It is widely assumed that the majority of adults in the U.S., have available credit cards, but this is not the case. Only approximately 50 percent of the U.S. adult population has the use of credit cards, whereas over 95 percent have checking accounts. Although, the percentage of credit card use increases among those who use hospitality industry services.

Lodging facilities receive the bulk of their payments through traditional credit cards. Whether this is at the front desk, through a booking engine or another facility within the property, the acceptance of credit cards is both expensive and dangerous. There are three payment methods that reduce risk and expense — Automated Clearing House (ACH), Dynamic Currency Conversion (DCC) and debit online.

ACH ACH represents a major electronic payment method in the U.S. ACH can be used for paying bills, receiving funds, paying taxes, as well as electronic benefits transfer (EBT). In the fourth quarter of 2002 over 1.8 billion items were passed over the ACH networks. The dollar value of these items, passed in the fourth quarter alone, essentially equaled the dollar value of all merchant service activities in the U.S. in 2002. The ACH system grew by over 10 percent between the third and fourth quarter of 2002.

ACH payments are delivered in a wide variety, including mail, telephone and the Internet. In addition to domestic ACH transfers through various processes know as OGO Canadian, ACH transfers can be accepted by U.S. merchants and deposited directly to U.S. financial institutions. Each specific method of accepting ACH payments has specific rules associated with it, and each method has a specific standard entrance class (SEC), a three-letter code that represents the transaction type. Currently there are over 20 SECs, most of which have sub-classifications. These sub-classifications are related to whether the transfer is a debit or a credit, whether it is a commercial or consumer transfer and whether or not there is an attached addendum of information.

The cost of an ACH transaction is determined by item, not by dollar value, and usually runs at 25 cents per transaction. On the other hand, a $300 reservation made with a credit card by telephone or Internet will cost approximately $7 to the merchant. This is derived by taking the qualified discount rate of 2.25 percent, plus an item charge of 25 cents. If the item is not qualified, such as a travel and entertainment card or a commercial card, the discount rate will be higher and therefore the cost will be substantially more. The same transaction through the ACH network would be a 96 percent reduction in cost. There are no downgrades or non-qualified transactions through the ACH system.

Using an ACH system also brings the possibility of additional income from penalty fees charged when an electronic check item is dishonored or returned. Reasons for this include, insufficient funds or non-collected funds in the receiver’s account, with the receiver being the one who authorizes the electronic debit from his/her account. Approximately 85 percent of return items fall into the eligible category, with the penalty averaging $25. In 2002, the dollar amount relating to these penalties exceeded one billion dollars per month.

DCC

DCC represents a new, significant revenue source for merchants. The inability to convert foreign currency at the point-of-sale has been a significant issue for travel and entertainment related merchants. This is also an issue with companies that price their goods and services in their native currency.

DCC is the process by which association (MasterCard and VISA) cardholders purchase goods or services in a foreign country, and the transactions are settled in the currency of the merchant, not the cardholder. Therefore if one were to make a purchase in a foreign country, a currency exchange would have to take place. This is billed to the cardholder directly as an additional charge that would roughly run at 3 percent of the purchase price.

There is significant room for a merchant to profit from using DCC. The fee associated with DCC is divided amongst the banks and currency exchange operations involved. At the end of the day the merchant can receive a portion of the fee. The amount can range from 5 to 15 percent of the total DCC fee. For example, if a guest stayed at a property and presented a foreign card for payment, the transaction could look as follows: cost of stay, $150; DCC fee, 3 percent of cost ($4.50), rebated amount to merchant, 10 percent of the DCC fee (45 cents).

If the qualified rate of the $150 charge were 1.7 percent, then the cost to the merchant would be $2.55. The 45 cents rebate represents an 18 percent reduction in cost. VISA states that for U.S. merchants, approximately 5–25 percent of all transactions are paid for with foreign cards. The hospitality industry probably falls in the higher range of foreign card use, especially for properties that have a lot of foreign guests.

Some of the issues that need to be understood when implementing a DCC program include refunds, chargebacks, express checkout, checkout adjustments, forfeited deposits, as well as issues of pegged and controlled currencies.

DCC refunds and chargebacks as it currently stands are handled in a similar fashion. Some of the alternative considerations as it relates to these activities are as follows. First exchange handling of refunds and chargebacks can be configured at an acquirer or merchant level. One could convert the refund at the wholesale exchange rate, or add mark-up, therefore reducing the amount. If the wholesale route is employed, the gain/loss on the settlement can be shared between entities (inclusive of merchant). In the instance of express-checkout, association rules will require the property to mail a statement. In addition, as per Visa International rules the folio must include the converted amount, rate and currency. Late checkout adjustments need to be tied back to the original rate and therefore receive the same treatment as rate and currency.

