RAA Group

Franchisee Columnist Todd Michaud has spent the last 16 years trying to fight IT issues, with the last six years focused on franchisee IT issues. He is currently responsible for IT at Focus Brands (Cinnabon, Carvel, Schlotzsky’s and Moe’s Southwestern Grill).

Envision a world where credit card transactions are free. How could we accomplish such an outrageous feat? Well, crazy things can happen when you start to apply IT problem-solving initiatives to business issues.

I just finished reading “Free – The Future Of A Radical Price” by Chris Anderson. Chris, the author of “The Long Tail,” discusses how several factors–including the constant reduction of technology costs–have enabled companies to give away valuable services to their customers. Examples include Google giving away search functions and videos on YouTube, eBay giving away free phone calls with Skype and Linux as a free version of Unix software. But for some reason, the costs of processing credit card transactions have been immune to the same trends that have provided free versions of far more complex technology. Why?

Somehow, the system has evolved in a way that primarily protects the banks at the expense of retailers and, ultimately, customers. From a purely technological perspective, credit card transactions should cost a fraction of what they actually do. Moore’s Law, loosely translated, states that the cost of technology will reduce by roughly 50 percent every 18 months. If this law is true, then why, after decades of credit card processing, does Home Depot pay more for credit card processing than it does for employee healthcare benefits?

A credit card transaction is fairly complicated and involves several different organizations/people:

The issuing bank: The bank that provides the credit card to the consumer.

The cardholder: The person who uses the card to make purchases at various retailers.

The merchant: The retail organization that accepts the credit card in exchange for goods or services.

The acquiring bank: The bank that processes the credit card transactions.

The bankcard association: Visa, MasterCard, American Express, Discover, etc.What is the big problem in this ecosystem? The merchant is the only one hit up for a fee to process a credit card transaction. The merchant pays a “merchant discount” to the acquirer, which then splits up the fee among itself (processing fee), the issuing bank (interchange) and the bankcard association (assessments). In the case of credit cards that offer rewards programs, the merchant also funds these customer perks through a forced higher interchange fee. Ridiculous! So how do we change it?Interchange rates should be demolished.
Issuing banks will no longer be paid an interchange fee; instead, a transaction processing fee will be charged to manage the costs of providing authorizations, settlements and money transfers. The rate should be about equal to the current ACH transaction costs, which should serve as a good benchmark for the costs associated with moving money between two bank accounts. Rewards programs would then be completely funded by the issuing bank.

Remove Overhead From The System.
In this crazy New World, the bankcard associations are no longer in the transaction processing business. With 88 percent of all cards issued by the top 10 issuing banks, the acquiring banks should process directly with each issuing bank. They will take on this responsibility in exchange for lower assessment fees.

Reduce Costs Through Improved Efficiencies.
And what about the acquiring banks? Because their job will also be one of transaction processing, they will earn a flat monthly fee from each merchant rather than a transaction fee. A flat monthly fee? That is crazy talk! Now, imagine travelling back in time to 1999 and telling Michael Armstrong (then CEO of AT&T) that in just 10 years an Internet company would offer unlimited calling to anywhere in the world for just $24.99 per month. (Vonage recently announced this plan.) I’m pretty sure he would have told you that you were nuts.

Subsidize The Remaining Costs With Someone Who Gains Value.
OK, but I said that in this crazy New World credit card processing would be free. Except that the previous examples still add costs. Granted, this solution is a ton better than where we are today. But you were promised free. So, how do we get there? I’m going to leverage more of what I learned from Chris Anderson and his book. In the book, Chris discusses the concept of “free” as a “three party market,” where a third party subsidizes the costs of providing the goods or services between the merchant and the consumer.

An example is how TV stations can offer you free programming in exchange for broadcasting advertisers’ commercials. In our crazy New World of free credit card transactions, we are going to subsidize the costs of credit card transactions by leveraging a three party market. So how do we do this?

Sell Receipt Space.
Acquiring banks can work with merchants and POS companies to pass along small “banner ads” that are displayed at the bottom of each receipt. The merchant has the opportunity to set parameters for which ads are displayed to avoid conflicts, such as making sure that no competitors’ ads are run. In today’s media-heavy world, eyeballs are worth money.

Sell Signature Banners.
Let the acquiring banks display small banners that are placed above the spot on the electronic signature pad where a customer signs for credit card purchases. This option could be used in conjunction with selling receipt space.

Sell Data.
Allow marketers to access information about spending at your location. Each company would be aligned with a central catalog of different merchant types. The transactions would then be categorized and aggregated in a central system that can be used by marketers for a fee.

