Electronic payments, often referred to as merchant services, are prolific in business today and can be a significant expense. Today's consumers expect retailers to accept credit cards. Businesses selling to the Federal government are commonly required to accept purchasing cards. More and more, business-to-business payments are being made using commercial credit cards. Checks are being displaced by debit cards and ACH payments. As profits are squeezed due to the recession and rising prices, the 1-3% businesses pay for electronic payments stand out now more than ever. What can be done to lower your cost for accepting electronic payments? Actually, businesses can significantly reduce their cost of electronic payment acceptance by managing their payment acceptance mix.

The Mix
Not all electronic payments cost the same. For tickets of $40 or greater the hierarchy from most expensive to least expensive is generally:
1.    Bankcards & American Express
2.    Offline (signature) debit cards
3.    Online (PIN-based) debit cards
4.    Point-of-sale check conversion (to electronic payment)
5.    ACH transactions
6.    Check acceptance using Remote Deposit Capture (RDC)

Ticket size can alter the above rankings. For example, PIN debit becomes more expensive than signature debit for tickets less than $40. ACH fees, because they are fixed fees, can be more expensive than the other alternatives for tickets less than $10. The cost of accepting private label cards should fall between PIN debit and signature debit, but were left off this list because their costs vary widely. For example, many oil companies charge the same fees for processing their private label gas credit card as they do for bankcards.

A business can lower its cost of payments by shifting its payment acceptance mix down the above ranking. This is not always easy, but can be done by actively managing payment acceptance. Many merchants have invested in a PIN pad because they were told that PIN debit is cheaper than bankcards and signature debit cards. Most, however, are disappointed when the PIN pad collects dust because few consumers shift purchases to PIN debit. I call this the PIN debit Field of Dreams-if you buy it, they will use it.  It doesn't work that way; the merchant must drive the buyer's shift to PIN debit.

When using a Visa or MasterCard debit card at a major merchant, have you noticed that the terminal automatically directs you to enter your PIN? Major retailers have sophisticated systems that detect when a Visa or MasterCard is PIN-debit capable and encourage customers to enter their PIN rather than use the card offline with a signature. This technology is generally available to larger retailers. Although smaller businesses don't have the ability to auto-detect PIN debit cards, they can still improve their payment acceptance mix. Cashiers can be trained to look for the PIN debit logos on cards and to encourage customers to use the PIN pad. Point-of-purchase signage and promotions can also be used to encourage customers to use PIN debit over the more costly signature debit.

Many online retailers, MOTO (mail order/telephone orders) retailers and B2B marketers can encourage buyers to use ACH (direct withdrawal from a bank account) rather than the more expensive credit cards. If you use PayPal online, you have probably noticed it defaults to paying from your checking account (ACH). The consumer must take action to instead use a credit card on file for payment. If you don't have a checking account registered, PayPal asks if you wish to register one. PayPal is lowering their cost of payments by shifting the payment acceptance mix. If your online or MOTO business doesn't currently accept ACH payments, take a look at this lower cost option. But again, if you don't implement programs (as has PayPal) to drive the payment acceptance mix to ACH, it won't impact your costs.

Retailers should not waste time and money on POS check conversion. With POS check conversion the merchant scans a consumer's check through a reader and then hands the check back to the consumer. Wal-Mart is the most visible retailer using POS check conversion, but even the neighborhood tire store may be doing it. POS check conversion has been pushed by a number of merchant acquirers to differentiate themselves. POS check conversion has never really caught on and is being displaced  by Remote Deposit Capture (RDC) and debit.

Remote Deposit Capture is a result of the new Check21 initiative passed by Congress following 9/11. Banks, especially regional banks with few branches, are actively promoting RDC. Rather than taking checks received to the bank to deposit them, checks are scanned onsite daily using a check reader supplied by the bank (often for free). The bank then processes the check transaction electronically through the Fed using the scanned image. RDC is inexpensive, reduces the need to go to the bank to make deposits, speeds up funding and lowers NSF risk. RDC is hot! If you are still physically depositing checks received, talk to your bank to see if RDC makes sense for your business.

Credit Card Acceptance Mix
The payment acceptance mix can be further adjusted within just the credit card category to reduce the cost of credit card acceptance. American Express merchant rates are typically higher than Visa, MasterCard and Discover causing some businesses to not accept American Express. Limiting cards accepted is one way to positively impact the cost of electronic payment acceptance; however, the potential for lost business has to be measured against the premium paid for American Express transactions. American Express is king in hospitality because that is their roots. No decent restaurant or hotel would ever consider not accepting American Express because they would lose business.

Credit card acceptance practices impact your cost. The bankcard companies have different Interchange fees depending on the way the bankcard is processed at the point of sale. Ranked from most expensive to least expensive, the general acceptance categories are:
1.    Paper credit card receipt processed (not an electronic transaction)
2.    Card not present (mail order, telephone order, online)
3.    Key entered retail transaction (with signature)
4.    Electronic capture with signature

The more you can drive transactions to the lowest tiers, the lower your cost of payment acceptance. Let's use pizza delivery as an example. The most common practice is to take the card number either over the phone or when delivering the pizza. The transaction is key-entered into a payment terminal and the transaction processed. Some companies are now using wireless, portable payment terminals. This turns pizza delivery transactions into less costly electronically captured transactions. Of course, you must weigh the investment in wireless terminals against the savings in transaction costs and reduction in acceptance risk to justify this the investment.

Even storefront businesses should be cognizant of the credit card acceptance mix. If the card reader in a payment terminal is dirty, it may not read cards with damaged mag stripes. Cashiers then key enter the transaction, increasing the cost of payment acceptance. One merchant having an abnormal number of key-entered transactions discovered that a cashier was using credit card acceptance to practice their numeric keypad skills for an upcoming test at school. Not only did this increase the cost of those transactions, but also resulted in the merchant being placed on a bankcard fraud watch list due to the high number of key-entered transactions. 

Conclusion
Businesses feel that they are not in control of their electronic payment acceptance costs. However, by proactively managing their payment acceptance mix, businesses can reduce their payment acceptance costs by shifting buyers to lower cost alternatives. This shift does not occur simply by offering lower cost alternatives. Buyers' behavior must be modified. In addition, business can alter their payment acceptance practices to minimize the cost of electronic payment acceptance. Businesses must develop and implement programs that encourage buyers to use lower cost payment alternatives and change the way their employees process payments. Ask your merchant services provider to consult with you on how to improve the cost of payment acceptance. If they can't help you, find another merchant services provider who will.

The next article in the series will focus on getting better rates for electronic payment acceptance.