Tuesday, June 24, 2008

Congress & Interchange

An Opinion from a Reformed Libertarian.

There’s good news and bad news.

The good news is that sales of my training manual, Understanding Credit Card Interchange in Card-Not-Present Environments, have increased dramatically. The bad news is that a lot of these sales have been driven by congressional interest in regulating the Interchange rates merchants must pay on credit card sales.

I am often accused of being in the right place at the right time. Better lucky than good – as the saying goes.

Mixed in with the usual merchant and processor want-to-learns, I have been seeing a greater number of sales from the beltway crowd in DC, Virginia and Maryland. They never purchase using their company names. I think they are lobbyists.

Being a merchant, and having been involved in the direct marketing industry for some time, I welcome some type of Interchange relief. Being a libertarian, I get an uncomfortable sensation in my gut every time congress tries to fix anything.

The credit card systems, at least from a technical perspective, are a modern marvel. These “small-i” internets grease the skids for billions of commerce transactions worth trillions of dollars. My guess is that roughly 99.7% of these pass through the system without any type of consumer dispute. Do you really want congress going anywhere near that machine?

That machine, however, is not perfect and Interchange happens to stick out as one of the areas ripe for improvement. In particular, those Interchange rates having to deal with Customer-Not-Present transactions. For years, CNP merchants have paid a “risk premium” on their Interchange rates because of real and perceived fraud concerns. These premiums generally run between 30 and 80 basis points (.30% - .80%), depending on merchant category and transaction type.

This is an expensive premium. In many regards, fraud can be measured by chargeback rates. Across the entire CNP spectrum, fraud as represented by chargebacks is less than 0.5%. What’s more, about half of this fraud is “friendly fraud:”

“I told my husband not to use my credit card! He’s not authorized to use it, and I’m not paying for the charge.”

This, my friends, is not fraud. Dividing 0.5% in half, the real CNP fraud rate approaches 25 basis points. So, you have this average risk premium of about 55 basis points, covering a 25 basis point problem. Things like this need to be fixed. Things like this need to be negotiated. So, Senator Durbin and Congressmen Conyers and Cannon have a good idea! Negotiation. You have to be smart to get into congress. Having congress and the courts run the process, however, is risky business in my opinion.

This problem needs to solved directly between the card Associations and a centralized merchant association. Let’s try like heck to leave government out of it – both Congress and the courts. This is an important warning. Many pundits say that these bills are dead-on-arrival. Every once and a while, though, Congress serves up a surprise. And I can tell you this, Congress is not particularly happy with the banking industry these days. Between “greedy” card-issuer fee policies and the mortgage crisis, Congress might just act with a certain amount of prejudice.

In the mean time, I am commercially happy with this new interest in Interchange. One way or the other, I hope these bills take a long, long time winding their way through Congress.

Monday, June 2, 2008

Chase Paymentech–First Data Break-up

Chase Paymentech® – First Data® Break-up
- An Opinion In the Spirit of Kurt Vonnegut -
Card-Not-Present Merchants Beware!

Chase Paymentech and First Data have come unstuck in time. I have been reading a great deal lately about the earlier than expected disintegration of the Chase Paymentech® – First Data® Alliance. Most of the reporting concerns details surrounding the divorce of assets – including customers. If I were a card-not-present customer of this processing behemoth, I would start getting concerned. This concern, incidentally, would have begun in 2005 when the Alliance was formed. This concern would have been centered around technology platforms.

There are fundamentally three technology platform familes available to merchants now processing through the Chase Paymentech – First Data Alliance:

1) The Paymentech® set,
2) the First Data Set, and
3) The Chase® “in-house” platform.

Of all these platforms, there is a real gem, at least for card-not-present merchants. This is the Paymentech “Salem” platform – named after its facility in Salem, NH. Interestingly enough, the platform on which an Alliance merchant now resides has just as much to do with selling as it does with the merchants’ needs and requirements. You see, not every new card-not-present merchant sold by the Alliance was placed on the Salem platform. Somewhere, a terrible mistake had been made.

You see, the Salem platform was the brainchild of one Thomas J. “Tim” Litle, who possessed an unusual combination of technical prescience and direct marketing knowledge. Mr. Litle was also a good salesman; he sold a product that delivered outstanding value to customers. His company prospered. Virtually all of his customers were simply giddy over the platform and customer service. It was the best. Mr. Litle sold his company in 1995 to a Texas outfit called First USA Paymentech®. Since then, the Salem platform has been involved in a myriad of corporate transactions involving First USA®, Banc One®, J.P. Morgan Chase®, First Data®, KKR® and others. Through all of its corporate incarnations, the Salem platform has continued to be the best platform for card-not-present merchants.

During the Alliance, a merchant probably would not have heard about this gem of a platform from a First Data salesperson or First Data ISO. The same can be said for native Chase salespeople or ISO’s. Since the inception of this Alliance, these people have routinely placed card-not-present merchants on First Data and Chase platforms – this behavior ostensibly driven by thoughts of financial gain and cultural xenophobia. As it turns out, this behavior killed one of the greatest opportunities in card-not-present processing history. So it goes.

