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ROLLING OUT A CREDIT CARD SURCHARGE PROGRAM: HOT TOPICS AND BEST PRACTICES
Scott E. Blakeley, [email protected]
Brad BoeDirector of Credit
Mike BevilacquaSr. Director Credit & [email protected]
Ron Clifford, [email protected]
CRF B2B Credit Card Acceptance/Surcharge Study Sept. 2018
2
Yes No0.00%
20.00%40.00%60.00%80.00%
100.00%
Do you accept credit cards as a form of payment for invoices? (If
you answered "no", go to question #26)
Responses
Yes No0.00%
50.00%
100.00%
Has your approach to credit card acceptance/surcharging
changed since 2016 (i.e. in light of new rulings)
Responses
3
Yes No If yes, how muchsince 2016 (list as
whole %.. i.e. 15%)
0.00%10.00%20.00%30.00%40.00%50.00%60.00%
If you answered "Yes" to question #1, have you experienced a
meaningful increase in card use this past year?
Yes No If yes, what type ofincentive?
0.00%
20.00%
40.00%
60.00%
80.00%
Do you offer incentives to discourage credit card use
such as early pay discount?
Yes No48.00%
48.50%
49.00%
49.50%
50.00%
50.50%
51.00%
Are credit cards accepted for all terms of sale?
Yes No0.00%
20.00%
40.00%
60.00%
80.00%
If not, do you place restrictions on accepting credit cards for
certain terms of sale?
4
Yes No0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
Are credit cards accepted as a form of payment for past due invoices?
Yes No47.00%
48.00%
49.00%
50.00%
51.00%
52.00%
Do you direct all credit card payments through a payment
portal?
Yes No0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
Do you have a companywide credit card acceptance policy?
Yes No48.00%48.50%49.00%49.50%50.00%50.50%51.00%51.50%
If no, are you contemplating implementing a companywide credit card acceptance policy?
5
Yes No0.00%
10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%
100.00%
Do you surcharge for credit card usage?
Yes No0.00%
10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%
Do you have a companywide credit card surcharge policy?
Yes No0.00%
10.00%20.00%30.00%40.00%50.00%60.00%
70.00%
If no, do you contemplate implementing a credit card
surcharge policy?
Yes No0.00%
20.00%40.00%60.00%80.00%
100.00%
If you do not have companywide credit card acceptance and
surcharge policies, do individual operating companies/lines of
business or distribution centers …
6
Yes No0.00%
20.00%40.00%60.00%80.00%
100.00%120.00%
If you do not have a credit card surcharge policy, are sales reps charged back for the cost of the
transaction fee?
0.00%10.00%20.00%30.00%40.00%50.00%60.00%
If you do not surcharge, what are the reason(s)?
Yes No0.00%
10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%
Is there any other way in which you offset the transaction fee?
Yes No0.00%
10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%
Do you expect B2B credit card transactions to increase?
7
Yes No0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
Do you have a two-tiered pricing structure – one for
cash and one for credit cards?
Yes No0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Do you tokenize credit card transactions?
Yes No0.00%
10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%
Do you segment your portfolio?
CreditTerms
Revenueand
Customer
Floor andceiling for
dollaramount ($)of invoice
Risk Level Do notsegment
Other(pleasespecify)
0.00%5.00%
10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%
If you answered "yes" to question #22, how do you segment your
portfolio?
8
Yes No0.00%
10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%
100.00%
Do you use customer segmentation as a form of exception? (accepting or
rejecting credit card transactions)
Low riskcustomers
Certainproductlines or
businessdivisions
Based onorder value
As a riskmitigation
tool
Other(pleasespecify)
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
If "yes" to question #24, how do you apply "exceptions" in your
portfolio?
