The payment processing industry has evolved rapidly as it grows in size and complexity. Without a dedicated staff to ride this wave of evolution, and enjoy the benefits while minimizing the cost, a merchant is left with excessive expense and shrinking net profitability.
Consider the following points and how they do/will impact your business:
- Electronic payments currently constitute 45% of all financial interactions within the merchant community, and is anticipated to surpass currency transactions (cash and checks) in the near future.
- In 1995 debit and credit cards represented less than 20% of non-cash payment transactions while in 2003, with a much expanded transaction base, they represented 40%.
- Consumers spend more with plastic - currently the average cash sale is $9 while the average credit/debit sale is $40.
- From an operational perspective, credit/debit cards are cheaper to process: 2.8% of revenue for credit/debit cards, 4.0% for checks, and 4.8% for cash.
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The Bankcard model, used by Visa and MasterCard, is increasingly complex:
(for more information, click the Flowchart link at left)
- Payment processing services include capturing payment at the point-of-sale terminals, authorizing transactions, moving funds from the issuer to the merchant, calculating and collecting fees, reporting for banks, and managing dispute resolution.
- Fraud and operational risk must be reduced through sophisticated controls that enable the processor and merchant to manage suspicious activity by routing cases to the most knowledgeable staff.
- Since each individual processing component is an expense to the processor and merchant, maximizing efficiency is critical to both.
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- Visa and MasterCard together make up 90% of the U.S. credit and debit card business.
- The Interchange fees, which consume 70 to 90% of all transaction fees, are also growing in size and complexity
- When the interchange rate was first established in 1971 there was one rate set at 1.95%. By 1998 there were 32 different rate categories and today there are more than 150.
- A recent Morgan Stanley report found that a weighted average for Visa and MasterCard interchange had increased from 1.58% in 1998 to 1.75% in 2004 (10.8% increase).
- The net effect:
- The Wall Street Journal stated that the average convenience store paid $31,000 in interchange fees in 2004 while recording a pretax profit of only $36,000.
- The Food Marketing Institute claims that the share of the grocery customer's dollar that goes to card companies and banks is almost double what goes to the grocer's bottom line.
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This is occurring while the U.S. pays among the highest interchange rates in the world and is the only industrialized nation where rates are increasing.
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