interchange best practices - merchant advisory group is interchange? interchange is the rate charged...

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Interchange

Best Practices

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Moderator

Dodd Roberts MAG CEO/President

Interchange 101

Kathy Hanna The Kroger Company

Interchange and Management Analysis

Troy Carrothers Kohl’s

Laura Ermer McDonald’s

Kelly Andrus Tesoro Refining and Marketing

Chris Priebe Southwest Airlines

Best Practices Committee Chairs

Doug Linkowski Marriott International

Chris Priebe Southwest Airlines

Presenters

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Russ Rhine Arkadin

Rhonda Sullivan SAS

Event

Facilitators

Kathy Hanna The Kroger Company

Presenter

Interchange

101

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1. What is interchange?

2. What are the components?

3. How is interchange distributed?

4. What are the common pitfalls?

5. What can merchants do to affect

interchange cost?

Agenda

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What is interchange?

Interchange is the rate charged to a merchant by a

bank for providing debit and credit card services.

The rate is determined based on factors such as

volume, average ticket price, risk and industry.

The merchant must set up this service with a

bank/acquirer, and agree to the rate prior to

accepting debit and credit cards as payment.

www.answers.com

Interchange is a multi-billion dollar industry.

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Estimated components of interchange

Source: Diamond Management & Technology Consultants:

A New Business Model for Card Payments

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other issuer transaction costs &

profit margin 35%

issuer rewards 44%

issuer processing 9%

network rewards 1%

network branding 3%

network servicing 4%

network processing 4%

Other fees besides interchange

Visa

• APF fee

• dues and assessment

• Base II settlement fee

• image documentation fee

• outgoing exception item

• risk fee

• zero floor limit

• account verification fee

• auth misuse fee

• raw data fee for RTC

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MasterCard

• NABU fee

• dues and assessment

• settlement fee

• documentation image fee

• retrieval request fee

• AVS fee

• chargeback assessment fee

• chargeback support

document fee

Product

• credit

• debit

• commercial

• rewards

How is interchange charged?

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Market Segment

• T&E

• fuel

• grocery

• other retail

Processing Technology

• card terminal

• AFD/self-service

• key entry

• e-commerce

How is interchange distributed?

Issuers

Acquirer

Network

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No authorization

Late presentment

Key entered

Bad or missing data

Pitfalls that increase interchange

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1. TALK with acquirer on regular basis-

Ask WHY? WHY? WHY?

2. Understand downgrades and

surcharges-correct actions

3. Review billing reports timely

(daily, monthly, etc.)

What can the merchant do?

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Questions?

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Troy Carrothers Presenter

Interchange:

Analysis and Management

Kohl’s

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Kohl’s – Interchange: Analysis and Management

Analysis

Understand your interchange origin and trends:

• Perform monthly analysis of network invoices

• Understand your mix between:

a) in-store and on-line

b) credit and debit

c) signature and PIN

d) card present and exceptions

Understand your true interchange costs:

• Compare the networks marketing benefits against the net expense

• Do you know:

a) The financial impact of every interchange increase?

b) Your sales breakeven point for every interchange price change?

c) Your chargeback rights?

d) When you should challenge a network response?

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Kohl’s – Interchange: Analysis and Management

Management

Look for opportunities:

• Reduce exceptions by challenging your internal processes

• Reduce fraud and chargebacks with clearer return policies and

the implementation of fraud detection technology

• Don’t be shy … ask your acquirer for help

• Create a flexible payment hierarchy in-store and on-line to draw

attention to the lowest cost (net) network

• Take advantage of the grey

“Kick the habit” … reduce your dependency:

• Introduce a rich loyalty program for non-interchange related transactions

• Allocate interchange expense back to your stores to gain

store level involvement

• Incent your store managers to promote the loyalty program

• Don’t believe what you read … the majority of your sales can be

made on your own proprietary tender … trust me!

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Questions?

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Laura Ermer Presenter

Interchange

Management

McDonald’s

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McDonald’s – interchange management

What is It • Prompting at the POS based on tender type

Primary Objective • COST SAVINGS

Implementation Scope • National across all ownership types

Timing • Upon launch in 2003

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Benefits • Debit interchange cost savings

• Speed of service (D Thru)

Challenges • Card network rules (PIN & sig debit)

o Discrimination

o Min/Max

o Cardholder choice

• Communications

• Customer experience


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Breakeven Calculation

The transaction amount at which the

1. Blended PIN debit interchange cost

IS EQUAL TO

2. Blended signature debit interchange cost

Based on the current market share at

McDonald’s of each debit network


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• Currently based on blended interchange by auth

type vs. individual networks (PIN vs. sig debit)

• Treasury monitors rate changes and calculates

breakeven amount

• I/T implements changes in breakeven

• Field communications issued upon changes

in breakeven


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Interchange Reporting

Data provided by interchange qualification:

Total transaction counts and amounts

Rate (includes dues/assessments)

Primary uses:

Calculate market share of each debit network used for:

○ interchange management breakeven calculation

○ management reporting for cashless program

Validate accuracy of interchange fees charged


Questions?

