In the hospitality sector, hotels allocate a significant portion of their expenses to enhancing guest experiences through staffing, Wi-Fi, and laundry. While these direct costs receive thorough scrutiny, indirect expenses like merchant card fees often go unnoticed. While being one of the most convenient ways to transact, credit card processing fees have become increasingly costly and complex over the last decade.
On an ongoing basis, the more successful property owners ask themselves fundamental questions, such as, "What are the all-in costs for merchant card processing?" This question can readily be answered by reviewing a monthly processing statement and dividing the total processing fees by the monthly sales amount, often referred to as the Effective Processing Rate. As a rule, the Effective Rate of a well-managed merchant card when the customer physically uses their card (tapping or inserting it into the terminal) should be below 2.40%. Transactions with card details taken online or over the phone should be below 2.70%.
Merchant card processors derive revenue primarily from the discount paid based on transaction volumes and other administrative fees that may or may not add value. Unfortunately, this is often the primary focus when property managers or owners negotiate a processing agreement due to misinformation regarding pricing structures that were phased out well over a decade ago. While it is still important to negotiate those costs, they typically represent below 20% of the total processing costs. The fees charged by the card brands through their interchange and card brand fees constitute over 80% of the overall processing costs.
Many believe that interchange fees are fixed, but there are numerous ways that transactions can qualify for a lower interchange cost, especially for online and manually entered transactions. These can have a significant impact on total processing costs compared with the cost attributed to the processor.
For example, merchant card transactions made during standard business hours are typically submitted in a batch process each evening. This process is often automated, but some still prefer to perform it manually. If that process is delayed for any reason for over two days, it will cause the average interchange for all those stored transactions to increase by 60-75%. While the cost for each of the over 400 interchanges is fixed, the property manager has more control over which interchange rate is applied than most think. Another example is that submitting the sales tax amount for business card transactions can reduce its interchange cost by 25-30%. For the property owner, the difference is avoiding a significant cost penalty or gaining a substantial benefit in processing costs.
What next?
There are many more aspects to optimising merchant card fees, and a focused study on historical usage and fee trends would provide valuable insights. While many hotel or motel owners have a good grasp of managing the merchant card fees portion of the property's operating expenses, reviewing the various areas mentioned in this article regularly is key, even if the Effective Rate has typically been below the threshold of 2.40% for retail transactions or 2.70% for those payments entered online or manually. Changes in staffing are very common in the hospitality industry, and assuming that the new recruit will process cards correctly can be a costly error.
However, if the effective rate exceeds the aforementioned rates, you should confirm that you have all the correct policies and procedures for processing card transactions to avoid interchange and card brand fee penalty rates. Should you be unsure about any aspect of this cost category, you can consult with an ERA consultant to evaluate your merchant card costs. You will receive, at a minimum, an objective assessment of your merchant card expenses and an independent report demonstrating that you are operating optimally in this area. Merchant card fees can accumulate rapidly, and having the assurance that you have optimised this cost or have a resource that can assist you in achieving this can provide that peace of mind, whether for yourself or the board.
