Nuances of the Game: Strategies to Manage Card Interchange

Anand Goel

Optimized Payments Consulting

Greg Moore

AutoNation

Presentation Objective

Understand the impact of The Durbin Amendment and learn a 5-step analytical framework to manage payments from an interchange perspective.

Presentation Outline

• About Optimized Payments Consulting

• Understanding Interchange

• Durbin Impact on Debit Cards

• Using Analytics to Simplify Interchange

• 5-Step Process

• AutoNation’s Dilemma

• AutoNation Case Study

About OPC

Background• Founded in 2007; privately held• Headquartered in Atlanta • Professional staff from payments industry

Service offerings• Payments consulting to help merchants understand and

lower the cost of electronic payments• Payment analytics

Client profile• Retail, Internet, b2b, healthcare, telecom merchants• Mostly Fortune 1000

Understanding Interchange

• Interchange (IC) is defined as the wholesale price, charged by Visa/MasterCard/Discover, for settling a credit/debit card transaction

• All the IC that a merchant pays goes to the bank that issued the card

– For instance, if you use a Citibank Visa credit card at a Macy's department store and charge $100 - the IC cost of $1.61 (Visa CPS Retail at 1.51% + $0.10) goes to Citibank

• Visa & MasterCard interchange tables are available through their respective websites. Discover interchange tables are available through acquirers.

• For issuers, interchange revenue pays for 1) cost of money, 2) rewards programs, 3) internal costs including fraud and 4) profit

Why So Many Rates?

Visa/MC/Discover have set up a complex scheme of 700+ interchange rates. Various considerations are involved in how interchange rates are set in the U.S.…

• Market Considerations1. Competition amongst card networks

2. Card network and issuer strategies

3. Emerging markets/verticals

4. Emerging Technologies (e.g., EMV and mobile)

5. Legislation

• Merchant & Card Considerations1. Merchant's industry type (MCC – Merchant Category Code)

2. Type of card (Visa Traditional, Visa Rewards, Visa Signature, Visa Debit, etc.)

3. Method of entry (swiped vs. keyed)

4. Risk and adherence to compliance standards

• auth vs. settlement timing

• auth vs. settlement $ amount tolerances

• address verification

• commercial card data element requirements

Durbin Impact on Interchange

• The Durbin amendment imposed a cap on debit interchange fees for cards issued by regulated financial institutions.

• Since implementation in October 1, 2011, Durbin has saved merchants approximately $8 billion according to a Federal Reserve study released earlier this year

• Most merchants have benefited from debit fee caps, but not all

Vertical

Company

Size

Average

Debit Ticket

Pre Durbin

Cost/Txn

Post Durbin

Cost/Txn

Debit

Savings/Txn

Annual Interchange

Savings

Retail $340M $38.00 $0.59 $0.24 $0.35 $1.3 million

E-Commerce $54M $268.00 $4.57 $0.35 $4.22 $0.6 million

B2B $80M $541.00 $13.35 $0.49 $12.86 $0.4 million

Parking $60M $3.25 $0.09 $0.22 -$0.13 -$1.4 million

Debit Interchange Fee Cost & Savings

Maximizing Durbin Impact

• Nationally, regulated debit transactions have averaged 70%...we have seen regulated transactions as high as 90% in some localized markets

• Ensure that you are receiving Interchange pass-through pricing…merchants with bundled pricing do not receive the savings from Durbin amendment

• Promote debit (signature, PIN, and PINless as applicable) with signage at retail POS or web checkout page

• Evaluate incentives to drive customers to pay with debit or less costly payment tenders

– Bluenile.com offers 1.5% discount for bank wire– Ikea offers a 1.0% debit discount that is good towards future purchase– Some gas stations offer cash and debit card discounts– Meijer grocery stores offer extra bonus points for PIN debit card usage

• Evaluate PINless debit if you are in government, telecom, insurance, utilities, education

Using Analytics to Simplify IC

Payment instruments vary in use, cost, and performance. Applying analytics to any of these can provide insightful, actionable nuggets.

If you can’t track and analyze, you can’t capitalize upon them

Analytics allow you to:1. Proactively identify problems/trends and apply corrective measures

before they become an issue

2. Monitor primary drivers

3. Understand costs that can be controlled and managed

4. Understand effective costs

5. Drive/influence customers to lower cost options

6. Identify best practices in areas that can be applied throughout the organization

How Do You Build Analytics?

By following a 5-step process, your organization can build a repeatable, sustainable payment analytics program.

STEP 1: Identify Key Metrics

STEP 2: Gather Data Sources

STEP 3: Organizing Data

STEP 4: Segmenting Data

STEP 5: Layering a Business Intelligence (BI) Tool

Step 1: Identify Key Metrics

Identify key payment metrics that are important to your organization

• Metrics to consider

• Percent interchange downgrades

• Interchange cost vs. cost of assessments and acquirer fees

• Total organizational effective cost for all payments (% of sales)

• Effective cost by payment tender (or by division, store, etc.)

• Trending of mix of payments (consumer preferences)

Step 2: Gather Data Sources

• Monthly merchant statements

• Monthly bank statements

• Individual transaction level detail is not important…monthly summary level information works very well

• Internal studies of direct and indirect costs, as applicable

– Gateway costs

– PCI compliance costs

– Cost of managing and responding to chargebacks

– Exception handling costs

Step 3: Organizing Data

• Request data in electronic format (Excel, comma delimited, or even pdf) from your payment providers

• Data in pdf files can be extracted into Excel by using inexpensive software like pdf2xl from www.cogniview.com

• Data can be stored in a relational database, Microsoft Access, or simply in Microsoft Excel (2007 or later version can store over 1 million records)

• You can layer a BI tool on top of any of these data repositories…more on that later

• Continue to add new monthly data to your database or Excel

Step 3: Organizing Data – cont.’

