MasterCard also presented on the change in debit and credit card volume and transactions.  According to their research, both debit and credit card usage declined from Q3 2008 to Q4 2008.  Debit card usage has since increased, almost to the Q3 2008 level, while credit card usage has remained close to flat.   Between 2007 and 2009, debit card usage has increased 15-18%, while credit card usage has remained flat; cash usage declined 12-14%; and check usage declined as much as 5%.  (Retail categories included supermarket/grocery, department store, sit-down dining, gas/gas station and drug store.)

“Between 2007 and 2009, debit card usage has increased 15-18%, while credit card usage has remained flat”

This movement from credit to debit could be closely related to the closure of credit lines. The Equifax Credit Trends Report (September 2009), indicated that bankcard issuers are continuing to close accounts and reduce credit lines.  It might be assumed that credit lines are being closed mostly due to the increased in card issuer charge-offs (loans the companies do not expect to be repaid on), as well as to the lack of usage on some accounts.  The Dec 16 charge-offs report included:

• JPMorgan (JPM) charge-offs increased to 8.81% from 8.02%.
• Charge-offs at Capital One (COF) increased to 9.6% from 9.04%.
• Bank of America (BAC) saw a slight decrease to 13% from 13.22%.
• Discover Financial (DFS) saw an increase to 8.9% from 8.5%.
• American Express (AXP) saw a slight decline to 7.6% from 7.8%.

According to the Equifax report, new accounts, opened between July, 2008 and July, 2009 were 54 percent lower.  “American consumers are making the most fundamental change in the way they handle their finances we have seen in a decade,” said Dann Adams, president of Equifax’s U.S. Consumer Information System. “They are conserving cash and reducing debt across the board. We haven’t seen savings rates this high since shortly after the third quarter of 2001 – just after 9-11 – when they were at 3.25 percent.”

While consumer may be losing credit lines, they are not going back to checks and cash.  These bank activities have created a push towards debit cards, since consumers today prefer cards to cash and checks.  Consumers are either using check debit cards (tied to their bank accounts) or switching to open loop, reloadable prepaid cards.  The latter card type is especially increasing in popularity amongst teens, college students and the unbanked segment.

All reports on bank card usage make it pretty clear that card usage is not declining and shows no signs of disappearing.  With checks soon becoming a payment method of the past, payment cards usage will increase even more. The most recent action comes from the UK Payments Council, the body for setting payment strategy in Britain.  Comprised of Britain’s leading banks, the council agreed on Dec 16 to set a target date of October 31, 2018 for closing the check clearing system. UK supermarkets, high street retailers and petrol stations have stopped accepting checks, but they are still a popular form of payment among elderly people, many of whom find the idea of using automated cash machines intimidating.  “The next generation probably won’t even have a checkbook,” said Addy Frederick, a spokeswoman at the payments council.  Checks have all but disappeared in high-tech countries like Sweden and Norway and their use is under review in Ireland, South Africa and Australia, Frederick at the council said.

The Independent Sales Office, or ISO, is not only focused on generating merchant accounts for the Processor they are registered with, but are responsible for maintaining their relationships with the merchants that are accepting and processing credit cards through them. An ISO can be anywhere is size from a few people to hundreds and can offer everything from merchant accounts and customer service to technical support and credit card terminals.

As a rule of thumb I tell merchants to do their homework because bigger isn’t always better when it comes to choosing an ISO. One of the main complaints I get is that as the ISO gets bigger, it’s usually at the expense of service or support. Many merchants have told me they are on hold forever and sometimes can’t even speak with a live person. A good ISO will have agents whose job is to create and foster the relationships with businesses and merchants that need brand new, different or additional merchant accounts yet also require a good level of support and service to go with them.

Finding the right ISO and having a good agent to assist you whenever you need will make the whole process pain-free and give you the peace of mind knowing you’re never on your own when you need service or support.

The majority of merchants seem to have no idea just how beneficial accepting credit cards can be for their business. If they just took a little time to learn how the Payment Card Industry works, I am sure I would hear a lot fewer negative comments. There is a common misperception that accepting credit cards or opening a merchant account is expensive, time consuming and just not really worth it. For every merchant that has turned away a paying customer because they wanted to pay with a credit card I ask, “Can you afford not to take credit cards?” More often than not I find myself spending some time with the merchant to let them know what the benefits to their business could be and also explaining the simple process of getting a merchant account.

