A Processing Exec Outlines Practical Steps to Save on Interchange

Merchants upset about interchange pricing may or may not ultimately prevail in their pending litigation against the bank card networks, but any outcome is likely to be years away. For now, there are practical steps retailers and service providers can take to cut acceptance costs, an executive with a major merchant processor says. Advising merchants to work more closely with their processors, Patricia Lenti-Crane, vice president of national sales at BA Merchant Services, Louisville, Ky., says her company saved its merchants $7.5 million in interchange costs in 2005, compared to $10.2 million in 2004 and $6.5 million in 2003. Pointing out that Visa USA and MasterCard International now maintain rate schedules with 81 and 71 separate price categories, respectively, Lenti-Crane told an audience of supermarket executives last week that managing how transactions are processed is more crucial than ever. “Monitor interchange daily or weekly,” she advised. “Your goal is to get as many transactions as possible at the lowest possible rate.” One big step, she said, is to avoid pricing downgrades, or added interchange in cases when transactions don't meet criteria for the lowest rates. Failing to settle transactions within 48 hours, she said, pushes interchange up by 50 basis points; a 72-hour delay costs an extra 100 basis points. One merchant she was familiar with, she said, submitted a day's batch of transactions with an authorization date mistakenly stated as a week earlier, triggering the costly downgrade. Bad card swipes will invoke downgrades because they require key entry. Merchants may be able to avoid some of this by making sure their terminals have clean read heads, Lenti-Crane advised. One merchant next to a bakery learned that flour from its neighbor was corrupting its terminals. When it started cleaning read heads weekly instead of monthly, it saved interchange by avoiding key-entered transactions. “It's a little thing, but it was costing 50 basis points in downgrades,” she said. Another critical step is managing bank-identification-number (BIN) files, which allows retailers to identify cards that can be processed through regional electronic funds transfer switches rather than through the bank card networks. Software for this purpose on a merchant's server can tell a cashier in moments whether a debit card is eligible to be processed at these lower PIN debit rates, Lenti-Crane said. Unfortunately for merchants, this money-saving technique may be frustrated by banks that charge cardholders for PIN-based transactions. And at least three banks, which Lenti-Crane would not name, deny authorizations for PIN transactions on their debit cards to force the transactions to process at higher signature rates, she said. Lenti-Crane stressed that with interchange rates higher than ever, and rate structures more complex than ever, working with a processor that can help monitor rates and channel transactions at the lowest possible cost is the most important short-term step merchants can take to save on acceptance costs. Pending the outcome of litigation, she said, merchants must work with the existing pricing regime. “Interchange is what interchange is,” she told grocers attending an electronic-payments conference sponsored by the Food Marketing Institute, a national supermarket trade group. “Interchange is 95% of your cost of card acceptance. Please work with your processor.”