Bank Of America Merchant Services

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					Bank of America
Merchant Services
A market leader with a powerful commitment
to the merchant business.

Industry Overview

Date: May 2011

     •   Introductions and brief overview of BAMS
     •   Industry overview
     •   Economics of merchant acquiring industry
     •   Pricing methods
     •   Controlling cost of card payments
     •   Items currently impacting the industry
     •   PCI overview
     •   Non traditional/other payment trends
     •   Q&A

Bank of America Merchant Services                   2
A Powerful Partnership

                 Geographic Footprint - 6,000+                                           Broad and Most Innovative
                      Banking Centers                                                        Product Portfolio
                             Brand Strength                                            Leading Technology Platforms
                         Client Relationships                                               Client Relationships
        Best-in-Class Sales & Customer Support                                     Best-in-Class Sales & Customer Support

        Industry-                        World-class                        Expansive          380,000*            12.9 Billion*
         leading                         Technology                         Geographic         Merchant            Transactions
        Products                          Solutions                          Footprint       Relationships           Annually
  * Data projected based on prior transaction processing history of each entity.
 Industry Players – Terms to know

 • Cardholder - the person who has been issued the credit card
 • Merchant - the entity where the shopping occurs and the credit card is used
   for payment of goods/services, and contracts with an Acquirer to originate
 • Credit card Issuer - the bank that issues the credit card to the consumer in
   conjunction with a bank account or line of credit
 • Acquiring bank - the bank that facilitates transaction authorization, clearing
   and settlement on the merchant’s behalf
 • Association or Network - the entity that enables acquirers and issuers, or
   their third party processors, to connect together to facilitate electronic
   transaction processing (MasterCard, Visa, Discover, American Express)
 • Third Party Processor (acquiring and/or issuing) - an organization issuers
   and acquirers use to process their credit card transaction activity rather than
   performing the function in-house

Bank of America Merchant Services                                                    4
 Industry Players – Top Card Schemes in the US
   Brand, Associations, and Networks

     •   Visa
     •   Mastercard
     •   American Express
     •   Discover Card
     •   PIN Networks
          –   Interlink (owned by Visa)
          –   Star (owned by First Data)
          –   Pulse (owned by Discover Card)
          –   NYCE (owned by Fidelity)
          –   Maestro (owned by Mastercard)

     • Foreign Card brands
          – JCB, Diners, CUP

Bank of America Merchant Services                5
 2009 Volume Overview

                                                                  Can vary
     • $2.9 T spent on general purpose cards in 2009           significantly by
        – Visa – 55%                                         geography…why?

        – MasterCard – 27%
        – American Express – 14%
        – Discover – 3%
     • Debit accounted for 61.52% of transactions in 2009 and is projected to be
       approx. 68% in 2013
     • Electronic Payments accounted for 52% of transactions in 2008 and are
       projected to account for 63% in 2013

     Source multiple Nilson Reports

Bank of America Merchant Services                                                  6
 Industry Players – Top 10 US Issuers of General Purpose Cards
   by dollar volume

     1. Amex
     2. Chase
                                             What’s in your Wallet?
     3. Bank of America
     4. Citibank
     5. Capital One
                                       Trend: Banks issuing Amex/Discover
     6. Discover
     7. US Bank
     8. Wells Fargo
     9. HSBC
     10. Barclays

Bank of America Merchant Services                                           7
 Industry Players - Top 10 US Acquirers

                    • Total transaction count of top 10 US Acquirers (in billions)
                    • PIN and Signature based cards all brands

                     Acquirer                  Transactions      Go to Market Brands
                     First Data                      14.02       Citi, SunTrust, Sovereign, ISOs, Agents, …
                     Banc of America                 12.47
                     Fifth Third                      7.24
                     Chase Paymentech                 5.90       ISOs
                     Heartland Payments               2.39
                     RBS WorldPay                     2.32
                     Elavon                           2.01       US Bank, Wachovia, Bank of the West, …
                     Global Payments                  1.86       ISOs
                     Wells Fargo                      1.30       Alliance with First Data
                     First National Omaha             0.99       Alliance with TSYS
                     Total Top 10                    50.50

Bank of America Merchant Services                                                                             8
   Credit Card Transaction Process

Step 1 - Authorization
           • Cardholder makes a purchase using a credit card. The merchant must obtain authorization for
           the purchase from the bank who issued the card.