Sell More Data.
Provide the line-item details of the transactions to a centralized database. The products and services would also be categorized and aggregated from many merchants. Although most large organizations would not dream of giving away such intimate data, thousands of small businesses would be happy to provide the data anonymously (only the industry would be required) in exchange for lower transaction fees.That’s my case. It feels a little like a Sprint/Nextel commercial doesn’t it? (What if IT people ran the world?) Find major holes in my theories? Disagree with the concept? Love it like RockBand? Let me know: Todd.Michaud@FranchiseIT.org.

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Job Growth Hindered by Interchange Fees

Hefty credit card interchange ‘swipe’ fees prevent small business owners from hiring new employees

INDIANAPOLIS, Dec. 4 /PRNewswire-USNewswire/ — Consumers for Competitive Choice (C4CC) president Bob Johnson has a suggestion that will spur more job growth: interchange fee reform. The President and his economic team gathered yesterday to hear from some of the best and brightest CEOs, small business owners, and financial experts about ideas for continuing to grow the economy and put Americans back to work at a Forum on Jobs and Economic Growth. The meeting was held in advance of the Bureau of Labor Statistics’ announcement today that our national unemployment rate remains in the double digits, at an unsettling 10%.

Interchange fees are the charges that merchants, local governments, universities, or anyone else who accepts plastic, are assessed every time a transaction is completed by swiping or keying in a credit or debit card. Last year alone credit card companies received $48 billion dollars in these fees, this number up 300% since 2001. Not surprisingly, small business owners say that if they were not saddled with these skyrocketing fees, they would be able to spread those resources elsewhere – like hiring additional employees.

“In 1995, CN Brown paid $353,000 in interchange fees,” said Jinger Duryea, President of CN Brown, which owns Big Apple convenience stores across Maine. “In 2007, we paid $3,494,000 in interchange fees. This amount of money could stretch very far if any portion were available to us to hire additional employees or lower costs for consumers, rather than lining the pockets of credit card companies.”

Every dollar spent on interchange fees is a dollar not spent hiring workers or providing savings to customers. At an average cost of 2% per credit card swipe these fees add up quickly, and the potential savings or job growth that could result if the funds were not going to big banks and credit card companies is one that we cannot afford to overlook.

“With the national unemployment still at a troubling level, we have a very long way to go before this economy is where we need it to be,” said Johnson. “I have spoken with small business owners throughout the country these past few weeks and they all have one thing to say – credit card interchange “swipe” fees are increasing and are hurting both small business and consumers. This fact was recently supported by the Government Accountability Office’s report on interchange fees.”

“Interchange fees are currently the highest expense for small businesses behind payroll and healthcare. The cost is astronomic, and we don’t need a job summit to know that the jobs that could be saved or created if these fees are reduced are real. The numbers don’t lie. Any level of relief would be a significant step toward our economic recovery. With unemployment holding steady in the double digits and small business growth being impaired, it is imperative that our Representatives and Senators in Washington take steps to reduce this unfair burden, especially considering the economic impact such reform could have.”

About The Credit Card Con

The Credit Card Con is a project by the Consumers for Competitive Choice. For more information, visit The Credit Card Con website at www.thecreditcardcon.com.

SOURCE Consumers for Competitive Choice

Most leaders avoid openness and vulnerability like the plague – some even view it like kryptonite. However, for the flawless leader, vulnerability is not optional; it’s oxygen! Without vulnerability and openness, a leader is trapped in a world that is severely limited by her own perceptions and assumptions.

A mandatory vulnerability for flawless leaders is forgiveness. Forgiveness is often the only key that can dislodge a leader stuck in the trap of her own perceptions.

“He knew that our enemies by contrast seem always with us. The greater our hatred the more persistent the memory of them, so that a truly terrible enemy becomes deathless. The man who has done you great injury or injustice makes himself a guest in your house forever. Perhaps only forgiveness can dislodge him” Cormac McCarthy, Cities Of The Plains.

Forgiveness is just too abstract to discuss without making it personal with examples. Forgiveness must be experienced viscerally. Victor Hugo’s Les Misérables illustrates this eloquently. Jean Valjean, the main character, spends nineteen years in prison for stealing. He is released after being hardened and calloused by excruciating cruelty during his long sentence. Now, a former convict, he must carry identification that informs everyone he is lecherous and dangerous. After wandering four days in a merciless world that summarily rejects him, he is shown kindness by Bishop Myriel, who gives him a warm meal and shelter for the night. The tough, indifferent Valjean only knows a world of judgment, threats, and survival, and returns the first gift of love he has received in almost twenty years by stealing the Bishop’s silver and leaving in the night. The next day the authorities return with Valjean in custody to restore the stolen silver to its rightful owner. The Bishop unexpectedly swings open both the door and his arms widely, and warmly greets Valjean as a long lost friend. He exclaims he is overjoyed that Valjean has returned. Myriel then explains to the gendarmes that Jean had evidently forgotten to take the silver candlesticks that he had given him also. The police leave, and Jean Valjean’s hardened heart of stone melts as the Bishop explains that he forgives him. The Bishop’s gift of the silver is to start a new and honest life, a life full of love and power. Hugo’s tale then expounds on the beautiful transformation that occurs in Valjean’s life – a life that essentially becomes an enormous expression of compassion and kindness, a huge enlivening ripple in the sea of humanity from one flawless leader’s act of forgiveness.

