The cost of credit card processing has become a bigger factor to FBO margins as credit card rates have continued to climb over the past several years thanks to several factors including the growth of rewards and purchase cards which increase the interchange fee to the merchant to fund the rewards programs. The increases in the interchange rates have led to several high-profile confrontations between big retailers and the card networks recently including a battle between Amazon and Visa that led to Amazon threating to stop accepting Visa in Europe due to the high fees. Of course, aviation hasn't been immune, at today's fuel price ($6.73) credit card fees can be as much as $0.29 per gallon. Today the average FBO transaction has a fee of just around 2.9%. That means the average cost per gallon is $0.19. First, let's look at how we get to 2.9%.
What are Interchange Fees?
Think of the interchange rate as the cost in a cost-plus fuel price and they can range from 1.29% ($0.08681 per gallon) to 3.5% $0.2355 per gallon). The interchange is what the bank or card issuer sets at the cost of processing that card. The interchange fees are how the issuers cover the costs of the risk associated with issuing credit, their operations and as mentioned the rewards programs. Here are the factors that can impact the interchange rate you are charged on any given transaction:
The Credit Card Brand - Each credit card sets its own interchange fees so accepting one card brand over another can result in a higher interchange fee. American Express is often singled out for assessing higher fees than Visa, MasterCard or Discover but we have seen higher cost cards from the other brands and attempts by American Express to offer better rates to small businesses.
Your MCC Code - This one is essentially how the credit card companies have labeled your business and the risk they associate with that category. The MCC (Merchant Category Codes) can have a significant impact on the cost of the card and that is why some processors in aviation are able to offer better rates than others. There is no specific business category created for the FBO business which makes it difficult to explain our higher dollar lower risk transactions to some processors. An argument could be made that our interchange rates should reflect the minimal risk of FBO transactions to the card issuers. The MCC codes are also used by card issuers to manage approvals. For example, a company purchase card (you may hear the term P Card) may have a policy against purchasing liquor and an attempt to use the card at the liquor store would cause the card to decline because of the liquor store's MCC code.
Who owns the card - Credit card associations assign various rates to cards based on the card's owner. Individuals are treated differently than government or business. That means the interchange for a card presented by an individual can carry a higher rate than a card presented by a business or government agency.
Card Present - This is a BIG one in our business; most of our credit card transactions are COF (Card on File). There are several reasons for this, and they all make sense with how FBOs and our customers operate but these transactions drastically increase the cost of the transaction. In regular retail transactions the lack of a card swipe and the data associated with that card increases the risk of an issue with that transaction. Even keying in a card number that you are holding in your hand does not provide the card data required for a card present transaction. Again, as an industry we have almost zero fraud but are still subject to the risk associated with traditional e-commerce, telephone, and mail order transactions. Outside of lobbying the credit card networks we have limited impact on the difference in interchange between card present and card not present transactions.
Address Verification - Having limited impact doesn't mean we have no impact. Modern systems like X-1FBO can use address verification systems that some processors make available. What the AVS systems do is verify that the customers address they have matched the billing address information you have. This level of detail means that the customer is highly likely the right one and the risk to the issuer on this transaction is lower. That information is transmitted to the processor during the authorization of the card. This approach that more data equals a lower risk transaction is also true in the transmission of invoice details. The more information that is submitted in the authorization the more it can impact the interchange fees. Today few of the current aviation processors and software platforms can lower costs using AVS but expect this to become more common as companies continue to upgrade payment infrastructure.
Tokenization - This is important for more than just the cost of the transaction, this is key to PCI compliance and reducing your exposure to malware or bad actors gaining access to your customers credit card information. Tokenization means that the information from the card swipe is not saved in the system performing the swipe, instead the card data is sent directly to a vault or service that then provides the system swiping the card with a string of characters that represent the card. If anyone gained access to that information the string of characters would be useless to them. As of October of 2021, Visa began offering reduced interchange fees to merchants that tokenize card transactions.
Rewards Cards - These are another big one in the FBO business. To fund the benefits associated with rewards cards such as frequent flier programs, cashback offers, and the like, card issuers charge higher fees for these cards. Pilots like rewards cards.
The interchange fees are set by the networks (Visa, Mastercard, Discover & American Express) and each one of these networks maintains its own schedule of interchange fees that are updated annually and available online. The issue is that there are a lot of factors that impact exactly what your interchange fee will be on any given transaction. Interchange can be different from one transaction to the next, even when it is the same card.
Credit Card Processing Fees
The average credit card processing fee is 1.5% - 2.9% for a swiped transaction and 3.5% for an online transaction. Generally, today FBOs have an effective rate over 2.9% on transactions that include a mix of cards and processing rates.
Here are the average credit card processing fees for the four major credit card networks:
Visa: 1.4% - 2.5%
Mastercard: 1.5% - 2.6%
Discover: 1.55% - 2.5%
American Express: 2.3% - 3.5%
Fees for using Visa, Mastercard and Discover are based on the card type and if swiped or keyed-in. For AMEX, however, it depends on the type of merchant and transaction size.
Ways To Save on Processing Fees
Credit card networks have mandatory interchange fees but that does not mean your FBO can't save money. What is the current scenario of credit card processing fees for FBOs and what solutions are readily available to still save money?
Choose the right POS system: If your point-of-sale system has an AVS tool (address verification system), then it would cover the risks of not-present transactions.
Automated daily Batch closing: Sending batches daily can save your FBO up to 0.50% interchange rate increase. Use a system that allows automatic daily batch settlement.
Avoid manual entry: Keyed-in transactions have a higher rate. Use swiped methods more often if possible.
Offset processing fees with credit card surcharge: Include a credit card processing fee on your customer's invoice to offset your processor's fees. This comes under strict rules like not exceeding the cost of the processing fee or 4% of the transaction.
Negotiate your provider's costs: Your payment engine or provider is not able to negotiate your processor's rates, but it can offer lower and competitive costs. X-1Pay is the proprietary card processing provider for X-1FBO.
Negotiate your processor's markup: This is a small portion of the total credit card processing fees but can be negotiated as opposed to the credit card network interchange fees.
Choose the right pricing model: The most common and with more potential to lower costs is the interchange-plus model. This structure breaks down interchange and markup fees.
It may seem that credit card processing fees is a subject your FBO cannot work around. However, all entities involved need each other to function. However, you can compare payment processing providers and choose the most suitable for your business, negotiate what can be negotiated and implement cost-savings strategies and technology to sustain your own business model.
Reference: Interchange Rates (web)