uring May 2003, three questions relating to transaction fees and processing services were posted online to the MLS Forum "Ask the Green Sheet" area. In turn, we passed these questions to our Advisory Board for their comment and response.

If you have a question concerning the payment processing industry that you would like to see addressed by the Advisory Board, please send it to paul@greensheet.com or post it online.

We want to thank those members of the Advisory Board who gave of their time to respond to our inquiry:

• John Arato, Golden Eagle Leasing
• Mitch Lau, Money Tree Services
• Bob Carr, Heartland Payment Systems
• Steve Christianson, TransPay Processing
• Rob Connelly, VeriFone
• Steve Eazell, Secure Payment Systems
• Ginger Hollowell, Electronic Money Co.
• Jared Isaacman, United Bank Card
• Dave Siembieda, CrossCheck
• Scott Wagner, Hypercom

Transaction Fees

Our first question this month is perhaps the most complex subject in our industry:

"Everybody has a transaction fee. What exactly is the purpose of the transaction fee? Is it to cover costs of authorization? Is it just an extra fee (apart from the discount) for processing a transaction? Is it there because merchants just pay it? The real question is, if a merchant uses voice authorization at $0.65 to $0.95 each, should he still have to pay a transaction fee?"

The complexity and varied nature of the responses to this question are indicative of how complex the pricing structure is with respect to bankcard processing acquiring. Since 1983 we have devoted countless words to defining and explaining this process; obviously, we're far from finished. Here is what our Advisory Board members had to say on the subject:

Bob Carr

Heartland Payment Systems

"The purpose of a transaction fee is to eliminate the concern about being 'gamed' by the merchant or salesperson concerning the number of tickets. If there is no fee to cover the costs of processing a ticket (i.e., "bundled rate"), the experienced merchant may be highly motivated to distort his average ticket to be higher than it actually is, knowing he will get a lower rate than by telling the truth. Of course, none of our merchants would do that, but I have heard that some might try!"

Steve Christianson

TransPay Processing

"This fee is the front-end authorization fee charged to the merchants by the ISO or bank. It covers the phone call expense, processing front-end charge and the markup by the ISO or bank.

"For acquiring banks that sponsor ISOs, therefore, with the ISO getting interchange pricing, this is where the acquirer gets much of its profit.

" 'Is it to cover costs of authorization?' Yes, and other costs. 'Is it just an extra fee (apart from the discount) for processing a transaction?' No. 'Is it there because merchants just pay it?' No - as stated above, it is a real cost but is usually marked up and is part of profit for the ISO.

"The estimated average cost to an ISO for 'front end' [authorizations] is between 3 cents and 7 cents. The actual cost for the acquirer [bank] is between 2 cents to 5 cents. Then there is the cost to the ISO for back-end settlement and hosting. This can cost between 3 cents and 8 cents.

"This would make the total auth/transaction fee between 6 cents and 14 cents before the ISO makes any profit. This settlement cost for back-end processing is as little as 2 cents. The balance is what the acquiring bank makes before it provides the transaction fee cost to the ISO.

"The real question is, if a merchant uses voice authorization at $0.65 to $0.95 each, should he still have to pay a transaction fee?' Yes, because the voice auth transaction still has to be run through the terminal and settled as normal.

"While the Prior/Post/Force sale [when used with a previously obtained authorization] cost is a penny or two less because no electronic auth is obtained, the bank does not necessarily pass that savings to the ISO and therefore the ISO does not pass the same savings to the merchant.

"The number of voice [authorizations] compared to electronic [authorizations] is minuscule, and while it may amount to a somewhat significant amount nationwide, it really is not significant enough to pass through to the merchants."

Steve Eazell

Secure Payment Systems

"[Secure Payment Systems'] true purpose is to cover our costs only. Those include telecommunications, our risk-management system and our ancillary negative database. 'Is it to cover costs of authorization?' [Yes,] and other costs. 'Is it just an extra fee (apart from the discount) for processing a transaction?' No. 'Is it there because merchants just pay it?' No, we want merchants to pay cost plus, not just what the market will bear."

