As you are coming up with your personal resolutions for the new year, we wanted to offer some potential payments ‘resolutions’ or goals for your organization for 2020. Here are 5 key payments goals that you should tackle or start tackling in 2020:
1. Security – Encryption/Tokenization/Omni-channel
Every retailer with exception of Automated Fuel Dispensers (AFDs) should have implemented EMV payment terminals. EMV terminals help eliminate fraud and chargebacks due to counterfeit fraud. According to The National Retail Federation, 99 percent of large merchants and 81 percent of small retailers have implemented EMV terminals. And AFDs are working to implement EMV acceptance before the liability shift deadline of October 1, 2020. For any merchant still swiping cards, it is time to purchase EMV terminals. It will enhance data security, reduce fraud and provide a consistent customer experience. And it seems most customer have EMV cards. According to Visa, 97 percent of in-person card purchases were made with chip cards as of June 2018.
Next, payments security solutions have evolved and are so ubiquitous and inexpensive that there shouldn’t be a single retail merchant that doesn’t have encryption deployed at each payment terminal or an ecommerce merchant that doesn’t have tokenization. Encryption solutions encrypt a transaction at a payment terminal and at decrypt at end of gateway (before sending to acquirer) or at the merchant acquirer. Encryption services can be purchased from gateways, switches (see our presentation on gateways/switches) or merchant acquirers for few pennies a transaction to sub-penny for significantly larger merchants.
For a complete security solution, no merchant should be housing live card data within their organization. For merchants needing to store card numbers (e.g. card on file, recurring billing, customer spend analytics), they should utilize tokenization. Tokenization is simply the process of replacing a card number with a unique value or token. This token can only be translated to the original card number by the token provider…usually the gateway or acquirer. We recommend format preserving tokens so that the token retains the first six and last four digits of the original card number. This allows for easier back office operations like chargeback management, customer refunds and BIN analysis.
Some retailers struggle with having different tokens for their retail and ecommerce channels. Their goal is to create an “omni token” so the same token can be utilized whether the customer shopped online or in store. This allows for many use cases like shopping online and return in store with a refund to the original card or customer cross channel penetration analysis. There are number of number paths to generating omni tokens including gateways, switches and acquirer-based solutions.
2. Simplified Payments Architecture
We recently did a consulting engagement for a client that had 13 different gateways and processor across four business units. This complexity made every aspect of payments management more costly and time consuming. Through a consulting engagement and an RFP, we were able to reduce the number of vendors down to 3. This significantly reduced costs, enhanced data security, eased reporting and back-office operations like daily reconciliation and chargeback management. So how many gateways and processors do you have in your payments’ environment? Can you simplify by consolidating your relationships with few vendors? If you think there’s an opportunity, we recommend conducting a payments RFP. If you don’t have the bandwidth, hire a consultant. We can certainly help. Optimized Payments has conducted over 40 payments RFPs.
And if you have a direct relationship with Discover, think about moving that relationship to your acquirer so your acquirer can provide authorization, settlement and funding for Discover sales. Unless you are a top 20 retailer, we rarely find incremental value in having a direct contract with Discover. By having a full service Discover relationship through your acquirer, you not only eliminate having to manage a relationship with Discover, but you also simplify reporting, funding and chargeback management because all of that is now provided by your acquirer. We have found that Discover interchange and network fees tend to be same under either scenario. We have helped many merchants migrate from a Discover direct relationship to a full-service relationship through their acquirer.
Remember, the goal for 2020 is simplicity. There is time and cost savings in simplicity…and fewer headaches.
3. Evaluating Alternative Payments
According to Merriam-Webster.com, there are 40 synonyms of the verb “pay”. When did we decide that any new mobile-based alternative payment methods (wallets) must use the term “Pay” in the product name? Think about it, below are some of the top new mobile wallet payment options in the market today:
- Paypal
- Apple Pay
- Samsung Pay
- Google Pay
- Alipay
- WeChat Pay
- Amazon Pay
While it is interesting, this really doesn’t answer the question that retailers want to know. Retailers are asking, “which one of these methods is right for my business? Is it worth the time, effort and resources from my integration team, gateway or processor to support any of these methods? And which one(s) should I choose?”
To understand what works best for your business, you need to really understand your customers. This is where payments analytics can really help you define your payment acceptance strategy. Your customers are the shoppers carrying these wallets and hoping that they can use their new technology at your business. The good news is that with your payments data you can analyze:
- What country are your customers coming from?
- What level of spend do your customers have?
- Which bank cards are they carrying?
