Payments by cards have been a massive enabler for both merchants and consumers by allowing quick and easy payments as the world transitions rapidly to a cashless society.

The cost to merchants when they accept card payments is a major business expense. A component of these fees is unavoidable. The card brands dictate specific percentages for specific cards for specific transactions in what are called "INTERCHANGE" tables.

Our long experience here at Curbstone Corporation has shown there are STILL a number of ways of minimizing the merchant fees. The parties involved are shown here:

STEP 0 - WHAT ARE FEES and DOWNGRADES

Transactions are billed to the merchant based on a small, per transaction, set fee, plus a percentage of the transaction value as dictated by the Interchange table. These fees are so small, they are discussed as "BASIS POINTS". One Basis Point is one-one-hundredth of a percent (0.01%). Even a small reduction in the percent charged has a major effect on a merchant's bottom line, which makes it worthwhile to pursue every opportunity.

The transaction fee is based on the Interchange fee levied by the credit card brands, such as Visa, Mastercard or Amex. That is the starting point for the best case transaction. But...

Various factors increase the base Interchange fee, called "DOWNGRADES". The downgrades are levied when the transaction is performed in a way that increases the chance a cardholder will protest it and do a "CHARGEBACK".

Typically, the amount of the downgrade varies according to the risks of fraud or likelihood of Chargeback associated with each transaction.

STEP 1 - DETERMINE YOUR CHARGEBACKS

The first step in reducing transaction fees is for the merchant to determine exactly what their current charges are for. This will point to possible areas where improving transaction security could result in a fee reduction. The company who processes your card charges is called the "ACQUIRER" and can be you rlocal bank, another bank, or a company specializing in that. They provide a fee report periodically. The report they provide may not give you the detail required to know what your downgrades are being caused by. Request a detail report from them, explaining that you want to evaluate your individual chargebacks. Once you have that report, review the causes, and get them to help you understand what they are. Alternatively, engage a processing Partner like Curbstone to assist.

STEP 2 - UNDERSTAND THE CATEGORIES

The chargebacks will fall into the following categories:

The primary areas that incure Downgrades include:

1. Timeliness
2. Fraud Prevention Compliance
3. Category
4. Content

CATEGORY 1 - TIMELINESS

The longer it takes for the cardholder to see the charge on the card, the more likely they will forget it. If they forget, they can protest the charge and cause a "CHARGEBACK" where the merchant has to jsutify the charge, an expensive and time-consuming process for the Acquirer. So, to encourage the merchant to "SETTLE", deposit the authorization and request payment, as soon as possible, the card brands will charge HIGHER FEES the longer it takes. If a card is pre-authorized on Monday and setled that night, the base Interchange is applicable.

However, if the card is settled the next day, a Donwgrade is applied and the merchant pays a higher fee. The Downgrades continue to increase after one day, three days, and 7 or 10 days (MC or Visa). \

So performing a pre-authorization that you cannot settle quickly works aginst you.Some businesses must work this way and absorb the downgrades. Most can work to settle transactions quickly.

CATEGORY 2 - FRAUD PREVENTION

The biggest way to prevent fraud is to use the two functions provided for all US-issued cards:

• AVS - Address Verification Service
• CVV - Security Code Validation

AVS requires the merchant to provide AT LEAST a 5 digit US zip code to be checked against the billing address of the cardholder at their issuing bank. The zip does not have to match, BUT THE ATTEMPT MUST BE MADE, or a large downgrade is levied. For the merchant's protection, an attempt should also be made on the street address at the same time. Many smart merchants will not accept a card without an AVS match.  

If you accept the card, and it turns out to be a fraudulent use, you get the biggest fee of all, a chargeback, where you lose both you payment and the goods or services.

CVV is the security code on the card, 3 or 4 digits. Since it is not coded in the magnetic stripe, it cannot be stolen if the stripe contents are stolen. While cards can be authorized and approved without the security code, that exposes the merchant to an indefensible chargeback. Not attempting a match will not result in a 

CATEGORY 3 - CATEGORY

This refers to the type of transction. For instance, you are a retailer and accept physical cards in an EMV terminal. A customer, for any reason, cannot get their card to work, so you KEY in the card number into the terminal. It is a CARD PRESENT terminal, doing RETAIL transacitons, typically. But the act of keying the card is another cATEGORY of processing, not "retail", but "MOTO" - mail order, telephone order. Since the connection is for retail, you will pay a significantly higher rate for that keyed transaction.

Another area here is behind the scenes, where your software is not populating the fields correctly. At Curbstone, we commit to provide ALL of the required fields to allow merchants to get the best rate, so our software will never stand in the way.

CATEGORY 4 - CONTENT 

Content covers a lot of things, specifically that data contained in the fields submitted. For one example, if a pre-authorization is done on Monday for $1200, and settled on Monday for $1106, there will be a downgrade. This is levied because the amount held on the pre-auth does not match the settled amount. This presents a great opportunity for the cardholder to do a chargeback because they don't recognize the amount! The downgrade for timeliness was avoided in Category 1, but the differening amounts cost the merchant.

Another aspect of CONTENT is when a Corporate Purchasing Card (CPC) is used, which are typically issued to companies for B2B purchases. If the card is a Level II CPC, and the merchant does not provide the additional four fields of tax amount, tax flag, destination zip code, and customer purchase order number, there is a stiff downgrade.  

If the card is a Level III CPC, and the detailed line items are not also submitted, the downgrade is even more. This is primarily affecting B2B businesses. Curbstone assisted on merchant in svings about $40,000 in downgrade fees by providing support for Level II and Level III. Each month. Yes, they saved $40,000 per month by just providing fields for Level II and Level III for their B2B operation.

SUMMARY

Curbstone Corporation has long experience in assisting clients to maximize their transaction security, thus minimizing the fees they pay. We welcome questions from any merchant on the IBM i Operating System.

Curbstone Corporation’s secure technology processes about $2.4 Billion per year for merchants on the IBM i (AS/400, iSeries) platform, for phone orders, e-commerce, and retail.