Ginger Hollowell

Electric Money Co.

"A transaction fee is part of interchange plus dues and assessments. It can be bundled into the discount rate. Voice authorization carries a separate charge because the merchant is accessing a different system that has costs involved."

Jared Isaacman

United Bank Card

"Although 'Transaction Fee' is very generic with respect to the bankcard industry, it is most often referred to the cost for each authorization issued by a POS terminal or ARU [Automated Response Unit] service. The actual cost per transaction is broken down in several areas. The only real 'fixed' transaction cost that applies to all acquirers is included in interchange. This is usually 10 cents on most interchange categories; some of the more exotic are as little as 2 cents.

"The variance in the cost per transaction is what the acquirer pays to the front-end and back-end network. This varies among acquirers based on the processing networks they contract with and the number of transactions they are doing monthly.

"The remaining portion of the transaction cost after interchange is broken down in three parts: the authorization, the capture and the clearing/settlement of the transaction. The front-end network handles the authorization portion, and the back-end handles the capture and clearing. When you add up those three portions of the transaction, you have your total network cost per transaction. Add that portion to interchange, and you have your total and effective cost per transaction.

"Other types of transaction fees are charged for non-bankcards, such as American Express, Discover, Diners Club and JCB, although only the authorization and capture portion exists since each card type settles through its respective bank. Voice Authorizations are another form of transaction costs but are far less frequent since the massive conversion from paper processing to EDC (Electronic Draft Capture) terminals. Now voice authorizations are only used during terminal malfunctions, worn magnetic stripes, code 10 authorizations and certain wireless or home-based business that would not normally be able to obtain an authorization through a terminal.

"The real question is, if a merchant uses voice authorization at $0.65 to $0.95 each, should he still have to pay a transaction fee? Well, typically, the approval code obtained from a voice authorization is 'forced' or 'offline' entered back in the terminal for settlement. At this point the authorization portion of the transaction was covered by the voice authorization (which costs 10 times more than a traditional dial-up authorization); however, the cost for the interchange transaction fee and settlement still exists. Unless merchants are set up to be billed on just the dial-up authorization, which some do - but not many - the merchant would be assessed another transaction fee.

" 'Are transaction fees there just because merchants pay it? And just to cover an authorization?' No, they are in place to cover several per-transaction costs that acquirers have to pay. They are an iatrical part of the interchange system. The point in any business is to assess your costs for doing business and providing service and generating a profit on them for your end-user. Transaction fees are part of this business, and situations where you see them waived (bundled rates) are only because the basis points were increased on the discount rate to compensate."

Mitch Lau

Money Tree Services

"Transaction fees are used for several reasons: (1) to cover the actual cost of a transaction; (2) may include 10 cents for interchange costs; (3) if the fee is high enough it may include some profit for the ISO, bank and processor. If the merchant is making many voice auth calls, then they need a wireless terminal or a new processor."

Dave Siembieda

CrossCheck

"For most authorization systems, there are certain minimum system costs involved in getting the authorization captured. In our case, the transaction fee covers the custom communications costs involved to produce authorizations via voice, terminal and Internet and provides for 24/7 access and a complete dual-authorization system for 100% backup. Unbundled, these fees are very apparent and, at 9-20 cents per transaction, minimal for the merchant. Bundled in with a discount rate, a high-ticket merchant will, effectively, be paying much more."

Passenger Transport Data

Seldom has an inquiry posted to the Advisory Board resulted in such an absence of responses:

"Does anyone know of a terminal/software application that is capable of posting Passenger Transport Data?"

If any of our readers has further information on this subject, we would love to hear from you.

Mitch Lau

Money Tree Services

"Shift 4, a Las Vegas company, may have the answer. Its phone number is 702-597-2480, ext. 3436 (Burt)."

Scott Wagner

Hypercom

"I don't know specifically whose software supports said app. I do know Hypercom does have an open operating platform, and if someone wanted to write such an application it would fit very nicely in a Hypercom terminal. Contact me directly for more info. I can be reached at swagner@hypercom.com."

