What is Interchange?? Interchange is a term used in the payment card industry to describe a fee that a merchant's bank (the "acquiring bank") pays a customer's bank (the "issuing bank") when merchants accept cards using card networks such as Visa and MasterCard for purchases.

Interchange & Assessments Merchants Must Pay a Fee to Accept Cards Interchange is paid to the Issuing Banks Assessments are paid to VISA/MasterCard/Discover Discount is paid to Elavon (authorization, settlement, risk) Interchange: wholesale price paid to issuing banks for the settlement of a credit card transaction

Interchange & Assessments (continued) Assessments on Settled Transactions Fees paid to card associations (VISA & MasterCard & Discover) VISA is 0.1100% and $0.0025 per item MasterCard is 0.1100% and $0.0185 per item Discover is 0.11% and $0.0185 per item

Interchange & Assessments (continued) Assessments on all Authorizations Fees paid to card associations (VISA & MasterCard & Discover) VISA is $0.0195 (NAPF) and $0.0010 (Risk ID Service) per auth MasterCard doesn’t have auth assessments Discover is $0.0050 (Data Usage Fee) per auth

Interchange & Assessments (continued) Visa Per Occurrence Assessment Fees Account Verification - $0.0250 – Authorization fee billed on zero dollar account verification transactions Mis-Use of Auth - $0.0450 – Authorization fee billed on authorizations that are not settled or pre-authorizations that are not settled. Zero Floor Limit - $0.1000 – Authorization fee billed on transactions that are settled, but not authorized. Zero Floor Limit - This is judged by transactions that are settled without a Tran ID to match to an auth. Forced transactions will most likely get billed here.

Visa Authorization Examples Fee Category NAPF Account Verification Mis-Use of Auth NAPF (2nd Auth) Zero Floor Limit Auth Cost Ex. 1. Zero Floor Limit fee imposed for no Auth with Settle Ex. 2. $1.00 Status Check, no Reversal; then Auth and Settle Ex. 3. Account Verify, AVS, CVV2; then Auth with Settle Ex. 4. Auth with Settle   Ex. 1 Force No Auth Ex. 2 $1.00 Status Check Ex. 3 Account Verify Ex. 4 Auth & Settle (Optimal) $0.0000   $0.0195 $0.0250 $0.0450 $0.1000 $0.0840 $0.0445 While most authorization and clearing transactions are processed correctly, those that are not can impact a cardholder’s open to buy, cause confusion at the point of sale, and impair the effectiveness of automated risk and processing intelligence systems

Elavon Specific Costs Authorizations Settlements Foreign Networks Fees Every instance in which a POS system submits a request from processing network Processing Network checks with banks to confirm validity, funds availability Most companies charge between $0.05 and $0.25 Covers network infrastructure costs Can be bundled with per item in Discount rate Settlements When authorizations are approved, they must be settled by processing network Processing Fees are assessed as a percentage and per item rate on settled transactions Funds are transferred to merchant bank account Foreign Networks Fees Competitors: Vital, Global, Paymentech, ADS Gateways: Shift4, Merchant Link

Industry Pricing Methods Tiered This is the most common: about 80% of all Elavon merchants are boarded with Tiered pricing. Merchant receives three, four, five, or six tiers (such as Qualified, Mid-Qualified and Non-Qualified) Each tier contains a collection of interchange categories Downgrade tiers are the most profitable for banks and processors Interchange Pass-Through (or “Cost Plus”) Popular method for pricing large merchants/industry specific (large ticket, Utility, Supermarket etc). Merchant pays a fixed processing fee over and above the cost of interchange and assessments Method is usually transparent and easy to see Least profitable of the three methods Interchange Differential (Elavon) Infrequently used in MSP Channel, but common across the industry Merchant receives one qualified rate and the downgrades are assessed at the difference between the qualified and non-qualified rates Can be considerably more complex for the merchant or competitor to understand

Pricing Tools BET Reference Nationals Guide Pricing Model Building a Buy Rate Model Retail MOTO

BET Reference & Nationals Guide

Elavon Pricing Model for MSP Channel Click in the box above to open the Pricing Model

Tools for building a Buy Rate One for Retail One for MOTO

Building a Buy Rate Visa Retail Qualified Buy Rate - 1.68% + $0.2255 CPS Retail Interchange – 1.54% and $0.10 Visa Assessments – 0.1100% and $0.0025 Visa NAPF and Risk ID Auth Assessments - $0.0205 Processing Fees – 0.03% and $0.03 Authorization - $0.05 Buy Rate - 1.68% + $0.2255