Merchants don’t often leave the Salem platform. When they do, it’s usually because they jump to Tim Litle’s new platform, Litle & Co.® (http://www.litle.com/), or some other direct marketing specialist. So imagine for a moment, that back in 2005 a Chase Paymentech – First Data plan was hatched to move each and every card-not-present merchant within the Alliance to the Salem platform. Imagine owning an entire client category happy with their service. Imagine unwavering loyalty to a vendor. Imagine oodles of what investment bankers like to call “stickiness” and “defensibility.” This plan, incidentally, was not lost on some of the core group of managers operating the Chase Paymentech – First Data Alliance (mostly Litle hires). How the plan died would rival any novel by Kilgore Trout, and is known only by true insiders.

In Vonnegut’s novel, Timequake, a cosmic hiccup causes the universe to relive approximately ten years of its existence. For good or ill, all of the players in the universe were forced to relive what had happened to them for ten years of their lives a second time through – unable to change a thing. After the quake, “free will kicked-in again.” The upcoming Chase Paymentech – First Data break-up reminds me of this time quake. Perhaps merchants will have to relive the past three years of their lives. Perhaps nothing will change.

Possibly, however, merchants will write a novel of their own.

If you are a Chase Paymentech – First Data Alliance card-not-present merchant and currently reside on the Salem platform, relax a bit. You’re probably OK. In repeating the next three years, you’ll know that you are on the best platform the Alliance had to offer. In your new novel, however, you would be wise to include free will. Look around; see what else is out there. This is especially true if the asset-split gets messy and people start to suggest that you switch to one of the other platforms.

If you are a Chase Paymentech – First Data Alliance card-not-present merchant residing on any of the other platforms, get free will and get it fast. Find a way to end up on the Salem platform, Mr. Litle’s new platform, or on some other processor’s platform optimized for card-not-present merchants. Try native, real-time online reporting. Experience cost-plus pricing, especially now that Congress is beginning to take a harder look at reducing interchange fees. Investigate advanced chargeback handling and some of the other benefits these platforms provide.

Make yourselves young again.

Friday, April 25, 2008

Welcome to the Merchant's Guide

Welcome to The Merchant’s Guide Blog. The Merchant’s Guide, LLC provides merchants accepting electronic payments with methods to lower fees and improve revenues by offering informative training guides, payment operations audits, and professional guidance. At the time of this posting, our Website (http://www.themerchantsguide.com/) is near completion, and should be up within a week or so.

I am sometimes asked why I wished to abandon an “exciting” and lucrative sales management career to enter the relatively mundane existence of a trade writer and sometimes consultant. Well, for many of us, there comes a time in life when we become infatuated with a different lifestyle or another professional calling. At 45 years old, I just happened to have a yearning for both. Albert Schweitzer once said, “Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful.” Since my early school years, I have always enjoyed writing. Until just recently, it never occurred to me what I might write about, or that I might actually be able to earn a living at it (we’ll see!) The first “hints” that I would enjoy such a vocation emerged from my experiences writing articles for DM News and Electronic Retailer magazines.

Over the past 15 years, I have had the privilege of working amidst an extraordinary technological revolution. I am, of course, referring to the Internet and electronic commerce. In 1991, I started working for a small company called FTP Software, a firm that developed industry-leading TCP/IP (read Internet) software. At that time, the World Wide Web was in its infancy, if not just an idea. All we had to play with were the File Transfer Protocol, Telnet, and e-mail. No Web to speak of! Since then, I have primarily worked at companies specializing in electronic commerce and payments. My most recent adventure included a five-year stint building and running the sales force for Litle & Co., a payment processor well known for its transparent business practices, customer service, and developing innovative, technically advanced electronic payment systems.

One of the greatest lessons I learned while working in the processing industry was that relatively few merchants really understand credit card processing, especially as it relates to Interchange. Historically, Interchange rate information was restricted to members of the Associations and affiliated payment processors. So, it was impossible for merchants to “do the math” and determine their true fee structure. Ironically, Interchange generally represents the bulk of what merchants are required to pay the credit card systems! According to an extrapolation of data contained in Visa’s SEC registration statements, worldwide merchants paid over $100 billion of Interchange in 2006.

In the fall of 2006, however, both Visa and MasterCard decided to publish their respective Interchange rates in an effort to increase transparency into their payment networks – after all, they were going public! Although heralded as an epiphany, merchants quickly learned that the Interchange system was fairly complex, and that determining the equitability of their fees would be a challenge. Now, this I thought is a good subject to write about. It’s a big subject representing a lot of money to a lot of businesses. The subject matter is extremely complex – there are over 350 Interchange rates with thousands of rules and qualifiers. Simplifying the rules, I thought, would help a lot of merchants save a lot of money.

So, the fruit of my efforts thus far is a document entitled Understanding Credit Card Interchange In Card-Not-Present Environments, or Understanding Interchange for short. It’s about 80 pages, and pretty much tells you everything you need to know about CNP interchange and getting the best deal possible under the current rules. It has a lot of examples (including some impressive math), and even comes with a companion spreadsheet. You can buy this right from the website. I encourage you to check it out.

It will be my intention to post to this Blog once or twice a month, or as needed if something really important comes up. Like many bloggers, I am open to suggestion with regard to subject matter. Please feel free to e-mail me if you have an idea or would like something addressed on the Blog.