The Sales Head Office; Selling and Sales Management

With companies like Monex Group offering merchants discount rates in the 1.59% range, I find that my team spends a lot of time consulting with merchants and helping them understand that a rate like that is misleading.

Today we came across a situation where a competitor approached one of our prospects with an offered rate of 1.44%.

For all card types, that rate it is well below cost! The acquirer is flat out misleading the merchant. What follows is an explanation of why 1.44% is not possible.

There are 6 major processors in Canada that buy direct from the group that manages Visa and MasterCard rates, Interchange.

They all pay the same Interchange rate for a domestic, swiped, Visa or MasterCard. That rate is 1.54%.

There are also assessments levied on top of that rate which add an additional 0.06% (0.063% for MC) so the raw cost for a domestic swiped Visa is 1.54% + 0.06% = 1.60%. Everyone Canadian direct acquirer pays this rate.

Based on the nature of the merchant in questions transactions - ecommerce / telephone order - very few (2%) of their transactions qualify for the domestic, swiped, Visa rate. That means that our cost calculation now involves another factor, non-qualified Interchange adjustments, also known as billback. Our cost now looks like this:

1.54% + 0.06% + non-qual adjustment by card type. I’ve attached the grid below that breaks out the processors adjustment cost by card type.

Let me show you an example based on the grid above:

You take a High Spend MasterCard card over the phone and key it into your terminal. The processors raw cost is:

1.54% + 0.063% + 0.66% = 2.26%

Anyone that is offering 1.44%, which is 0.16% below Interchange on a domestic swiped Visa, has to be making huge adjustments on the non-qualification fees. In the case above they would be losing 0.70% on that transaction, not including their telecom and support costs.

Some processors, like Global Payments, have adjustments up to 2.4% depending on card type to claw back low margin on the domestic swiped transactions. What that means in this case is something like this :

1.44% + 0.06% + 2.4% = 3.9%

How do you like that 1.44% now!

Bottom line: a number of Canadian credit card processors are dangling a low base rate, knowing that 30-90% of the merchants transactions won’t qualify for the offered rate. It’s deceiving and low handed. Make sure you understand the major components of credit card processing

If it sounds too good to be true, it probably is!

Merchant services can be a confusing component of your business. Below is my list of 5 aspects of processing credit cards that every Canadian merchant should understand.

1) Consider buying or leasing the terminal; we come across merchants every day that have been renting the same terminal for ten or even fifteen years! With rentals running as much as $39.99 a month, there are merchants in the market that have paid for their terminal for their 3 times over. Now that most processors are selling EMV chip ready terminals - and EMV will be the standard until at least 2018 - consider purchasing or leasing your terminal. Buying or leasing a terminal ties you to the providers, so make sure that you….

2) Shop Around! You don’t have to get your credit card processing through your bank. In fact the bank - and its processing partner - assume that you think they are the only, or best, option. They may be, but you won’t know until you explore your options. There are a number of merchant account providers that will fight for your business. Make your provider earn your business.

3) There Are Three Rates You Need To Understand. Buying merchant services today is much more complicated than it was a year ago. Previously a merchant only had to understand what their discount rate was, and any fees on the account. Today they need to understand their discount rate, the brand fees or assessments and most importantly adjustment for cards that do not qualify for the discount rate, the non-qualified fees. For more details, I’ve outlined the rates in my post on canadian payment processing .

4) EMV Chip and PCI Compliance; it is your responsibility to make sure that your terminal is EMV chip compliant. By July 2010, the liability shifts from the association to the merchant for fraudulent transactions. If you take a credit card with an EMV chip and process it on a terminal that isn’t chip compliant you are putting your business at risk.

PCI compliance defines how merchants store and process credit card information :

All merchants, whether small or large, need to be PCI compliant. The payment brands have collectively adopted PCI DSS as the requirement for organizations that process, store or transmit payment cardholder data. PCI SSC is responsible for managing the security standards while each individual payment brand is responsible for managing and enforcing compliance to these standards.