From this story we can clearly see the raw anatomy of forgiveness. Forgiveness is a three-part harmony that Myriel evidently knew well. It is 1) a recognition of evil and harm, 2) the willful abandonment of judgment and rightful resentment, and 3) authentic acts of undeserving kindness toward the harmful evildoer. While the evil of Valjean is necessary for forgiveness to occur, the clarity of self-identity and transcendent capability of Myriel is even more necessary. Hugo’s scene of forgiveness occurred more because of whom Myriel was than because of what Valjean had done. Let us also make no mistake, Myriel’s act of forgiveness was not selfless; it was appropriately self-caring and self-honoring. He was grounded in firm submission to a powerful purpose: the healing restoration and transformation of others. For by compassionately freeing himself from his wall of wounds, his vexing victimization, and his addictive prison of resentment, Myriel was able to lead Valjean toward his own freedom. Flawless leaders must first scale their walls of wounds, like Myriel, before they can free others.

The lack of forgiveness is rooted deeply in most all societies. In Hemmingway’s short story The Capital of the World, he writes of a Spanish father who decides to reconcile with his son, Paco. The remorseful father places an ad in a newspaper saying “Paco, Meet Me At Hotel Montana Noon Tuesday. All Is Forgiven, Papa.” Caught up in the emotional desire for reconciliation when making the newspaper ad, the father did not realize that Paco is such a common name in Spain. On Tuesday, eight hundred young Pacos showed up at Hotel Montana, looking for their father’s love.

Flawless leaders are willing to abandon power in favor of love, vacate condemnation in favor of compassion, jettison judgment in favor of acceptance, shuck self-protection in favor of vulnerability, ignore independence in favor of relationship, and forsake fairness in favor of forgiveness. Anger and resentment are appropriately human responses to injustice. Forgiveness is an appropriately super-human intervention of healing and restoration.

What resentments limit your leadership? What forgiveness would set you free?

Several weeks ago convenience store operator 7-Eleven submitted a petition to Congress to protest the fees that credit card companies charge retailers each and every time a customer uses credit instead of cash to purchase its goods. These are known in the industry as interchange fees and according to a recent Wall Street Journal article, amounted to 1.82% of every transaction made in the U.S. in 2008.

The article also detailed that this meant $45.3 billion in additional fees for U.S. banks, 75% of which stemmed from them using the Visa and MasterCard brand names. American Express charges even higher interchange fees given it serves a higher-brow client base that many merchants like to cater to. And apparently Diner’s Club charged rates as high as 7% for the privilege of accessing its privileged members when its cards first came out on the market.

The year-over-year increase in banking fees garnered was 78% and is serving as ammo for 7-Eleven and other like-minded retailers to claim the fees are getting out of hand. Not surprisingly, the industry has countered that the average interchange fee has actually decreased in recent years and was closer to 2% back in 2005.

What Exactly is an Interchange Fee?

An interchange fee is the amount that credit (and debit) card companies charge businesses and represents a cost for accessing its vast system of cardholders and payment network that executes the transaction, starting from the store charge and ending when it shows up on the client’s statement as is paid off. Banks also earn hefty interest from consumers that rack up credit card debt and is not a cost born by merchants.

Letting banks and other credit card issuers take on credit risk (risk of nonpayment) is a definite perk for retailers, the majority of which don’t offer in house credit programs themselves. It also makes payment much easier for consumers and allows them more flexible payment options (e.g. pay off the balance with one payment at the end of the month, pay it off over time with credit, or pay-as-you-go with a debit card). Another key perk is a points program that allows a card holder to receive 1% of all purchases back in the form of points that can be used to buy plane tickets, other merchandise, etc.

The Merchant Foots the Bill

The benefits offer sweet deals for credit card companies and consumers but it is merchants that must foot the bill. The fees also loom large for many retailers as they already operate with razor-thin profit margins. For instance, many mom-and-pop gas stations lacking 7-Eleven’s purchasing clout have gone out of business in the past couple of years on the combination of credit card fees and gasoline profit margins that evaporated along with record-high oil prices.

The Bottom Line

The good news for merchants is that current industry sentiment favors taking a closer look at interchange fees. Europe and Australia already regulate these fees to keep them between 0.3% and 0.4%. They are unlikely to fall this low any time soon in the U.S., but the downward pressure on interchange fees isn’t going away any time soon.