• Depending on where the data is housed, clean and format data into a uniform table

• Your dataset should include some of following columns (include other information that may be relevant for your organization)

Date Date or Month of Data

Data Source Merchant Statement, Bank Statement, Internal Audit

Vendor Name FDMS, American Express, Chase Paymentech, etc.

Payment Tender Type Credit Card, Debit Card, E-Check, ACH, etc.

Payment Tender Name Visa

Account Number/MID 31500239432423

Account Region/Roll-up Group West Division, ESX Business Unit, etc.

Total Sales $5,000,000

Total Transactions 66,667

Sale Type Sale, Refund, Chargeback

Fee Type* Interchange Fee, Acquirer Fee, Exception Handling Costs, etc.

Fee Name CPS Retail Credit

Fee Amount Percent 1.54%

Fee Amount Per Item $0.10

Total Fee Charged $83,667

Interchange Qualification Consumer Cards, Rewards Cards, Signature Debit Cards, Commercial

Cards, and Downgrades

Step 4: Segmenting Data

• Card payments in particular are supremely complex…Visa, MasterCard, and Discover have over 700 interchange categories combined

• Simplify interchange categories by grouping them into six meaningful categories…categories in red can be influenced by merchants

1. Consumer traditional cards

2. Consumer rewards cards

3. Signature debit cards

4. Commercial cards

5. Downgrades

6. Refunds

• If you have 50 interchange categories that you see on a merchant statement, create a table that tags each interchange category with one of the above tags

Step 5: Layering a BI Tool

• Use a BI tool to access and understand your data in visual format (without needing IT assistance)

• Drag and drop dimensions and measures (headers in your dataset) to explore patterns, identify issues, create analyses, etc.

• Use your internal BI licenses or purchase inexpensive off the shelf single license…popular BI tools:

– QlikView

– Century Software Analytics

– Style Intelligence

– Cognos

– Oracle

Create Visual AnalyticsUnderstanding effective rates/costs by payment allows management of trends

Add all payment products relevant to your company to easily compare costs

Sources: First Annapolis, Nilson, Optimized Payments Consulting. Alternative Products refer to Amazon Payments, Google Checkout, and PayPal. Weighted average data across multiple merchants.

Highlight InefficienciesHighlighted in darker blue are store locations with downgrades greater than $100K per month

Identify OpportunitiesDowngrades represent 3%-4% of sales except for March (settlement delay due to POS outage)

Primary reasons for downgrades are no AVS on key-entered Visa cards, no sales tax for business cards, auth and settlement variance greater than 20% for Visa and 25% for MC, delay in settlement

Perform ReviewsSize of circle represents credit card sales for each month. Blue part represents qualified sales (consumer, rewards, business, and signature debit). Orange part of circle shows downgrades – ranges from 2-5% per month.

Division A

Division B

Division C

Division D

Total

Measure Key Metric TrendingTotal effective cost decreased by 1 bps in Jan11 and 5 bps in Feb11 due to downgrades improvement

MC volume eclipsed AMEX in February driven by acquisition

Analyze & Refine Processes

24

Footprint: Predominantly Major Metro Areas in Sunbelt

Selling 32 brands across 260 franchises

AutoNation is America’s largest automotive retailer headquartered in Fort Lauderdale, FL operating 260 new vehicle franchises in 15 states. AutoNation’s 2011 revenues were $14 billion. AutoNation is a member of the S&P 500.

Our Card Payment Issues:

• Reporting and analytics very cumbersome with two acquiring relationships

• Credit card interchange & processing fees were a significant cost

• Limited internal knowledge of the intricacies of credit card processing

AutoNation

Our perspective on payments:

• Managing payments (merchant services) was lower on the priority list given immediate pressing industry and economic issues

• We had always thought of auditing our payments and developing analytics but there was lack of internal expertise

• We needed to engage external expertise

AutoNation Perspective

Payment Analytics

• Clarified fact versus intuition

• Educated company on cost and manageable components of each payment type

• Developed confidence we were using the most effective payment products

• Learned specific strategies we could use to reduce downgrades

• Eliminated unnecessary service fees

• Negotiate better pricing with acquirer

AutoNation Perspective

• Debit analysis allowed us to quickly see the benefit of Durbin

• Allowed me to quantify Durbin savings by month, quarter, and annually

• Card networks usually don’t provide positive news…but this was great visual to share with management

AutoNation Perspective• Downgrade analysis allowed

us to quantify percent of sales receiving the best and worst interchange rates

• Allowed us to evaluate resources to optimize interchange versus the incremental savings benefit

• Refining analysis to remove downgrades due to tax exempt (B2B) sales and therefore, unable to pass it on for Level II qualification for b-cards

AutoNation Perspective

• Store level downgrade analysis identified specific stores with potential issues…allowed us to provide targeted education

• Primary drivers for downgrades for us are lack of AVS for Visa cards and Level II and III data for business, commercial, and purchasing cards

AutoNation Perspective

Benefits of Analytics

• Structured, organized way to look at payments

• Beyond savings opportunities, framework provides insight and education on payments

• Savings are meaningful too!

• Analytics/dashboard is key to measuring and demonstrating payments performance and value to management

Q&AThank you for your participation!

Anand Goel Optimized Payments Consulting

404-542-8520 anand@optimizedpmts.com

Greg Moore CMA, CTPDirector Treasury Operations

AutoNation954-769-7417

MooreG@autonation.com