Currently DCC relationships are being put in place amongst a number of providers of this service. Some of these companies include Planet Payment, OmniPay and FEXCO. The opportunity to participate in DCC should be sought by the individual merchant.

Debit Online and Offline

If one evaluates the use of merchant services in the United States the most significant finding is a shift to the use of debit versus credit vehicles. Merchant services sales have been relatively stable at approximately 1.8 trillion dollars over the last several years. What is dramatically different is how those dollars are exchanged. Historically merchant service sales have almost been exclusively with credit. In 2003 there will be almost an equal use of debit and credit through merchant services. This has great significance to the merchant. We will explain this in further detail below.

Debit online means that a card and a second form of identification, such as a PIN (Personal Identification Number), is presented and verified. Debit off-line means that the consumer is using a card in a debit modality, but since there is no PIN entered with the transaction, the transaction is priced at a credit transaction rate rather than the more favorable debit transaction rate.

Since all transaction pricing is based upon underwriting, and a key factor to underwriting is risk, more favorable rates exist for a debit online transaction. Again let me emphasize that the term "online" in this instance has absolutely nothing to do with the use of the Internet. Debit online transactions require the immediate use of a second form of identification. This could be a fingerprint, iris scan, a traditional PIN, or a more exotic ID, such as a voiceprint. The second form of identification increases the chance that the individual presenting the card for a transaction is the actual authorized user of the card. Therefore, the underwriting risk is lower and consequently the cost is markedly reduced.

When online debit is used, the merchant also increases the security of the payment for the goods or services that he has rendered to the consumer. In a traditional credit card transaction or off-line debit transaction, there is an effective reversibility period of 180 days from the time of goods and services delivery because the transaction includes at least four different entities. These are the consumer, the merchant, the merchant’s acquirer bank and the consumer’s issuance bank. The consumer’s issuance bank is the institution that has granted the consumer an open line of credit to be used for purchases. Therefore under these circumstances the issuance bank by regulation allows the consumer up to 180 days from delivery of the good or service to give notice to the issuance bank that the transaction is flawed. These reasons are varied, including denial of services rendered to product dissatisfaction. Additionally, there is a growing concern regarding "friendly fraud." This is when the consumer knowingly goes to defraud the merchant by accepting the provision of goods and/or services with the intention of reversing the transaction from the beginning. Although no one is sure of the amount caused by friendly fraud transactions, it is assumed, at a minimum, that this exceeded several billion dollars system wide in the United States last year.

When the merchant accepts an online debit transaction, the charge back (reversibility) period is nonexistent. The main reason for this, is that in a debit online transaction the relationship involves only two-parties — the consumer and the merchant. There are no issuance or acquirer banks because the money is withdrawn directly from the consumer’s funded account. The consumer does not have a 180-day period of reversibility. If the consumer has issues with the product or service, then action takes place between the consumer and the merchant only.

Based on the above, the cost of an on-line debit transaction is a flat fee rather than a percentage of the transaction, as well as a "penny cost." The difference can be substantial. The average "retail cost" of an online debit transaction is approximately 35 cents per transaction. This is regardless of the size of the purchase. For example a $100 credit card purchase will cost the merchant approximately $1.90, or approximately $17 for a $1,000. For both examples given, the cost of these purchases as an online debit transaction would cost the merchant approximately 35 cents.

Integration of new formats

As one evaluates the use of these various payment products, the question must be asked how can I incorporate them into my existing system or systems? There are a series of critical questions that should be asked during the evaluation period. These include those related to the specific demographic of the market served, equipment in place to include both hardware and software, communication channels, current payment vehicles, use of middle ware and future expansion.

Integration of these systems should also address the concomitant needs of accounts payable, accounts receivable, electronic domestic and foreign tax payments as well as payroll. All of these functions can be tied to a single unified system using the methods described above.

We conclude and strongly suggest that each property evaluate their total payment system(s). These systems should include a variety of alternative payment methods, which will reduce cost and risk, and increase security and operational efficiency. The specific alternatives that we discussed were ACH, DCC and online debit. Others that might be useful include SWIFT (Standard Worldwide International Fund Transfer) and EPN (Electronic Payments Network) formally known as NYCHA (New York Clearing House Association).

Ross Federgreen is executive vice president of CSRSI in Port St. Lucie, Fla. He can be reached at rfedergreen@csrsi.com.

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