Once they realize that the main reason they’ve had for not opening a merchant account is incorrect or misguided they want to know more and always have some degree of questions for me. I typically try to find out what their concerns are, begin at the top and work my way down starting with the major credit card companies we are all familiar with and ending with their customers – all the while answering questions along the way.

The big credit card companies are not an actual bank as many think, but have relationships with many different financial institutions, the most common being what you and I think of as a traditional bank. In the Payment Card Industry these are referred to as “Member Banks” or “Acquiring Banks” and have been approved by the credit card company to issue merchant accounts based on certain criteria. The guidelines and requirements are set by the credit card company themselves and must be agreed upon in order for that bank to become a “Member” of said company and therefore qualified to approve accounts allowing merchants to accept that type of credit card. The biggest of these is of course Visa and I will use Visa as the standard for demonstrating any examples. So up to this point we have Visa and a bank that has been accepted as a member of Visa and thus is now considered an “Acquiring Bank”.

Once a bank has been approved by Visa they are able to qualify and approve businesses for merchant accounts. These banks often times also create relationships with other companies to generate more business or to cover a larger demographic or geological area. Since the bread-and-butter for most banks is not in merchant services or the merchant account sphere, many encourage other companies who focus entirely on merchant services to become “registered” with them. In the Payment Card Industry (or PCI) these companies are referred to as “Processor’s” or “Service Providers” and are to able to approve merchant accounts assuming they meet the agreed upon criteria.

Ultimately, the merchant has the final say as to whether or not they are going to accept credit cards as one form of payment for their products or services. The ability of a merchant to accept payment via credit cards is getting safer, faster, easier, and more accessible everyday. The Payment Card Industry is committed to providing the largest array of credit card products, services, and solutions possible in these days where plastic is King.

Retailers had to resort to drastic sales and discounts to draw shoppers in. Although the sales receipts and purchases were reported to be high, the profits were low. ComScore, an Internet research company, reported Sunday that online spending was up a modest 2 percent for the combined Thanksgiving Day and Friday, compared with the same period last year. Karen MacDonald, a spokeswoman at Taubman Centers Inc., which operates 24 malls in 11 states, said that based on a sampling of malls, Friday’s business was anywhere from unchanged to up mid-single digits. Saturday’s sales were unchanged to down slightly.

Large retailers such as Wal-Mart estimate that November sales fell .01 percent at its US stores. Wal-Mart says this is the company’s first monthly same-store sales decline since April 1996. Although the stores had big crowds, people were not spending.

Overall spending by large retailers, such as Best Buy and Macy’s, was reported to be down by 50% over last year and is considered to be the largest drop in over a decade. Ultimately, the credit card companies will be taking the biggest hit. Many shoppers are resorting to paying with cash, check or debit card. Both Visa and MasterCard rely heavily on credit card sales vs. debit card sales. There is no telling what percentage of the credit card sales will simply become debit card sales or just cash.

Here is a list of common terms you should know when talking to credit card processing companies:

• Qualified Rate – This is typically the rate you are quoted when you sign up for a merchant account. This rate only applies to swiped regular retail cards. Be sure to ask what your Mid-Qualified and non-Qualified rate will be.
• You may also be charged an Authorization fee. This is the amount charged to a merchant account each time communication happens between the software or point of sale terminal and the authorizing network. Make sure you are not charged an additional transaction fee because the two are the same.
• Your sales agent may refer to Basis Points. Basis points are the percentage that you are charged on a credit card transaction. One basis point is equal to 1/100th of 1 percent. Thus a rate of 1.85% is equivalent to 185 basis points. For some merchants, a basis point mark above Interchange is advantageous.
• Batch Closure fee – This is a fee charged each time a settlement or end of day processing totals are sent to the financial institution.
• Electronic Data Interchange (EDI) – The electronic communication of business transactions, such as orders, confirmations and invoices.
• Transaction Fee – A per transaction amount charged by the bank for processing each transaction. This amount is in addition to the discount rate. For example: a discount rate of 1.85% plus 30 cents per transaction. Make sure you are not being charged an Authorization fee as well.
• PCI Compliance Fee – This fee is usually assessed by your merchant bank because they are passing on a fine they received from the card associations. Make sure to dispute this with your processor if you see it on your statement.

