July 27, 2006, 12:00 AM

Discounting the Discount

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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.”


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