Increase in the Use of Credit Cards in the B2B Space
Card Driver Use Card Network Perspective
More card use – B2B space
Marketing efforts to customers
Customer’s Perspective Card as extended terms Improved cash flow Convenience
Cardholder’s Perspective Points and miles Reimbursement
9
Source: Wall Street Journal https://blogs.wsj.com/cfo/2014/10/28/b2b-credit-card-payments-jump/National Small Business Association http://nsba.biz/wp-content/uploads/2018/02/Year-End-Economic-Report-2017.pdf
Making Credit Cards a Price Competitive Payment Channel
10
Supplier Choices with Cards
Pass Card Costs to Customer
Surcharging
Convenience Fees
Absorb Card Costs
No Surcharge: Lowering the Interchange Fee
Cash Discount for Non‐Card Use
The Vendor’s Teams’ Evaluation of Surcharge Rollout:− Critical Supplier or One of
Many − Implementation Costs− Decreased DSO− Total spend vs. profit/loss of
surchargeThe Customer’s PerspectiveThe Cardholder’s Perspective
Making Credit Cards a Price Competitive Payment Channel
11Scenarios detailing Supplier Options for $200,000 customer purchase:
SUPPLIERAssumes $2 mil annual credit card sales
Payment in full within 48 hours using credit card 200,000$ 2,000,000$ Interchange Fee 2.5% paid by Supplier (5,000)$ (50,000)$ Reinvestment/Redeployment of Funds at 3% 455$ 4,550$ Net to Supplier 195,455$ 1,954,550$ % of Purchase Price 97.7% 97.7%
Payment in full after 30 Days using credit card 200,000$ Interchange Fee 2.5% paid by Supplier (5,000)$ Supplier's Cost of Borrowed Funds (3%) (500)$ Net to Supplier 194,500$ % of Purchase Price 97.3%
Payment in full after 60 Days using credit card 200,000$ Interchange Fee 2.5% paid by Supplier (5,000)$ Supplier's Cost of Borrowed Funds (3%) (1,000)$ Net to Supplier 194,000$ % of Purchase Price 97.0%
Payment in full after 30 Days using credit card 200,000$ Interchange Fee 2.5% paid by Customer -$ Supplier's Cost of Borrowed Funds (3%) (500)$ Net to Supplier 199,500$ % of Purchase Price 99.8%
Non-Credit Card Payment (with Discount) in 10 Days 200,000$ 2% Discount to Customer (4,000)$ Reinvestment/Redeployment of Funds at 3% 457$ Net to Supplier 196,457$ % of Purchase Price 98.2%
Supplier payments
Card Surcharge Flow Chart
Card Company Rule Compliance
Rule Changes PCI
Legal Compliance
Card Holder Privacy RightsAnti‐Surcharge Legislation
Vendor’s Best Practices
Internal Card Policy Vendor’s Card Agreement w/ Customer, including T&C’s
FraudChargeback
12
PCI Compliance
The Six Card Network Rules for Surcharging
Disclosure to networks and cardholders Calculating the surcharge Level playing field Stratification Debit cards International transactions
13
State No Surcharge Laws
California Colorado Connecticut Florida Kansas
Maine Massachusetts Oklahoma New York Texas
14
Uniform Theme: Protect consumers within their states from retailers adding a charge to cards, therefore acting as a form of tax on those consumers choosing cards to pay for their goods or services.
Litigation Challenges to No Surcharge Laws15
California
Texas
Florida
New York October 2013:
Southern District of New York finds no-surcharge
law unconstitutional
September 2015:U.S. Court of Appeals for the 2nd
Circuit reverses decision of district court, making the ban enforceable
March 2017:U.S. Supreme Court rules law
impermissibly regulates commercial free speech and remands
September 2014:District court upholds the no-
surcharge statute
November 2015:U.S. Court of Appeals for the 11th Circuit vacates the decision of the District Court
September 2016:Supreme Court takes no
action on the petition
February 2015:District court upholds the
constitutionality of no-surcharge law
March 2016:U.S. Court of Appeals for the 5th
Circuit affirms decision of district court, keeping the ban enforceable
April 2017:U.S. Supreme Court
remands to following ruling with New York law.