Knowing the merchant processing industry lingo is just one way to protect your business from getting ripped off.  Always remember to read the fine print and get a second opinion.

Credit card acceptance has been said to add many different benefits to a business. Most business owners report large increases in profits when they begin accepting credit cards. Credit cards allow customers to make a purchase, despite a shortage of cash.

Services businesses, such as IT professionals, will see a large decrease in the number of past due accounts. It is also historically true that people will even spend more because they don’t have to part with cash. It is less expensive for you to accept a $50.00 payment by credit card, than the costs of labor, supplies and postage required to mail an invoice.

If you are a web based business, approximately 90% of web purchases are made using credit cards. If you sell on the web and you don’t accept credit cards, then you are potentially eliminating 90% of your potential profits.

Many businesses are using value added solutions, such as gift cards, to draw in customers. I knew a bar owner who purchased 1000 gift cards, and loaded $5 on each card. He then sent out girls to his competition to hand them out, saying the first beer at his bar is on the house. Gift cards and loyalty cards are a great way for a business to advertise. Most gift card reporting systems store contact information so that the business owner can send the customer free promotions, or even load free birthday items onto their loyalty card.

Businesses today that feel that accepting credit cards and value added solutions are too expensive, or not cost effective for them, are not seeing the big picture. The fees associated with processing credit cards are small compared to the business and revenue that could be lost.

MasterCard has teamed up with American Airlines to launch “Travel Concierge Sweepstakes.”  Visiting their site during the sweepstakes and using the concierge to book airfare, hotels and car rentals gives customers multiple chances to win several different prizes. You can earn $50,000 in MasterCard gift cards or $25,000 in American Airlines gift cards as well as many other great prizes.

MasterCard has also released a credit card inlaid with a diamond and laced with gold known as the “Diamond”; the card has a .02 carat gem embedded in its center. The card will have an annual fee of $1000, and will be issued by MasterCard and Kazkommerts bank. MasterCard is targeting rich people that may have not been hit as hard by the economy. MasterCard plans to issue only 1000 of these cards at a rate of 30 per month. Will the super rich buy into it? We will only know when the card launches on November 13^th, 2008.

MasterCard has also teamed up with the Better Business Bureau of Nashville to introduce the TrustCard Prepaid MasterCard Payroll Card. These cards ensure a safe, cost-effective and reliable way to pay employees.  Employee salaries will be deposited onto the card and the cards can be used anywhere debit cards are accepted.

The purpose of these alternative programs are most likely to pick up the reportedly poor 3^rd quarter earnings from Visa and MasterCard. Mastercard’s third quarter is likely to be marred once again from charges related to an antitrust settlement with Discover Financial Services. MasterCard and Visa agreed earlier this week to pay Discover up to $2.75 Billion to settle the antitrust suit. While Visa and MasterCard are somewhat sheltered from the deteriorating spending habits because they do not lend, analysts expect a huge downturn in transaction volume as consumers cut back on spending.

Consumers should be on the lookout for great rewards programs and getting the most bangs for their buck. Retailers should expect these programs to help stir up the shopping bug again. Calyon Securities analyst, Craig Maurer says, “Looking out to 2009, it’s now clear that global economic pressure on volume growth will be significant, and that the currency tailwind from 2008 will morph into a meaningful headwind in 2009.”

Many people are trying to avoid using credit cards by turning to debit cards instead.  Some banks have turned to prepaid programs tapping into the unbanked markets – the millions of people who don’t have a bank or credit card account – and some employers are turning to employee payroll debit cards. Employees have their paychecks deposited onto a card which they use for all their purchases to try to avoid debt. According to The Nilson Report, debit purchases are expected to climb 13% in 2008, to $1.2 trillion. According to Visa, debit spending could surpass credit this year.

