By Ken Musante
Humboldt Merchant Services
In my last article, I discussed barriers to entering the payment services industry. They are increasing due to the industry's stiffer regulatory, capital and knowledge requirements.
While these barriers have pushed down merchant processing margins, they will help stabilize our long-term profitability. Specifically, barriers will lessen the number of new competitors.
Intuitively, this makes sense: As regulatory and capital requirement barriers increase, the cost to enter a business increases and, thus, lowers the total return. A lower return in an industry lessens the desire of businesses or individuals to enter a market.
Further, complexity and knowledge-based barriers can serve to provide certain competitors distinct advantages. Innovative Merchant Solutions, for example, has an advantage because of its affiliation with QuickBooks.
Cam Commerce Solutions has an advantage because of its expertise and integration into software for specific vertical markets.
Humboldt Merchant Services has an advantage because of its affiliation with its parent banking organization, which allows for unique relationships and residual advances for sales partners.
Once a product or service permeates through competitors, it is difficult to differentiate. Payers attempt to add value either through enhanced service or lower pricing (or a combination).
Stated differently, increasing complexity and knowledge requirements are barriers payment professionals can utilize to keep competition at bay.
Moreover, if you, as ISOs and merchant level salespeople (MLSs), can understand how your processor prices each category and how that impacts your compensation, you have truly separated yourself.
At HMS, for example, sales professionals have the option to set nonqualified rates for check cards the same as or lower than the nonqualified rate for credit. Knowing this and understanding a merchant's customer base enables experienced ISOs and MLSs to analyze and price merchants more efficiently than those with less experience.
Another example is the category each interchange rate falls into. Processors and acquirers determine which items fall into qualified, mid-qualified and nonqualified. Work with your processors to know which items will down grade and into which category.
To further increase your utility, know that same information for your competitor so you can truly provide a fair comparison to your prospects. Doing so and being able to explain it will elevate you to deity status in the eyes of frustrated merchants.
Market niches allow you to further separate yourself from competitors. Understanding the small-ticket market can serve as a micro-barrier.
To further illustrate, when a Visa U.S.A. Check, Rewards or Signature card is used at a small-ticket merchant and the transaction amount is under $15, the small-ticket rate applies instead of the Rewards rate (for all consumer categories.) The Visa Check card rate is 1.55% + $0.04, and the credit rate is 1.65% + $0.04 for small-ticket transactions.
With MasterCard Worldwide, the transaction amount varies with the merchant category code but is typically $25.
The small-ticket rate applies on all check cards, but Core Value and Enhanced transactions drop to QPS Merit 1 (which is 1.89% + $0.10 for Core Value and 2.04% + $0.10 for Enhanced transactions as of June 2007). World Cards will retain the World Card rates.
Less experienced sales professionals may not realize the above and misquote pricing to merchants. Or they may understand the interchange on a small-ticket rewards transaction but not realize where the transaction will be priced with their processors.
On June 7, an entire new class of rewards card rates will be applicable for MasterCard transactions. The new category is MasterCard's "Enhanced" card. They will be separated from "Core Value" cards, which have lower interchange.
World Cards will remain and carry a higher interchange. The new lineup is similar to Visa's. They are compared in the "Visa and MasterCard rewards card rate comparison" table accompanying this article.
Keep in mind, MasterCard and Visa categories are only similar. The interchange between these sets of cards is not equal, although they do correlate.
The new interchange structure proposed by MasterCard complicates an already convoluted subject. Taking the time to understand it provides you a competitive leg up on similarly situated professionals.
Get a breakdown from your processor of where these transactions will fall for your merchants. Doing so will provide a knowledge barrier between you and your competitors and allow you to stave off the margin compression within the industry.
It's not easy to obtain a knowledge barrier. But once obtained, it is lasting.
Ken Musante is President of Humboldt Merchant Services. Contact him by e-mail at email@example.com or by phone at 707-269-3200.
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