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Kelly Andrus Presenter

Petroleum Industry

Specifics

Tesoro Refining and Marketing

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Processing Tips

1. All card associations require partial auth capability:

• Visa charges a partial auth non-participation fee of $0.01 per

CRIND transaction that is not partial auth capable

• Pass on fees to the respective jobber if their systems are not

properly configured for this feature

2. Velocity parameters must be in place for Visa transactions to

qualify for CPS AFD rates

3. Authorization reversals:

• Visa and MasterCard require the reversal of authorizations where

the transaction was cancelled and will never be settled:

o Visa currently charges a $.045 cent fee per authorization

o MasterCard has announced that it will also start charging a fee,

but has not disclosed any details yet

• Tesoro’s processor automatically sends a reversal for any non-

settled authorization, except when a valid zip verification is present

Petroleum industry specifics

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Processing Tips

4. Ensure CRIND limits do not exceed card association limits:

• Visa will downgrade to EIRF if transaction exceeds their limit

• Visa caps the CPS AFD rate at $0.95; however, the transaction

amount to qualify for the cap is $105, which is above their

CRIND limit for Visa consumer cards (Visa fleet limit is $150)

• Although MasterCard does not downgrade transactions that

exceed their limit, the MasterCard AFD rate cap of $0.95 only

qualifies for transactions of $112 or more, which is above the

CRIND limit for consumer cards (fleet and purchasing card limit

is $150)

5. Zip prompting at the pumps:

• Helps to minimize fraud

• None of the card associations offers any interchange savings or

chargeback protection

• Tesoro requires our jobbers to prompt for zip; otherwise, the

location is liable for any fraud chargebacks that occur


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Interchange Management Tips 1. Review all unauthorized transactions:

• Utilize a tool such as

Monarch to extract all

unauthorized

transactions by day

• Review declines for

trends

• Set thresholds by

decline reason

• In our reviews, we have found some issuers sending wrong zip

verification responses, which had a significant impact to our pay

at pump customers

• Other findings include jobbers that are attempting to accept a

card type they are not set up for

• We also use this tool to monitor our company-owned sites for

communication issues


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Response / De finition 1 2 3

83 UNMATCHED PREPAY TRANSACTION 0 0 0

84 MATHED 30 WITH 01 ON HOST 254 165 198

85 MATHED 30 WITH 05/ 13 ON HOST 2 4 4

86 MATHED 32 (Void) WITH 11/ 13/ 34 ON HOST 18 16 9

87 ACCT, AMT & TSEQ ALREADY USED 0 0 0

94 PREPAY ONLY, DUPE PREV PROCESSED TRANS 14 21 4

95 PREPAY ONLY, INTERNAL MALFUNCTION 3 12 0

96 PREPAY ONLY 0 0 0

97 PREPAY ONLY, VOID/ DRAFT NOT IN SYSTEM 1 2 0

98 REQUESTED TRANS PROHIBITED 14 16 6

Interchange Management Tips 2. Review downgrade reports from acquirer:

• We can run reports at a client or merchant level

• We can specify a date range or run by a single day

• Reports can be downloaded into excel for easy incorporation into

our analysis tool

• Address root cause with IT or jobber if downgrade is the result of

action taken at the location (e.g., not closing batches daily,

manual entry, exceeding CRIND limit, etc.)

• Not all downgrades are a result of processing errors at the

location, address root cause with processor:

o Do not assume you should be liable for all downgrades


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Interchange Management Tips 3. Review interchange reports from acquirer:

• We can run reports at a client or merchant level

• We can specify a date range or run by a single day

• Reports can be downloaded into excel for easy incorporation into

our analysis tool

• Verify that at least 90% of your transactions are qualifying for the

best rate possible

• If you are not reaching this threshold, work with your processor/

acquirer to understand why and make corrections as necessary


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Questions?

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Chris Priebe Presenter

Airline/Internet Retailer

Interchange Management

Southwest Airlines

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• Identify controllable expenses

• Daily monitoring

• Hold acquirer accountable - SLA

• Hold your company accountable

• Review quarterly statistics

Keys to Success

• 10 merchant numbers or less (one for each sales channel)

• Key daily interchange data from various acquirer reports into Excel

• Key monthly acquirer reports into Excel (balance to my GL)

• Keep it simple (accomplished with 2% of 1 associate)

Current Set Up

Interchange management

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• Pass through interchange rates vary according to card type, card

present vs. card not present, authorized vs. non authorized,

providing additional airline data, settlement date vs. authorized date,

authorized date vs. ticketed date, etc.

• The only items I can’t control are card type and CNP vs. Non CNP!

What are Controllable Expenses

• Daily monitoring of “less than optimal rates” or downgrades

• Benchmark your expectations

• When less than optimal rates as a % of total rates exceed

benchmark, research the root cause

• Reconcile our charges monthly by rate to the actual GL expense

How do we control


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• Ticket Processing Group authorized purchases on Friday, but

ticketed them on Monday, causing a greater than 24-hour timeline

between the ticket date and the authorization date - saved $100K

per year

• Reservations technology accidentally coded to skip all Visa

authorizations instead of skip certain Visa test card authorizations -

lost $10K on day 1, but fixed on day 2

• Identified certain BIN ranges that had a disproportionate number of

downgraded transactions (i.e. we had 1% downgrades but BIN X

had 80% downgrades); turned out to be a Visa problem that was

costing us $200K per year

• Acquirer error, which led to a one-day downgrade of +30% ($50K);

recovered via Service Level Agreement

Examples of What We Catch…


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Daily monitoring of interchange

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Monthly reconciliation acquirer reports to GL

Questions?

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To watch a replay of this webcast, which will be online

in the next couple of days, please:

1. go to the same URL that you used to log in today

2. enter the same e-mail address you used to register

for this event

3. type in access code MAG@746632

Webcast replay

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interchange best practices - merchant advisory group is interchange? interchange is the rate charged...

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