Age Verification

"We are hearing more about age/ID verification Services: (a) What terminals accept age/ID verification? (b) Who has more information about age/ID verification services?"

MLS/ISOs may find that specific segments of the market will be interested in this value-added service. Although it generated a great deal of "buzz" a few years back, it never really remained on the radar screen for this industry. Perhaps as the privacy, security and Patriot Act initiatives move from legislature to implementation, age verification will become more important to the retail merchants.

John Arato

Golden Eagle Leasing

"E-SEEK has a terrific age-verification product that I believe is certified on Concord and other processors. The application is set up to read the mag stripe and/or bar code on the driver's license, depending on state. The program runs on the Hypercom ICE 5500 and 5700 terminals. The contact person is Sam Dishman, VP Sales, and he can be reached on 512-291-4343."

Bob Carr

Heartland Payment Systems

"All terminals accept age verification data with the proper software. VeriFone has lots of information on this topic."

Steve Christianson

TransPay Processing

"The basic programming is relatively simple. Most Zon Jr. XL's cannot be used for credit card processing anymore because of memory requirements. But they usually work well with age-verification software.

"Other terminals such as a Tranz 380 X 2, Nurits, VeriFone Omni series, which can handle multiple merchant accounts, work, too. It really depends upon the software developer and what terminals he has coded the software to work with.

"While there are probably several companies that do this service, the only one I currently have information on is called Legal Age (www.legalagesoftware.com)."

Rob Connelly

VeriFone

"Age/ID verification services are ideal for merchants operating stores that sell tobacco or liquor as well as any venues that require a minimum age limit to gain entry. Not only does it take the guesswork out of calculating a patron's age, but it can be of great use in court should any legal problems arise. Target segments include convenience stores, liquor stores, bars/nightclubs and casinos.

"ISOs can sell dedicated terminals such as VeriFone's Omni 3200SE running an age-verification application, or, ideally, age/ID verification applications can securely co-exist with the payment application on VeriFone's Omni 3700 and 3300 family of countertop terminals as well as on its Omni 3600 wireless terminal.

"VeriFone's own Easy ID application as well as solutions provided by Legal Age Security Software are certified, working and ready to be added to an ISO's portfolio of solutions. For more information on Easy ID, visit: www.verifone.com/products/software/html/easy_id.html. For information on Legal Age, visit: www.legalagesoftware.com.

"If you want more information, contact your VeriFone sales rep or call 1-800-VeriFone."

Steve Eazell

Secure Payment Systems

"It depends on the terminal. Many software applications have been written to support this product; it is just a matter of development and certification. We have software that supports that and was not that difficult to produce since we process the data on the DL magstripe anyway. Not everyone does, however."

Ginger Hollowell

Electric Money Co.

"We sell age verification. Mostly we use VeriFone equipment. It can be loaded on a separate side of the Omni 3300 or Omni 3750 or stand alone in a Tranz 330."

Jared Isaacman

United Bank Card

"Age verification is an exciting new service that is complementing traditional POS terminals. For the last six months, United Bank Card has been loading this software in all of our Nurit brand terminals that we deploy. Today, age-verification software is included free in a full or limited basis in the Talento, Nurit and Omni terminals. This is often found in the newer line of terminals since supporting the application requires additional memory.

"Since credit card terminals' core function is reading magnetic stripes on credit cards, the age-verification features are limited to states with magnetic encoded driver's licenses. United Bank Card has a made a big push in selling Nurit terminals with this capability loaded in them.

"As much as I personally may feel that it is a dupe for a youthful market that may have consumed a drink underage - and I may have been part of that at one point - there is no denying the technological advancements that we are now accepting."

Mitch Lau

Money Tree Services

"These days, age verification can be accomplished on many different terminal types. Contact the company that supplies your equipment for further information."

Dave Siembieda

CrossCheck

"We just returned from the National Retail Federation Loss Prevention show, where we talked to Chris Rocke from UVeritech. This company is developing the technology to support these services and is a leading supplier of loss-prevention equipment. The Web site is www.uveritech.com."