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Understanding & Reducing Credit Card Acceptance
Costs In The B2B Industries
By Matt Fluegge
Thousands of businesses are using cards as payment options and many more are signing up each day, creating an electronic pipeline between their money and their vendors' bank accounts. By supplying organizations with the accounting data needed to track type of spend, Business, Corporate, and Purchasing Cards (collectively referred to as Commercial Cards) are able to enhance the efficiency and cost effectiveness of corporate purchases.
Payment card usage in the Business-to-Business (B2B) industries is following the same trend as seen in the business to consumer industries, where the majority of all purchases are made with payment cards. While not yet equal to the use of consumer cards, commercial card purchases are dramatically rising year after year.
But as the use of these Commercial Cards continue to rise, so do the costs for those companies who accept credit card payments. Today, many B2B companies may be asking themselves, where did these large monthly credit card processing fees come from? Many companies started accepting credit cards within the last 5 to 10 years out of necessity. Whether it was because a few loyal customers asked them to accept their commercial cards or because it was less risky to accept a credit card than extend credit to a new customer, companies in the B2B industries started accepting credit cards. 5 to 10 years later these companies realize that their credit card activity has increased 20-fold, and what used to be a minimal expense has increased to a substantial profit-reducing line item on the income statement. The next question that then comes to mind for many companies is, "how can we reduce our credit card processing expense?"
The answer to this question can be found by understanding the costs associated with card acceptance and then meeting the requirements for lower rate qualification.
INTERCHANGE
Interchange is the fee assessed by the card associations such as Visa, MasterCard, or Discover and collected by an Acquirer or processor. A portion of this fee is then passed through the card associations to the credit card Issuing Financial Institution. Interchange can account for 80% to 95% of the total cost of accepting a credit card payment, making it the largest cost component of the transaction. Therefore, by controlling the Interchange expense, a company will be controlling its total credit card acceptance expense.
Card associations define different Interchange rate "categories". The specific Interchange category that a transaction qualifies at is ultimately determined by the type of card presented (commercial card, consumer card, rewards card, world card, signature card, etc.), the data that is included with the transaction request, a company's Merchant Category Code and the system being utilized to accept credit card payments. Interchange qualification requirements regularly change, so what one company may have been doing 5 years ago to meet these requirements, may not be enough to meet the requirements of today.
Commercial Card payments are obviously quite prevalent in the B2B industries. These types of transactions require additional data compared to standard Consumer Card transactions to qualify for optimal Interchange rates, and your payment systems may need to be updated to provide this data. The procedure for accepting Commercial Cards is similar to that of accepting standard credit cards, with the addition of transmitting some supplemental information at the time of purchase. The amount of additional information depends on the "level" of data that the merchant is equipped to transmit with each credit card payment.
Three different levels of acceptance have currently been defined:
- Level 1: The standard financial information present in all credit card transactions, including sale amount, card expiration date, merchant location and tax ID.
- Level 2: Includes sales tax amount and pertinent customer information, such as a customer code.
- Level 3: Includes specific line item information, providing a detailed description of the purchase.
Note: The information above is high level and not inclusive of all data elements required for Level 1, 2, or 3.
Ensuring your ability to accept and pass Level 2 and 3 data helps to protect valuable relationships with key customers, including many Fortune 1000 companies and government entities. In addition, supporting the transmission of Level 2 and Level 3 data can reduce the interchange expense of your transaction by 0.20% to 0.90% per transaction.
Visa and MasterCard have created a number of lower cost "incentive" Interchange categories, in addition to Level II and Level III. Some additional incentive categories are available for certain Merchant Category Codes (MCC), large ticket purchasing card transactions, and authenticated e-commerce transactions.
Understanding your company's systems, procedures, and the card-types being accepted, are all crucial pieces of information in managing down the costs of credit card acceptance. One final piece to reducing credit card processing costs is understanding the set up of your merchant services account and how your processor is assessing fees to your account. Simply being assigned the wrong MCC could impact the Interchange qualification of your transactions.
In conclusion, to reduce credit card acceptance costs, ask yourself these questions:
- Does my company utilize a system that passes the right data with each transaction, including Level 2 and Level 3 data?
- Has my company implemented procedures to take advantage of the lower incentive rates offered by Visa & MasterCard?
If you answer "NO" to either of these questions, then your company has a great opportunity to reduce its credit card acceptance costs.
Matt Fluegge is a Commercial Account Executive with Fifth Third Processing Solutions, the nation's 4th largest Credit Card Acquirer (Nilson March 2008). Through its partnership with American Check Management (ACM), Fifth Third Processing Solutions is the endorsed credit card processor of NACM affiliates nationwide. You can contact Matt at Matt.Fluegge@53.com or by phone at 608-834-2539.
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