July 27, 2006, 12:00 AM

Discounting the Discount

Retailers drive a hard bargain for payment services by sweating the details and knowing the fine print.

Having survived and finally thrived as a small web retailer in the ultra-competitive apparel space, Express Design Group Inc. knows the payoff of driving a harder bargain. A case in point is the retailer’s successful hunt for a new payments processor.

After putting up with high transaction fees and non-negotiable terms from two previous processors, the third time was a different experience for Express Design, which operates several personalized apparel and gifts sites.

Early on, Express Design didn’t have the clout or enough sales to negotiate a better contract. But now that Express Design has annual web sales of $2.5 million at such sites as GreekGear.com, NationalityShop.com and MySpiritGear.com, and an eight-year track record managing a successful online retail operation, the tables have turned.

$10,000 reduction

In 2005 Express Design negotiated a better deal with First Data Corp. that reduces overall processing costs by $10,000 over two years. “When we were starting out, we had to accept the terms the processors gave us,” says Express Design chief financial officer Denise Kellermann. “This time we were in the driver’s seat.”

Starting an online retail business is tough enough and managing a new e-commerce venture isn’t any easier when the merchant is inexperienced in negotiating deals with payments processors, financial institutions and independent sales organizations that sign merchants to card programs.

But once they’ve established a business, small web merchants are pushing for, and getting, better payment services agreements. To find them, online retailers are reading the fine print in contracts, checking with their competitors to find processors offering the best deals and even playing the loyalty card. Small web merchants are also issuing very specific requests for proposals that outline the length of a contract they are willing to sign and the specific processing fees they will pay.

“If they are willing to take the time to understand the fine print and learn the payments processing game, there’s no question that an established merchant can get a better deal,” says Steve Mott, principal of BetterBuyDesign, a Stamford, Conn., payments systems consulting firm. “But merchants also have to seek out processors and bankers who will get them better terms.”

A payments processing contract between a small merchant and a processor is usually a 3- to 5-year agreement that spells out fees, conditions and time frames for processing credit card transactions and alternative payments such as debit cards and electronic checks. Banks and payments processing companies aren’t likely to negotiate lower terms or issue shorter contracts with small start-ups since small retailers pose a higher credit risk. To even establish a merchant account, start-up retailers usually must supply the processor or financial institution with personal banking statements, submit to a thorough credit and business development evaluation and sometimes pledge personal assets as collateral.

Horror stories

“I often hear horror stories from start-up merchants that had their cash flow trickle down to nothing when their bank or processor suddenly invoked a higher reserve requirement,” says Joe Palko, CEO of Solid Cactus Inc., which designs and launches Yahoo Store platforms for retailers. “The smaller merchant or a merchant with no processing history often has to accept the terms the processor is offering.”

But as online merchants become established, they are able to negotiate better terms, in many cases for substantially reduced processing fees. Express Design now uses First Data to process bank card transactions after its local processor merged with NOVA Information Systems and NOVA began charging higher fees. To obtain a better deal, Express Design first outlined its processing priorities, which included a short-term contract and lower fees, particularly the $25 the retailer paid NOVA for a credit card chargeback.

Express Design next corresponded with other retailers in an online merchant forum, asked for recommendations and then issued a request for proposal to four processors. In face-to-face meetings, Express Design told each processor that the proposal had to feature the lowest processing fees and shortest contract terms upfront. “In the past, other processors made us supply them with our current processing invoices so they could determine the fee structure, but we didn’t do this in our last negotiation,” Kellermann says.

First Data responded and won the Express Design account with a two-year contract that reduced chargeback fees from $25 to $15 a transaction. First Data also reduced Express Design’s credit card transaction fee from about 3% to 2.14% and 10 cents a transaction. “We did our homework and obtained a better deal that reduced our processing costs by about 60% for a typical credit card transaction,” Kellermann says.

The most common problems small merchants encounter in negotiating a better payments services contract is obtaining enough detailed information upfront on the processor’s terms and conditions and knowing what other retailers are paying for their gateway service. To price a credit card transaction, all processors use the credit card interchange rates set by Visa and MasterCard as a base. The interchange rate is the fee that the merchant bank pays the credit card issuing bank. But the mark-up on the interchange rate and any per-transaction fees can vary widely. Processors also have tiered pricing schedules for other services they provide a retailer such as credit card chargeback fees, card authorization or verification fees and monthly statement processing.

Risk assessment

To obtain a better deal, small merchants can ask potential processors to supply them with an upfront risk assessment and benchmark pricing. Providing such a service is becoming common among bigger online payments processors such as Chase Paymentech Solutions LLC, which processes transactions for more than 4,000 small merchants, and First National Merchant Services, which has a portfolio of more than 3,000 small retailers. Chase Paymentech’s report, for instance, compares what the retailer currently pays for processing card transactions against 10 other merchants selling in the same merchandising category and with similar online sales. “We can provide this kind of information upfront and help the retailer get a better deal,” says Chase Paymentech executive vice president, global sales and client services Robert Wechsler.

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