5) If It’s Too Good To Be True It Is!. All major Canadian credit card processors buy from the same source, Interchange. What that means is we all pay the same base rate for a domestic Visa and MasterCard transaction. We also pay the same Interchange adjustments for cards that don’t qualify. If a provider is offering 1.59% - which is under Interchange cost - they are making up the money back somewhere else. Make sure you read the contract and look for items like transaction fees, debit minimum, access fees etc.

Apparently Moneris wasn’t satisfied with only making 1% on card types that don’t qualify for the minimum discount rate.

A lot of Moneris merchants will see their non qual rate go from 1% to 1.05% in June. It may seem like a small increase, but when you consider the portfolio that Moneris has, adding 5 basis points will resuly in a uptick in revenues.

Here is the thing; Moneris knows that the merchants that will see this rate increase have little understanding of their non qualified model. A lot don’ even read their statement.

Most small business merchants are not aware that there is a rate adjustment for credit card types that don’t qualify for the negotiated discount rate. Corportate cards, Visa Infinite, MasterCard High Spend and keyed transactions do not qualify for the minimum discount rate.

Moneris is making good money on transactions that do not qualify. Their cost on these card types is anywhere from 0.11% - 0.46% for Visa and 0.13% - 0.70% on MasterCard so they have a minumum 0.35% hedge built in. On most card types they are making an extra 0.75% !!

This creates a great opportunity for competitors to take this business away.

Selecting a merchant accounts provider can be an intimidating task. This post discusses how to go about selecting a merchant account provider in Canada.

All of the major financial institutions, and most of the Credit Unions, either have a partner that they refer processing requests to, or they own a processing company. The result is most people today are in a credit card processing relationship with the company that their financial institution recommended.

As I discuss in a post on payment processing, not all offers are equal and it is important for merchants to understand how to read their statement and to actively look for competing offers.

Below is a brief description on the major Canadian merchant account options :

Moneris

The payment processing industry is one of partnership and Moneris is no exception. Moneris was created Royal Bank and BMO in 2000. They are the biggest player in Canada by volume which is no surprise considering they have two of the 5 largest institutions sending them business.

TD Merchant Services

TD Merchant Services is a joint offer between TD Bank and First Data Canada. TD is a Visa house and provides the Visa, terminal and debit while the MasterCard is provided by First Data. As such merchants receive two statements; one from TD and one from First Data. TD Merchant Services is the referral partner of the Canadian Chamber of Commerce and a lot of their business comes from local chambers. TD is also the second largest bank in Canada so once again it isn’t a surprise that TD Merchant Services is the second largest player in Canada.

First Data

First Data is the largest processor in North America. Most of First Data’s business in Canada, today, comes from their relationship with TD for the MasterCard a, a previous relationship with Chase Paymentech and one of their business units UNPS. UNPS is a referral partner for a few hundred credit unions in Canada. In April of 2009 First Data was the first company in Canada give the ability to process all three major cards direct; Visa, MaserCard and AMEX. They are now in the market selling direct to merchants under the First Data brand.

Chase Paymentech

In 2002 Paymentech purchased Scotia Bank and Citibank’s merchant portfolio. They also have a referral relationship with the Canadian Federation of Independent Business (CFIB) that represents a large portion of their business.

Global Payments

Global Payments has an allance with CIBC. Like all the processors above they are an international player. In Canada a lot of their business comes from their relationships with the restaurant industry and of course from CIBC business clients.

The Independent Sales Organizations (ISO)

There are a number of ISO’s in the Canadian market re-selling credit card processing. Typically they develop a product line (terminals) and a relationship with a major processor (First Data, Moneris etc) and go to market direct. They mainly target small business and often small business that does not have the credit hsitory required to work with a major processor. The ISO’s make their revenue off the sale of the terminal and a trailing revenue/revenue share with the processor. Some ISO’s have a a significant portfolio and others operate on a very small scale. For most merchants there are better processing options. Examples of Canadian ISO’s include Monex, Pivotal Payments and Collective POS.

Each processors price model is different - in some cases are drastically different - and it is important to understand which provider has the price and service model to match your business. Covering the strengths and weaknesses of each processor will come in later posts!