- Which mobile devices are they using?
For example, if most of your customers are coming from the UK and not China, then maybe an Alipay integration is less important. But if a large portion of your customer base is coming from China, then Alipay and WeChat Pay need to be on your roadmap for integrated support.
4. Payments Analytics and Automation
According to The National Retail Federation, card processing fees cost retailers approximately $80B per year nationwide, and many retailers consider these fees as their second or third highest operating costs behind employee salaries and wages. For many large retailers, these fees could top $100M per year. For an expense line that large (and given the complexity of ‘swipe fees’), why wouldn’t you have a sophisticated tool to manage these costs? One small processing mishap could cost hundreds of thousands to millions of dollars. This is where payment analytics can help.
Payment analytics is the process of consolidating all your payment processors data (major acquirers, AmEx, Discover, PayPal, gift cards, private label, etc.) into one place, so that you can track and manage your card processing costs. All the major processors offer daily raw data files for consumption via secure transfer protocols. These files need to be consolidated, normalized, enriched and visualized. Do you have the payments expertise and IT resources to accomplish these tasks? If not, we can certainly help. We developed payment analytics 10 years ago and provide hosted analytics as a service to some of the largest merchants. Robust analytics can help you with some of the following use cases:
- Tracking payments KPIs like Sales, Transactions, Fees, Effective Rates, Chargebacks, Downgrade Ratios, etc.
- Optimizing Interchange through tracking card types, downgrade ratios and reason codes, calculating savings opportunities, validating Level 2/3 penetration, exploring least cost debit routing alternatives, etc.
- Enhanced chargeback reporting by reason code, issuer name, cardholder country, card types, etc.
- Key business insights like cardholder country codes, mix of card types (e.g. debit, commercial, premium), approval rate optimization, fraud ratios, etc.
Daily reconciliation - Customer spend analysis or customer share of wallet across channels
- Linking CRM data to transaction data attributes, including total cost of a transaction
Consolidating payments data can also help with automation. Do you have any tasks that require a lot of manual processes or excel spreadsheets? Automation can help free up time to focus on bigger and better initiatives in your organization, whether through chargeback notification/responses, sales reconciliation, managing/reporting fees, monitoring Level 3 qualification, least cost routing effectiveness, etc.
Payment analytics and automation can be built in-house, but if you are looking for an off-the-shelf solution, Optimized Payments was the first independent, payments consulting firm to create payment analytics in 2009. We have coded to raw data file specifications and consume daily files for almost all major processors in North America. We host data securely in the cloud, and provide customized, interactive dashboards accessible 24/7/365. Because of our expertise and automated infrastructure, payments analytics can be setup faster and at lower cost than internal initiatives. Often times, the analytics pays for itself within months through cost savings and back-office efficiencies.
5. Cost Reduction – Interchange Optimization and Least Cost Debit Routing
For most large retailers, interchange fees tend to be about 80-85% of the total cost of processing a transaction. Assessment/network fees tend to be about 10-15%, and processor fees are usually around 1-5% of the total cost. So, it makes sense that interchange fees should get your attention. Given that there are over 1,000 unique interchange categories in the US, interchange is very complex. And complexity usually leads to opportunities. If you are not managing and optimizing your interchange fees on a daily or monthly basis, you could be leaving significant savings on the table.
Interchange fees are determined by numerous factors, but generally, they can be influenced by five key elements – card type, merchant category code, entry method, enhanced data and cardholder/merchant jurisdiction. While some of these elements cannot be changed, others can be significantly managed to reduce interchange costs by up to 20%.
Card types are difficult to influence but there are opportunities for savings through least cost routing. Just about every debit card in the U.S. can be routed over multiple networks/rails based on a combination of consumer and merchant choice. Most consumers don’t care about routing and therefore, merchants can influence PIN/PINless/signature entry at the payment terminal level and network routing choice at the switch/gateway/acquirer level. This powerful concept called Least Cost Debit Routing allows merchants to route transactions based on their priorities…typically cost. Furthermore, merchants with significant debit volume can negotiate custom agreements with the debit networks, savings them millions. There are many different solutions/services that claim to offer least cost, and they are all not created equal. So beware, and feel free to reach out if you need help.
As you manage your payments costs in 2020, you want to be sure your systems and employees are empowered with the right tools and resources. If you need independent expertise, we can certainly help. We have been helping our clients manage payments costs for over 12 years and we would be happy to explore opportunities to help you.
We wish you a wonderful Holiday break and a terrific start to 2020! And remember to set your payments resolutions!
