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What are the Total Costs of Payment Acceptance for Your Company?

By Dean Sheaffer, SVP Financial Services/Chief Compliance Officer, Boscov’s

Many merchants do not have a complete understanding of the total cost of payment acceptance for their business.  While payments may be esoteric to a merchant's core business (buying and selling goods and services), the costs of various payment methods vary widely and often equal or exceed a merchant's bottom line profit. The payment process is also integral to the customer experience. Knowing the component costs of each payment method in each of your payment channels allows you to make better investment decisions to help reduce costs and improve the customer experience.  These are also the same cost components that a merchant wants to consider when negotiating a new processing contract. It is also noteworthy that in some cases merchants may have the opportunity to steer customers towards lower cost methods of payment.

There are some base expenses that all payment methods are common to all payment types. However these costs will vary based on the payment type.  Take, for example, Selling Associate Payroll.  This cost is directly related to the time to process a given transaction.  If a cash payment takes twice as long to complete as a credit card payment, the payroll associated with payment acceptance for that transaction also doubles.  Cost common to all payment methods include:

  • Selling Associate payroll, benefits and overhead associated with the transaction time to accept payment and make change, open/count the till, close/count the till.
  • Risk Management and Loss Prevention (“RMLP”) payroll, benefits and overhead associated with monitoring cash shortage and selling associate interviews.
  • Accounting payroll, benefits and overhead associated with bank reconciliation, whether it be cash, credit or debit.
  • Losses, whether from cash shortage, bad checks, fraud or theft.

In addition to the base costs, each type of payment has its own set of costs to consider.  Let's start by looking at an "easy" payment method - cash.  Cash is probably only applicable to your in-store channel.  Component costs to consider are:

  • Office payroll, benefits and overhead associated with cash reconciliation, safe counts and deposit preparation. Accounting systems (licensees, hardware, maintenance) for cash reconciliation (these can be internal costs to support homegrown systems, external costs for purchased systems or both).
  • Handling costs (e.g. Armored car service costs, till seepage/cash shortage cost, etc.).
  • Bank fees and costs associated with account maintenance, deposits, change orders and similar.

Checks may be accepted in many channels and can be augmented through conversion to ACH transactions (aka check truncation).   Component costs to consider are similar to cash with the following additions:

  • Authorization / Guarantee fees.
  • Bank NSF fees - Net these against NSF fees collected from customers (may be an income line item).
  • ACH / Check conversion fees.
  • Payroll, benefits, overhead and hard costs associated with bad check collection; or fees/commission paid to outside agency for collection.

Private label stored value cards (gift cards, bonus cards, rewards cards, etc) are likely accepted in all of your sales channels.  When a consumer purchases a gift card they create a balance sheet liability which is relieved when it is redeemed; this tender type should still be considered as a tender type with associated costs resembling cash with the following additional costs:

  • Manufacturing costs
    • card and carrier production,
    • warehousing,
    • transportation,
    • distribution,
    • fixturing, signage, displays.
    • Selling Associate / Visual Merchandising payroll, benefits and overhead costs to maintain displays.
    • Systems cost
      • Licensing,
      • hardware,
      • maintenance of internal or purchased systems;
      • per transaction fees;
      • per account fees or similar cost to external providers.
      • Accounting payroll, benefits and overhead associated with stored value system reconciliation.
      • "Discounting" or fees associated with resale of cards through partner channels (BlackHawk, InComm and similar) or bulk purchasing.
      • Compliance costs associated with monitoring and complying with federal and state and federal law and regulation.

Private Label Credit Cards ("PLCC") may well provide a significant income source for the merchant and, if offered, are likely accepted in all payment channels.  The economics of these programs are highly variable and complex.  Although many merchants have outsourced their PLCC Programs to an Issuer there are still those that run and maintain their own systems If this is being considered as a tender type a merchant would like to offer a detailed analysis needs to occur as the income and cost lines are highly variable and specific to both the merchant and the target customer base.  A thorough review of the Agreement between the Issuer and Merchant is required to understand all of economic components. At a high level, some component income and costs to consider include:

Merchant Participation or Royalty fees; marketing incentives; acquisition fees; coworker incentives paid to merchant by issuer include:

  • Rewards program costs.
  • Contact center costs
    hard costs, payroll, benefits and overhead associated with customer service issues handled my merchant's contact centers).
  • Selling Associate training costs.
  • Hard costs including
    • advertising,
    • marketing
    • in-store promotion of PLCC Program
    • Payroll,
    • benefits,
    • overhead and
    • PLCC program management costs
      executive sponsor, marketing personnel, operations, IT, networking and similar.
    • Payment specific costs:
      • Authorization costs and Settlement costs (telecommunication costs, switch licensing, maintenance and similar)
      • Discounting associated with promotional credit plans.
      • Compliance costs including
        •  Compliance monitoring and updating
        • Compliance with prevailing laws and regulations
          • State
          • Federal
          • Receipt management
            • Creation, storage and retrieval of "store copy" of receipts (electronic or paper).

Third party card (Visa, MasterCard, Discover, American Express and similar) transactions are clearly the most complex and expensive transactions for merchants. Many costs associated with these transactions can change completely at the whim of the card networks with little regard to merchant benefits or cost justification.There are literally hundreds of interchange rates for the various card brands, card types, acceptance channels and entry methods.  Post-Durbin debit transactions are bifurcated into "regulated" vs. "unregulated" interchange categories; debit networks have varying fees for PIN debit transactions.  Interchange is the largest single component of third party card acceptance and requires a thorough analysis and an on-going interchange optimization process; your processor may be able to help you with this.  In addition to interchange there are a host of other costs associated with third party card acceptance. 

Some of these component costs to consider are:

  • Specific fees and assessments imposed by card networks on a per transaction / per location basis (e.g. FANF fees, AVS Fee, NABU, etc.).
  • Processor and debit network fees.
  • Point of Sale hardware and software hard costs, licensing and maintenance associated with card acceptance. Include costs for field engineers to maintain MSRs, terminals and similar.
  • PCI costs including quarterly testing, annual Report of Compliance, internal and external costs associated with monitoring and implementing PCI requirements.
  • Data Breach insurance or instead reserving for the contingent liability related to breaches involving payment card data.
  • Payroll, benefits and overhead associated with monitoring systems, networks and databases for intrusion or improper exposure of payment card data.
  • Telecommunication and switch costs for authorization and settlement Receipt management costs
    • Systems
    • payroll
    • benefits and
    • capture
    • maintain
    • retrieve "store copy" of receipts. (electronic or paper).
    • Chargeback and retrieval  costs
      • Systems,
      • payroll,
      • benefits and
      • Retrieval requests and Chargebacks.
      • RMLP payroll, benefits and overhead to monitor and respond to potentially fraudulent transactions.
      • Fees associated with specific security products or services
        • Verified by Visa,
        • MasterCard Secure Code
        • Encryption
        • Tokenization
        • Fraud detection and CNP associated fees:
          • licenses,
          • maintenance,
          • payroll,
          • benefits and
          • overhead cost (may be internal, external or both) .
          • RMLP payroll, benefits and overhead to work with law enforcement investigations of fraudulent transactions.
          • PCI Costs
            • Labor
            • Security
            • Accounting

Once merchants have a complete understanding of the costs associated with each payment method in each payment channel, they can make an informed decision regarding their investments in payment acceptance and even in the methods of payment they ultimately choose to accept.