Building a Buy Rate (continued) MasterCard Retail Qualified Merit III Interchange – 1.58% and $0.10 MC Assessments – 0.11% and $0.0185 Processing Fees – 0.03% and $0.03 Authorization - $0.05 Buy Rate – 1.72% + $0.1985

III. Building a Buy Rate (continued) Discover Retail Qualified Retail AIP Credit Interchange – 1.71% and $0.10 Discover Assessments – 0.11% and $0.0075 Discover Data Usage Fee - $0.0050 Processing Fees – 0.03% and $0.03 Authorization - $0.05 Buy Rate – 1.85% + $0.1925

Building a Buy Rate (continued) Visa, MasterCard and Discover Rates are Different Typically a merchant is quoted a single Qualified Rate for all card types Based on a 70% Visa, 25% MC and 5% Discover Card Acceptance you will need to blend the qualified rates for all card types to determine the effective buy rate. Visa Retail Qualified Rate – (1.68% + $0.2255)*.70 MC Retail Qualified Rate – (1.72% + $0.1985)*.25 Discover Retail Rate – (1.85% + $0.1925)*.05 Effective Qualified Rate – 1.6985% and $0.2171

Building a Buy Rate (continued) Blending Card Types Can offer additional revenue and competitive advantage when quoting a single Qualified Rate Consumer Card Retail Qualified Rate – 1.70% and $0.20 Check Card Retail Qualified Rate – 1.15% and $0.25 Example – 60% Consumer Cards, 40% Check Cards Effective Qualified Rate – 1.48% and $0.22

Elavon Pricing Tiered Pricing Interchange Pass-Through Simplified rate structure Four to six possible rates 90% of Elavon’s merchant Interchange Pass-Through Interchange & Assessments are charged at cost to the merchant MSP adds a small mark-up Large merchants or Merchants on Special Interchange Programs (i.e. Utility, Large Ticket, etc)

Elavon Pricing Tiered Pricing Important Considerations: Qualified Qualified-Rewards 4th Tier Debit (Check Card) Mid-Qualified Commercial Non Qualified Non-Qualified Important Considerations: Interchange rates fall into one of those “buckets” (See BET Reference) Rates should be designed around industry (Retail, MOTO, Supermarket) Interchange Grids (BET) found on the MSP Info Center provide further detail

Pricing Strategies Interchange is Complex Keep it Simple Difficult for merchants to understand Lots of categories makes it intimidating Lots of math Keep it Simple Tiered pricing is a simplified presentation Know When to Use Tiered vs Pass-Through Tiered is simple, easy to explain, and offers the best margins But it is easy for competitor’s to beat Interchange pass-through is cheapest for the merchant and safest where you can’t be sure where a transaction will qualify. But spread is limited and may be complex to explain

Pricing Strategies Percent Rate versus Per Item Ticket Size Matters Example “Low” Rate: 1.60% + $0.25 What is the size of the average ticket? What type of business is it? Are there debit transactions? Ticket Size Matters

Pricing Strategies Effective Rate Example Means of calculating rates charged to merchant where fees are not fully discernable. Calculated by dividing Total Discount Fees by the Processed Volume Tool for Merchant Statement Comparison where limited information is provided. Example Total Discount Fees Due $160 Total Processed Volume $10,000 Effective Rate 1.60%

Working with Statements There are less than 10 major acquirers in the field today. While there are thousands of Independent Sales Organizations in the industry, they rely on a handful of acquirers. This means there are a limited number of statement types. Statements can be used to identify acquirers and therefore pricing methods. Many acquires purposely make their statements confusing so merchants can not easily compare between providers.

Working with Statements Use statements as information source, don’t automatically assume a math equation has to be done. Don’t lead the customer, or let the customer lead you to sell on price/savings comparison. Many acquirers purposely make their statements confusing so merchants cannot easily compare between providers. Don’t expect merchant statements to add up completely – focus on understanding how the merchant is priced, versus reconciling the statements to the penny. 90% of all statements can be deciphered, the few statements that may be difficult to analyze include: Certain BofA/NPC and Paymentech reports, indirect channel First Data statements, some gas station/pay-at-the-pump statements. Remember that acquirers are going to price business to make money. Look at downgrades, fees, avg. ticket, industry type, distribution of transactions, effective rate.