Retailers pay over 2% of credit card purchases to banks, three times the amount for debit cards. This is good news for merchants because their fees on transactions over the holidays could decrease significantly. However, banks are not going to go quietly into the night just yet. Be prepared to see an increase in overdraft fees. Typically, a bank would decline a debit transaction if you did not have enough money in your account to cover the transaction. Now, we could see banks allowing transactions to go through and hitting the customer with many more overdraft fees.

Like with any fees charged by the card processing industry, the government is attempting to regulate this money maker as well. Banks are having to come up with creative ways to enhance consumer spending and collect fees in trying times. MasterCard launched its Savings program that offers debit users discounts on luxury brands, as well as at retailers such as Home Depot and Target. Some banks pay higher interest rates to consumers when they use their debit card.

Are debit cards becoming the payment method of choice by consumers?  Will banks push for debit pay off?  These days debit cards are widespread and seem to outweigh the number of credit cards being used. Only time will tell what new programs the banks have in store for consumers and merchants alike.

Previously, I have talked about Google’s Android platform working with Visa on a service that sends you an alert if any payments have been made on your Visa card. This is great in helping to protect against fraud, and will also help in locating ATMs, but I don’t consider this to be a new technology.

In 2007, Visa partnered with Qualcomm, a wireless chip developer, to create technologies that allow consumers to make credit card transactions with a cell phone and a reading device. This would add another way for wireless carriers to make additional revenue by being paid a percentage of the transaction.

Now in 2008, in Brazil, Visa announced the availability of remote payments by Banco do Brasil. The service allows Visa cardholders to pay with their mobile device and confirm the transaction via text message. In Korea, T-Money provider Korea Smart Card Company, card issuer Shinhan bank, and Korea Telecom Freetel have partnered to make it possible for commuters to add funds to their T-Money balance automatically on their cell phones. T-Money is a rechargeable card used to pay for the Korean transit system.

Here in the United States, Visa is in a pilot program with Chase Bank to provide personalized offers sent to cell phones via SMS text giving discounts and special deals from online merchants. I wonder if standard text rates apply to this. I am not a big fan of this program but I can see how it can enhance advertising for businesses.

Visa is also working on providing NFC (Near Field Communication) with several large banks across the United States. NFC is a short range high frequency wireless communication technology that enables the exchange of data between devices. This technology is most frequently used for mobile phones.  This technology is also in its pilot stages in France with “Payez Mobile” and in Spain using “payWave”.

Is this mobile technology going to cause an increase of stolen cell phones and future security issues? Is cell phone payment technology going to be the way of the future?

I then noticed the sales agent wrote, “We will save you X amount of dollars by educating you on how to make your non-qualified EIRF (Electronic Interchange Reimbursement Fee) qualified.” What they did was take the non-qualified transactions and told her they would be qualified, so she would pay less Interchange fees on those transactions.

This situation happens often, and merchants are not always aware of what to look for or who to trust. There is no way this merchant services provider could guarantee what interchange category each card will fall into.

Here are some tips to ensure you are being treated fairly:

1.       Keep in mind that your merchant account is under a contract and is enforceable by law. These contracts are long and not always easy to understand. Make sure that you ask for your full terms and conditions. Many sales people will give you the merchant application, but not the terms and conditions that are associated. Online applications are also binding contracts with your electronic signature.

2.       Make sure you ask for all hidden fees to be disclosed. Look for fees such as merchant club fees and supplies fees. Some processors will have adjustment fees, network fees, PCI Compliance fees, standard fees and annual fees. A good way to avoid being surprised by these is to see sample statements or get references.

3.       Look out for bait and switch practices. Processors will entice you with a low rate, but this rate is generally for a specific type of card. Make sure you know exactly what you will be paying for all your card types.

4.       These days a lot of processors are running free equipment programs. These terminals are not always free and could end up costing you $1000s in the end. Some come with a hefty annual fee and others are simply a placement. If your placement terminal is not returned in new condition, you can be liable for 3 times the cost of the equipment.

5.       Make sure you are not signing any long term contracts that have a large cancellation fee.

I think as time goes on and merchants become more educated, these types of sales agents will be weeded out. If not, merchants should not give up on the fact that there are good honest companies out there.