Step 2 - Clearing
           • If the transaction is approved, the next step is “clearing.” In this phase the acquiring bank
           obtains basic transaction data from the merchant such as the amount, date and location of the
           purchase. This data is then sent to the credit card issuer for posting to the monthly credit card

Step 3 - Settlement
           • The final step is “settlement.” When a consumer uses a credit card, the merchant does not
           receive payment at the time of purchase. The funds are collected from the credit card issuer
           and transmitted to the acquirer. The acquiring bank credits the merchant’s bank account. The
           cardholder receives a monthly statement and settles with the credit card issuer for purchases
           made using the credit card.
 Interesting Facts and Figures
  Average amount for a credit card transaction: (Nilson Report)
        Visa-- $103 Mastercard--$102
  Average amount for a credit card purchase: (Nilson Report)
        Visa--$88 Mastercard--$86
  Average amount for a cash advance: (Nilson Report)
        Visa--$1,046 Mastercard--$1,561

  Net fraud loss was 6.7 cents for every $100 in total volume, up slightly from 6.6 cents.
    (Nilson Report)

  Of the $2.202 trillion in total Visa and Mastercard volume in 2005, purchases accounted
    for 77.5 % of total volume. Cash (obtained at ATMs, over the counter at a bank
    branch, by paper check, or electronic interbank payment) accounted for 22.5%.
    (Nilson Report)

  The average credit card purchase transaction averaged $87, the average debit card
    purchase transaction was $39 (Nilson Report)

Bank of America Merchant Services                                                            10
     Credit Card Acceptance Benefits

Merchant Benefits
•    Prevention of lost sales
•    Potential for increase sales
•    Higher average ticket
•    Additional payment options for customer
•    Speed of checkout
•    Ease of use
•    Reduced risk of fraud/losses associated with cash and check
•    Accepting credit cards electronically offers the merchant the ability to accept more forms
     of payment with reduced risk, at the same time reducing the delay in funding

Consumer Benefits
 •   Multiple payment options catering more toward the customers preferred method of
     payment by accepting credit cards, debit (online and offline) as well as checks.
 •   Fast and convenient payment methods
 Payment Types

     • Issuers now issue a full array of card products
          –   Traditional Credit cards
          –   Rewards cards
          –   Signature Debit cards
          –   Business, P-cards, Corporate Cards
          –   Prepaid Cards

     • Mix of card products accepted my merchants vary widely by industry and
       average transaction amount
          – Fast Food Restaurants, Grocery, Pharmacy, small ticket retail
          – High end restaurant, jewelry store, furniture
          – B2B merchants, wholesalers

     • Cost of acceptance varies significantly based on card product

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Components of Merchant Pricing
 Interchange
       • Card type determine interchange pricing
       • How well the merchant adheres to “Best Practices” for the items within his control
         impacts the amount of interchange passed to him for each transaction
 Association Dues and Assessments
       • 0.11% of the transaction amount for Visa
       • 0.11% of the transaction amount for MasterCard
 Association Network Access Fees - based on processed volume. Associations retain fees
and is their primary source of revenue to finance their own marketing and operations.
   $0.0195 Visa Access Fee
   $0.0185 MC NABU Fee
 Third Party Processor Wholesale Fees
       • One time fees (e.g. account set up, certification)
       • Monthly fees (e.g. statement generation, maintenance fees)
       • Per item fees (authorization, ticket posting, exception item)
       • Special fees (PCI, supply replenishment)
 Sponsorship Fees
 Equipment Fees
       • Purchases, Rentals or Leases
 Retail Margin Fees
       • Acquirer Profit Margin – can be applied to any of the above listed items
   Other
 Economics of a traditional credit card transaction

3 entities are the recipients of
   what a merchant pays to
   accepts credit cards
    – The issuer of the card
        gets interchange
    – The card association
        gets assessments and
        access fees
    – The acquiring bank
        gets either a processing
        fee or margin above cost

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 What if scenarios based on pricing methods

     • Merchant in prior scenario is charged a rate of 1.97% by acquirer
          –   Merchant accepts rewards card (+9bps) interchange of 1.65%
          –   Merchant accepts a corporate card (+66 bps) interchange of 2.20%
          –   Merchant accepts a phone order (+36 bps) interchange of 1.90%
          –   Etc… literally hundreds of scenarios
          –   Processors sometimes surcharge the billback
     • Growing popularity of Cost plus or interchange plus pricing
          – Full disclosure of who gets what
     • Growing popularity of tiered pricing – bucketing of 400+ potential
       interchange categories into 3 rates, for example:
          – 1.97% for credit cards
          – 2.27% for rewards cards and similarly priced
          – 2.80% for corporate cards and similarly priced