Competitor Pricing Strategies First Data – Employs a variety of pricing methods, including Discount with Billback. Discount with Billback pricing can be explained as the same style of pricing as differential but downgrades and markups are not clearly visible. Bank of America – Based on Vital platform. Frequently uses interchange differential on old BofA portfolio. Acquired NPC division is largely priced as tiered. Elavon – Frequently utilizes tiered pricing with lower lead rates, higher mid, commercial and non-qualified rates. Fifth/Third Bank – Interchange differential is popular. Global Payments – Popular platform for ISOs, uses a mix of interchange differential and tiered pricing. Heartland – Interchange pass-through is very popular, although it still often puts merchants on differential with no surcharge.

10 Steps for Statement Analysis 1. Get current complete statements Not reports or partial statements Preferably 2 consecutive months 2. Identify the processor Look for logo or name May be masked by MSP name, bank name etc. Become familiar with formats 3. Identify the volume mix between credit and debit cards between Visa , MC and Discover, and average ticket This could be a chart located on the statement or you may need to calculate based on summary information in the statement Formula to figure percentages is sales by card type divided by total amount of sales 4. Identify Gross or Net Net will indicate credits issued for refunds on statement as a negative discount due Gross will not show any fee credits for refunds 5. Consider the merchant’s business: What do they do, what do they sell? Would they qualify for any special interchange programs? Look for specific Interchange categories on statement for example (supermarket or fuel) Review interchange guides (BET & Nationals Guide) to better understand programs that are available to better educate the merchant. You may be able to save them money by adding value rather than negotiating based on rates.

10 Steps for Statement Analysis- continued 6. What kind of pricing do they have? Tiered- Should recognize repetitive rates on the statement for Qualified, Mid, etc. Up to 6 rates. Interchange Differential- One qualified rate, downgrades assessed at the difference between qualified and non qualified. Often seen as one rate with a small basis point and/or per item markup on various categories. Enhanced differential will indicate credit discount on check card transactions. Interchange Pass-Through-Usually transparent and easy to see as a fixed processing percentage and/or per item over interchange 7. Identify the distribution of transactions: How many were qualified, hand-keyed, corporate etc….. Estimate based on Interchange categories presented. The Interchange Grid can be used as a guide to determine qualifications keeping in mind they may differ from other processors. 8. Identify current pricing (rate, per item, mark up) Pass-through easily recognized with a set mark up in basis points and/or per item Tiered pricing contains a rate based on a collection of interchange categories and will typically be shown with the qualification level and the rate assigned for that level. Differential is more complex and harder to recognize. Look for a lead rate and then markup on individual categories. 9. Reconcile all fees and bankcard-related charges in the pricing model Statement fees, monthly minimums, auth fees etc. The pricing model user guide will assist with entering data into that tool. 10. Determine current processors margin and then determine your pricing strategy and proposal Use pricing model as a tool for completion of the 10 steps.

Heartland Statement Breakdown Statement Type-Heartland Heartland typically targets the restaurant industry and other low average ticket industries with pass-through, differential, or enhanced differential pricing. These statements are typically easy to analyze. In the Fee Summary section below you will see that this merchants pricing is interchange plus .25% and a .20 transaction fee.

Identify current Pricing, rate, per Step 2 Identify the Processor Step 3 Identify the volume mix of card type Step 5 Consider the merchants business what Do they do or sale Step 4 Identify net or gross Step 7 Identify the distribution of transactions Step 6 What type of pricing do they have Step 9 Reconcile all fees Step 8 Identify current Pricing, rate, per Item, markup

Step 3 Identify the volume mix of card type Step 1 Get current complete statements Step 10 Determine current processors margin and then determine your pricing strategy and proposal.

Heartland Statement Breakdown Steps: Get current and complete Statements preferably 2 months Identify the processor Heartland identified by logo on statement Identify the volume mix of card type: Formula is sales by card type divided by total amount of sales M/C=54% Visa=46% Identify gross or net: Net-per credit issued for refunds on statement Merchant business type. Unable to tell because DBA is not available. Per interchange categories this is a MO/TO merchant Pricing type. Pass-through-easily visible on statement Identify the distribution of transactions by adding the different qualification categories and divide by total volume for percentages this will give you an estimate. Note: this is based on Elavon qualifications as disclosed on the Interchange Grid from the MSP Info Center. Moto Qualified-4,805.05 (divided by) 11,498.96 = 42% Non Qualified-6,693.91 (divided by) 11,498.96= 58% Current pricing Pass-Through .25% and .20 per item All fees Service Fee- $8.00 in addition to pricing indicated above. Margin and pricing Strategies: Effective rate-2.34% Total Bankcard Discount fees (divided by) Total Bankcard Sales volume- $269.23 (divided by) $11,498.96