What’s Your Rate?

Short Answer — Interchange + 50 Basis Points + 5 Cents

When I started in the merchant account business over 20 years ago and a prospective merchant asked “What’s your rate?” it was easy to simply quote 1.69 % + 20 cents, take out my pen, and start writing up the paperwork. Wow has that changed. Over the past two decades MasterCard and Visa, in their infinite wisdom, has developed a daunting list of interchange rules based upon your type of business, what type of card is presented by the consumer, the amount of the sale, what type of data you enter into your terminal or software, and if you swipe or manually key in the sale. In the 1980’s I could count on one hand the number of different interchange categories while today the list is over 100 pages long. Up until recently interchange was a trade secret guarded like the recipe for Coke but now it is publicly posted on Visa and MasterCard’s corporate websites.

It is important to know that every merchant account provider is bound by the exact same interchange schedule. It is the markup from this schedule that determines what you will ultimately pay. There is no such thing as wholesale rates, not even for the largest retailers. So when today a sales rep quotes you a tiered rate such as 1.69 % you really have to ask for the rest of the picture as very few of your transactions will qualify for that rate. As you can see from the chart below interchange cost for almost every category is higher including all rewards cards, business type cards and keyed cards. Therefore only swiped debit/check cards and small ticket (Under $15) sales in a limited number of business types have an actual cost lower than 1.69 %. In this example one could expect that most sales would be downgraded to a mid-qualified or non-qualified rate which usually adds 1 to 2 % to the qualified rate.

OK, so why do we have rates on our site similar to the 1.69 % example. The reason is because it has been so embedded in merchant’s minds over the years to just say “What’s your rate?” that it would be foolish for us to not at least offer this popular option. However, the educated merchant (which we want you to be), including most every large merchant knows that the least expensive option is Interchange Plus pricing. That is why Credit Card Processing Services offers all of our merchants either tiered pricing or the following low cost interchange plus pricing schedule.

CATEGORY	INTERCHANGE	ADD 30 BP + 10 Cents	YOUR RATE
Visa Check Cards
CPS Hotel – Debit Cards	1.46 % + $0.15	Add 30 BP + 10 Cents	1.76 % + $0.25
Visa Credit Cards
CPS Hotel – Credit Cards	1.68 % + $0.10	Add 30 BP + 10 Cents	1.98 % + $0.20
CPS Rewards 2 T&E	2.00 % + $0.10	Add 30 BP + 10 Cents	2.30 % + $0.20
Signature Card Electronic	2.40 % + $0.10	Add 30 BP + 10 Cents	2.70 % + $0.20
Visa Commercial Cards
Business Card Electronic	2.50 % + $0.10	Add 30 BP + 10 Cents	2.80 % + $0.20
Corporate Card Electronic	2.30 % + $0.10	Add 30 BP + 10 Cents	2.60 % + $0.20
MasterCard Offline Debit Cards
Merit 3 – Debit Cards	1.15 % + $0.15	Add 30 BP + 10 Cents	1.45 % + $0.25
MasterCard Credit Cards
Merit 3 – Credit Cards	1.68 % + $0.10	Add 30 BP + 10 Cents	1.98 % + $0.20
MasterCard World & Elite Cards
World Card T&E	2.40 % + $0.10	Add 30 BP + 10 Cents	2.70 % + $0.20
World Elite Card T&E	2.85 % + $0.10	Add 30 BP + 10 Cents	3.15 % + $0.20
MasterCard Corporate & Business
Face-to-Face Corporate Cards	2.15 % + $0.10	Add 30 BP + 10 Cents	2.45 % + $0.20
Face-to-Face Business Cards	2.42 % + $0.10	Add 30 BP + 10 Cents	2.72 % + $0.20
World & World Elite Business T&E	2.60 % + $0.00	Add 30 BP + 10 Cents	2.90 % + $0.10
Diners Club Electronic	2.10 % + $0.00	Add 30 BP + 10 Cents	2.40 % + $0.10
Discover
Hotel – Debit Cards	1.45 % + $0.10	Add 30 BP + 10 Cents	1.75 % + $0.20
Hotel – Credit Cards	1.81 % + $0.10	Add 30 BP + 10 Cents	2.11 % + $0.20
Hotel – Premium Cards	2.40 % + $0.10	Add 30 BP + 10 Cents	2.70 % + $0.20
Interchange Rates already include Dues and Assessments which we have rounded off to 10 BP
Interchange Plus Pricing available for all lodging properties processing at least $10,000 per month in volume
Visa Dues and Assessments are .0925%
MasterCard Dues and Assessments are .0950%
Discover Dues and Assessments are .0950%
Interchange Table Current as of June 2009