Bank of America Merchant Services                                                15
 Cost of Electronic Payments

     • Effective cost of Electronic payment types from lowest to highest based on
       $100 average ticket and magnetic strip read
          –   PIN Debit (0.65% – 0.85%)
          –   Signature Debit (1.25 - 1.50%)
          –   Credit Card (1.75% - 2.00%)
          –   Rewards Cards (1.85% - 2.40%)
          –   Corporate Cards (2.30% - 2.80%)
     • Card not swiped rates are generally 20-40 basis points higher
     • Controllable downgrades can cause rates to increase by 30 – 60 basis
     • Several industries are industry specific rates such as lodging, car rentals,
     • Emerging industries like government, schools, utilities, insurance have
       special rates

Bank of America Merchant Services                                                     16
 Cost of Electronic Payments

     • Merchant processing is generally priced based on a dollar volume, the
       more volume, generally, the lower the margin can be negotiated
          – Small mom and pop stores under $1MM in expected volume
                • 50 – 100 basis points
          – Medium merchants $1 to $5 MM in expected volume
                • 30 – 75 basis points
          – Large merchants over $5 million
                • 15 – 30 basis points
          – National merchants over $100 million
                • 5 – 20

     • Pricing variability includes processing risk, communication method,
       number of locations, support needs

Bank of America Merchant Services                                              17
Merchant Pricing Model Options

 Bundled Pricing
    •   Assessing the merchant a fixed percentage or fixed flat fee applied to each transaction
    •   More common with small and regional sized merchants (size based on annual sales volume)
    •   Pros: Simple for the merchant to understand and reconcile
    •   Cons: May result in uncompetitive pricing in order to cover the acquirer from higher than
        expected interchange
  Unbundled Pricing (Interchange Pricing)
   • Assessing the merchant a fixed retail margin above all variable components that are associated
     with transaction processing
   • More common with mid sized, national, and premier merchant accounts
   • Pros: Acquirer always makes a fair margin on the transaction regardless of the interchange rate
     assessed, the merchant to identify opportunities to improve processing costs at the terminal level
   • Cons: More difficult for the merchant to reconcile, merchant may not like all of the various fee
     components on his monthly statement
  Tiered Pricing
    •  Assessing the merchant a fixed percentage or fixed flat fee applied to each group of transactions
      similarly priced by the card associations
    • Pricing simplifies the complex interchange pricing categories by bucketing them into tiered rates
    • Common with all sized merchants
 Top 5 Items Impacting Industry

     • Economy
     • Regulation
        – Pending Legislation
     • Security
        – PCI
        – Encryption and Tokenization
     • Form Factors for Payment Initiation
        – Mobile
        – Chip Cards
     • Alternative Payments
        – Paypal / BML, Google, ACH

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 PCI Overview (brief)

       • 12 things all card acceptors must do..
       • Determining your merchant level 1-4
       • Key points
          – Merchants are allowed to store credit card data – but must be secured
          – ALL merchants are required to be PCI compliant – levels don’t matter
          – Levels determine validation requirements only – not compliancy
          – Compromises do occur frequently and are easily tracked back to merchant POS
          – Fines and publicity costs are significant

       • Recommendations – complete the assessment questionaire, hire qualified assessor,
         conduct scans, stay certified
          – Make sure your software, gateway, processor are all listed on the approved
            certified vendor list at all times
          – Consider tokenization

Bank of America Merchant Services                                                                  20
 Non Traditional and other payment trends

      • Check conversion at POP
         – Elimination of bank deposit fees, labor costs, float, and collection efforts
         – Supported F2F, Internet, or over the telephone
      • Gift Cards continue to grow
         – Social egifting is newest trend
         – Delivery of gift via web, text, or email
      • Open loop stored value cards
         – Incentive, Rebate, or Rewards cards
      • Paycards
         – Compliant solution in all 50 states
         – Eliminates or reduces all checks on payday
         – Employee and 1099 models
      • Tokenization
         – Virtually eliminates PCI concerns
      • Global Acquiring solutions
           – DCC, Global acquiring
      • Loyalty Applications
           – Instant rewards at the POP
      • Mobile Applications
           – Replace plastic with phone
Bank of America Merchant Services                                                         21
                                Thank you

Bank of America Merrill Lynch               22

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