Retailers drive a hard bargain for payment services by sweating the details and knowing the fine print
By Mark Brohan
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.
In contract negotiations, retailers often fixate on a particular point, such as the lowest transaction fee. But to strike an even better deal, retailers need to look at their total transaction processing costs. When negotiating with smaller retailers, First National asks the merchant to supply very specific information, such as peak card processing times and dates, a breakdown of transactions by type of credit card and number of chargebacks.
By analyzing a retailer’s processing history, First National can then offer the merchant a customized proposal that includes specific provisions for cost savings such as using real-time card verification and reporting tools to avoid chargebacks. “In a negotiation, a retailer may focus only on the fact that they want to pay a rate of six cents a transaction, but any savings that might be gained is negligible if their highest cost is paying for too many $200 chargebacks,” says First National senior vice president of service and operations Brian Ridder. “The merchant can negotiate a better contract if they first analyze their cost centers.”
Making sure that payments processors can handle new technology is another factor. For instance, after installing a new order management system from OrderMotion Inc., SkyGeek.com, online retailer of aviation products, books, software and pilot accessories, needed a gateway service that could link directly into its new application and support real-time payments. In early negotiations, some processors offered SkyGeek only a basic point-of-sale terminal to process credit card transactions and no application integration.
Seeking new tools
To obtain both better rates and technology, SkyGeek issued a new request for proposal that included specific requirements for automated reporting and real-time payments processing. The retailer then negotiated a five-year contract with First Data that reduced processing costs from an average of 3% per credit card transaction to around 2%. First Data also provided SkyGeek with real-time access to automated reporting and cardholder verification programs that helped reduce chargebacks.
“To get a better deal, we first had to know what our new capabilities were and then see if a new processor could handle them,” says SkyGeek president Steve Styles. “Now we have a payments processing program with a new processor that will produce very significant savings.”
In their bid to select a new processor, some small web retailers start from scratch and then research, interview, and weed out a host of new companies before finding a better payment systems vendor. But staying with an incumbent processor, especially when the relationship between the bank or gateway company and the retailer is a long one, can also produce a better agreement.
BayVillageStore.com, which sells gifts, accessories, home décor and houseware products, has used Wachovia Corp. as its payments processor since 1997. During its start-up phase, BayVillageStore couldn’t find a payments processor or a merchant bank until Wachovia offered the company a multi-year payments systems deal at a discount rate of 2.9% and 55 cents per transaction. Over the years BayVillage, which has annual web sales of about $500,000, could have taken its business to another processor.
The loyalty factor
However, loyalty was a factor that produced better results for both Wachovia and BayVillage. With an upscale and established clientele, BayVillage is a lower credit risk with infrequent chargebacks. In return for maintaining a long and established account with Wachovia, BayVillage is able to consistently ask for, and receive, better processing terms. The retailer received a substantial discount in 2004 and another this year. Altogether the discounted fees have reduced BayVillage’s average credit card transaction fee to a discount rate of 2% plus 20 cents per transaction.
“When I first began online nobody would touch me except for Wachovia,” says BayVillage founder and CEO Eileen Brady. “Now I am loyal to them and they are loyal to me. I negotiate better deals by reminding them that I am a long-time customer.”
Small web retailers say that it takes a threshold of at least two years in business and a minimum of $500,000 in annual sales before most processors will respond to specific new terms and conditions. But equally important during serious contract talks is sharing realistic future revenue projections and providing access to past order information. “A retailer should ask for and receive lots of specific information from the payments processor and respond in kind,” says Mott of BetterBuyDesign. “If the processor knows that their new potential client is serious about the long haul, they will likely respond with a much better offer.”
mark@verticalwebmedia.com
