I am always amazed at how little Interchange is understood by professionals in our industry. Since launching our Instant Quote Tool we have received almost daily calls typical to the one my business partner received yesterday from a merchant sales representative. This particular rep had a prospect who is on Tier Pricing. The rep wanted to convert this merchant to Interchange Plus Pricing and show significant savings in order to close the deal. Like most sales people in our industry, he sent the statement to three different processing companies for a statement analysis.
Here are the three responses from the three processing companies which prompted the rep to call Ben Shirey (my business partner):
- One company priced the merchant on Interchange Plus 40 Basis Points and $0.08 transaction fee and showed a savings of around $12.00 per month.
- A different processor simply refused to do a Tier to Interchange Plus conversion. They lowered the qualified rate slightly and showed a savings of $15.00 per month with no real idea how much profit the account would generate.
- The third processor did complete the conversion to Interchange Plus Pricing and priced the merchant at 50 basis points with a $0.10 transaction fee. This showed savings of $75.00 per month (5 times higher than the first processor who actually used lower pricing!)
So, what is obvious about this story so far? First of all, these processors can’t all be right. In point of fact, they are all very wrong because none of them is using an Interchange Algorithm to predict future Interchange costs. Instead, they are completing the comparison by using some combination of effective rate and guess work to make a stab at how much the interchange fees would be.
Perhaps you are wondering why these three processors show such different results? In this case, all three are honest companies who are doing their best to provide an accurate comparison. Unfortunately for them, there are over 300 variations of interchange. For a human to calculate what the interchange cost should be for a merchant is just not possible. As a result, processors use one of these three approaches in order to complete a cost analysis:
#1 – The “Honest” approach. This is the approach the first processor used. Realizing they don’t know actual interchange fees, they provide a very, very conservative estimate which shows minimal savings. The obvious problem here is that most sales reps, knowing the merchant probably won’t switch when shown the “honest” proposal, will end up choosing another processor.
#2 – The “Accurate” approach. This is the approach the second processor used. Realizing there is no way to accurately make a calculation without knowing interchange, they basically refused to do a conversion from one cost structure to another. The problem with this approach is that without recognizing the advantages of another cost structure, to show significant savings in some situations is difficult. To “accurately” calculate residual if you can’t calculate interchange is impossible. Therefore, the sales partner is left to make a decision without the necessary profit information.
#3 – The “Average” approach. This is what the third processor used. Rather than using an ultra-conservative guess or deciding not to complete the conversion, they made an educated guess probably based on other similar merchant types. In this case, their approach is the closest of the three. However, this is not always the case with the “Average” approach. Each merchant type is unique. Many times these processors use a very large data set such as “show me the average interchange effective rate for all restaurants” instead of “show me the average interchange for all taco restaurants with an average ticket size between $20 and $22.” Both Interchange costs and consumer behavior are largely dependent on the average ticket size, so using an average percentage rather than rebuilding an Interchange Table can be risky.
#4 – The “dishonest” approach. None of these three companies used this approach, but we see it all the time. Because the savings projections vary so much by processor, the sales rep and the merchant are confused. Many times they just look for the “highest savings” rather than questioning whether or not the savings numbers are accurate. Some processors take advantage of this uncertainty by showing a lot of savings which will never materialize. They are banking on the sales rep’s ignorance and the merchant’s willingness to take a risk. It is amazing how often these less-than-reputable companies win in our industry. I have seen statements where only the qualified rate is listed, as if none of the merchant’s transactions will be mid or non-qualified. Other times I have seen an interchange cost projection that would only make sense in a fairy tale. When the savings don’t materialize, these processors make excuses. They may say, “You must be running different card types than you did before.” The merchant doesn’t understand such statements and cannot argue.
What is the solution? When we loaded this merchant’s statement into our Instant Quote Tool, the correct Interchange was calculated. Then all of the programs this rep had loaded into his profile were compared on a level playing field.
- No more guess work.
- No more people trying to make an incredibly complex calculation without the help of a computer algorithm.
- No chance for the processor to gain an unfair advantage by using a different set of assumptions in order to show higher savings.
Once we removed these variables, the choice was clear. The processor who offered the lowest pricing would actually save the merchant close to $100.00 per month rather than the $12.00 per month calculated using the ultra-conservative, “Honest” approach. Not only could the sales rep now compare programs based on savings, but he could also get an accurate picture of the monthly residual profits and the up-front bonus in order to make the right decision.
This next week I am finalizing and testing our improved algorithm. The improved algorithm will allow you to view and edit every assumption that we use to build the interchange table from the SIC code and Average Ticket Size, the percentage of phone sales versus swiped, and even the percentage of check card transactions that are regulated versus unregulated. You will still be able to skip all of this complexity if you accept our assumptions. But for the serious industry professional who would prefer to see what our algorithm is doing behind the scenes, you are going to love these new features.
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