March 2015:District court rules the surcharge
ban is unconstitutional
January 2018:U.S. Court of Appeals for the Ninth Circuit
affirms, finding California’s no-surcharge law violates commercial free speech
December 2017:2nd Circuit certifies to N.Y. Court
of Appeals to answer specific question on no-surcharge law
May 2017:5th Circuit remands to
district court to conform ruling with New York
court.
October 2018:District court strikes down no-surcharge
law as unconstitutional
Rowell v. Paxton: TX Surcharging Decision
Texas Strikes down no‐surcharge law as unconstitutional Decision represents a significant expansion of market opportunity
and a landmark step toward legal adoption in all 50 states Merchants have embraced surcharging as a means to push back against the
rising cost of credit card acceptance, which has increased 24% for Visa and MasterCard rewards cards in just four years.
Now, businesses in these states have the option to pass on the fee when their customers choose credit cards for convenience or rewards, so long as they comply with the card network rules introduced in 2013.
After legal victories in Florida, California, and Texas, the only pending challenge is the litigation facing the New York “no‐surcharge” law.
16
U.S Supreme Court Upholds Anti‐Steering Provisions in American Express Case
The federal government, along with several state Attorney Generals brought a case against American Express for its anti‐steering provisions for being anticompetitive. Anti‐steering provisions in contracts between American Express and merchants prohibit merchants from steering customers to cards with lower interchange fees through incentives or other means.
The Supreme Court held that the anti‐steering provisions were not anticompetitive to cardholders and actually allowed American Express to offer more benefits to its cardholders.
17
Visa and MasterCard Settlement in Antitrust Litigation
A class action initially commenced in 2005 by merchants against Visa and MasterCard over interchange fees, tying and bundling, and anti‐steering provisions
On Tuesday September 18, 2018, a $6.2 billion settlement amount was reached ending the long time class‐action lawsuit.
Court divided the merchants into two separate classes Monetary Damages: The Opt‐In Class Modifying Visa and MasterCard Business Practices: The Opt‐Out Class
Opt‐Out class can raise claims based on: Interchange fees Network or merchant fees No‐surcharge rules No‐discounting rules, Honor‐all‐cards rules
18
Settlement Agreement Hearing to be held in 2019.
Canadian Credit Card Settlement
In 2014, after discussions with the federal government, Visa and MasterCard agreed to voluntarily reduce their merchant fees for 5 years
In 2017, the class merchants and Visa and MasterCard agreed to a settlement, under which each Visa and MasterCard will modify its no‐surcharge rules and each pay C$19.5 million (US$14.7 million)
The rules will come into effect no later than 18 months after court approval of the settlement Merchants should expect a transition period following court approval of the
settlements: Card Companies will publish literature that officially establishes the new
card network rules Card Companies will distribute new payment terminals to merchants with
labels notifying customers of the merchant’s right to surcharge
19
Canadian Credit Card Settlement The settlement is subject to court approval in each of the five provinces in which
the claims were brought
Hearings will be heard as follows• British Columbia (Vancouver): Court Approves Settlement
• “Visa and MasterCard have agreed to modify their no‐surcharge rules to allow merchants to surcharge up to a cap, and to ensure this ability to surcharge remains in effect for a minimum of five years” (Coburn and Watson’s Metropolitan Home v. BMO Financial Group).
