Level II and 25 to 150 basis points for Level III (1 percent equals 100 basis points) where card data is needed to qualify for the best rate in that card category.
Recommendations for consideration…
- Determine your company’s credit card policy for individual transactions, as well as monthly invoice payments and make it clear to your customers and employees.
- Always require your processor to program the credit card terminals that are provided to process at least at Level II.
- Assess whether your business takes the type of cards that can qualify for Level III treatment.
- If Level III is warranted, look at the equipment and personnel needed to accomplish versus the benefits. Most Level III transactions are done through a PC.
- Require your processor to provide you with merchant statements that show you the interchange detail of your transactions to make ongoing assessments (many processors avoid doing this for competitive and defensive reasons).
- An interchange plus pricing program provides for transparency in what your processor is charging you. Never accept a tiered or flat rate program.
- Educate your personnel not to bypass and to always provide data in every field when prompted. You want to provide the right information, of course, but wrong information is better than no information.