• Alberta (Calgary): Court approves settlement and refers to the Coburn and Watson’s Metropolitan Home v. BMO Financial Group reasoning
• Saskatchewan (Regina): Settlement Approval Hearing Adjourned to September 5, 2018 Pending Decision
• Ontario (Toronto): Settlement Approval Hearing Adjourned to September 4, 2018 Pending Decision
• Quebec (Montreal): Settlement Approval Hearing rescheduled for October 15, 2018 @ 9am in Montreal. Court has not ruled
20
Credit Card Acceptance Policy Review
Give a background for adopting the policy Define the policy requirements in a policy statement Define the reasons for establishing a policy Define the scope of the policy Address the Visa and MasterCard rules modifications
21
Credit Card Acceptance Policy Should Define Policies and Procedures
22
Acceptable payment cards
Who is the policy applicable to
Are surcharges imposed at the brand level or product level
Define banner exceptions
Define prohibited card activities, i.e. cash advances
Define debit card prohibitions
How are payment card fees allocated to your various operating companies, i.e. on a transactional basis or monthly basis
How do you handle refunds
How do you handle chargebacks
How are discounts handled
Reconciliations
Define your rate structure
Maximum surcharge cap adjustments
Methods to accept credit cards
Under what terms of sale will you accept credit cards and are your operating companies given discretionary autonomy in this matter
Level I, II, III processing
Card not present processing
How to ensure the lowest possible transaction rate
Security of cardholder information
PCI compliance policy
Choice of law/venue enforceability
The Surcharge Rollout
This may be complex and should be preceded by a Credit Card Surcharge Project Matrix with the following:
Define and document customer treatment Establish/declare universal surcharge, variable surcharge and
maximum surcharge rates Establish/declare surcharge applicability Implement infrastructure and technology capabilities Develop and publish disclosures Operationalize credit card surcharge administration and application
23
The Surcharge Rollout
It’s a Negotiation! Vendors should negotiate with credit card companies for exceptions and concessions
The larger a vendor’s credit card sales volume, the more leverage that vendor has in negotiations
24
Depending on the detail of the information that is passed along with the card transaction, it may qualify for lower interchange rates. Below is the information required to lower interchange fees categorized into three levels: Level 1: Customer location, zip code; merchant name; transaction
amount; date; Level 2: Level 1 information and customer tax ID number; business and
corporate cards must include sales tax number; purchasing cards must include sales tax and customer code; customer minority code and customer state code; and
Level 3: Level 1 and Level 2 information; corporate cards must include line item data; item product code and/or item name
Lowering the Interchange Fee25
Internal Credit Card Policy In‐house procedures for accepting cards, surcharging cards, storing cardholder information and mitigating risk of chargeback and fraud
Ensures company‐wide compliance with anti‐surcharge statutes and credit card company rules
Vendor’s Credit Card Agreement Key language:
“Applicant” should be defined as “the customer buying from [vendor] or any person, natural or legal, who uses their credit card to make payments on behalf of the customer
In this way, agreement is applicable to both personal cards and corporate cards
Governing Law and Venue provision: Vendor may also consider venue provision
Best Practices for a Vendor’s Credit Card Payment Program
26
Reducing Processor Fees
How can your processor assist your company with implementing level III credit card processing – level of effort, cost, IT resources, testing, etc.?
Does your processor have a recurring engine for setting up recurring credit card payments automatically with flexible billing intervals with either a fixed or variable amount owing and can such transactions be processed at level III?
Does your processor support straight through processing (STP)?
27
Reducing Processor Fees
Does your processor support VPP and does your processor charge for participating in the VPP program by implementing the rates through a custom interchange table?
Does your processor have the ability to eliminate a gateway thereby reducing costs and increasing authorization approval rates?
Does your processor have a card updater that automatically updates cardholder cards that are about to expire?
Can your processor process all credit card transactions at level III? The reason being is that some processors will drop transactions that are not level III eligible (rewards cards, etc.). Ineligible level III transactions will be dropped by some processors to shed level III data and must be resubmitted involving another layer of coding complexity for your EIPP site. Level III data would have to be omitted from consumer cards which would be a function of your EIPP provider through additional coding with your processor.
28
The Logistics of Accepting Credit Cards
In the B2B space, a card‐not‐present transaction over the phone or internet is the most likely means of processing credit cards.Virtual Terminals can be established wherein the customer’s credit card information is manually entered by the vendor before being sent through a payment gateway for processing by a processor.Does your processor have a hosted pay page, e.g. its own virtual terminal outside of your system, for offloading credit card transactions away from your source systems in a card not present environment?
29
PCI Policy and Considerations Purpose
Audience and Scope
Statement of Policy
What is PCI?
PCI and Card Settlement Opportunities
PCI Breaches
PCI Overview
What are your current challenges with PCI?
Assessment Approach
Credit Card Handling Summary Electronic Data Handling Physical Data Handling
Enforcement and Exceptions
30
