The purpose of this article is to provide hotels with information regarding how they can cut their credit card processing costs, and how a brand new alternative may change the credit card processing industry forever. Specifically, this will include:

• How there are two ways that credit card processing can calculate your costs. About 95% of hotels are under the traditional method that can cost them more money, without them knowing it than the "new" method which is in place by about 5% of hotels.
• Information regarding being charged a higher rate every time a customer presents you with a credit card that offers frequent flyer airline miles or other "Rewards".
• Cost saving tips on saving money on your existing credit card processing equipment, regardless if you rent, lease, or own your equipment.
• Information for full-service hotels that have quick service restaurants, coffee bars, and/or gift shops can now implement a program that can eliminate customers having to provide their signature on all transactions of $25 or less, which saves your customers time. And, last; but, not least,
• How hotels can augment their credit card processing program with a new cost saving payment method where a customer may swipe their Drivers License to pay for their hotel stay in the same exact manner that an ATM/Debit Card can be used by a customer to pay for their hotel stay.

Before we begin, part of my background includes having been hired by the Chairman of a publicly traded credit card processing company in 1998, to re-engineer his order processing. I also helped Citicorp develop its global multi-party settlement program for the hotel industry in the 1980's, which culminated in being awarded a U.S. Patent in 1999 for a new automated hotel reservation system I had invented that incorporated integrating credit card payments for the Lodging industry. My point here is that I promise any hotelier that if they read this article, they will save a lot of money for their hotel(s), and/or be able to learn about a new program that augments credit card processing, and divert customers to a lower cost payment. The views expressed in this article are my personal opinions in interpreting where the credit card industry is going in regards to Visa and MasterCard. Those companies provide a valuable service. Think about it. Before Visa and MasterCard existed, how would your hotel extend credit to a customer? With Visa and MasterCard, you are being provided a valuable service that allows you to have your customer's loan money from those companies so that you are ensured payment.

In the past couple years, Visa and MasterCard have lost major lawsuits which had substantial monetary penalties that involved such things as retailers arguing (successfully) that the advent of "check cards" (funds debited from a checking account) created a 'cost of sale" for them that was not present before they were introduced into the marketplace, where customers wrote physical checks. In order to recoup these unexpected losses, these credit card companies, which are both Associations made up of their Member Banks (i.e. Bank Of America, Wells Fargo, etc.), instituted rate increases to all Merchants (i.e. Hotels, Restaurants, etc.).

While credit card processing companies all receive the same rates from which to mark up their profit, the vast majority of hotels would be unaware that there are two pricing schemes. The "standard" pricing model for credit card processing is called "3 Tier Pricing", which comprises: 1) Qualified (best rate), 2) Keyed in transactions, sometimes called "Mid-Qualified", and 3) "Non-Qualified". The latter two categories of pricing actually comprise a myriad of dozens of possible rates that actually have different costs associated with them. In fact, think of the latter two categories as "big buckets" of different types of fish卆ll living in the same bucket. In other words, the profitability varies on a per transaction basis. This "3 Tier Pricing" is the model that is conservatively in place by 95% of the hotel industry.

In the past couple year's, a new pricing program has surfaced that in many cases can yield a better pricing model than "3 Tier Pricing". This is called "Interchange" Pricing. What is Interchange Pricing? "Interchange" is the term used for the previously mentioned rates that all the credit card processing companies are provided by Visa and MasterCard. Simply, put, the charges are based on marking up the actual dozens of specific rate categories a percentage amount of "basis points" (100 basis points = 1%), plus the per-transaction fee (sometimes called the "per item" fee). The idea here is that by pricing the account in this manner, there will be extra savings generated, because the "3 Tier Pricing" model frequently defaults to the highest "Mid-Qualified" and/or "Non-Qualified" rate. In the credit card industry, these types of transactions are called "Downgrades". While some of the major hotel chains have been offered "Interchange Pricing", the majority of the marketplace is under the "3 Tier Pricing" scheme.

Which pricing method is better: "3 Tier Pricing" or "Interchange Pricing"? The answer is the latter, because typically a credit card processing company will have to cover itself on a "worse case" scenario in the "Mid-Qualified" or "Non-Qualified" transaction. Having said that, it must be pointed out that a purveyor of "Interchange" pricing can still provide a less competitive rate than a competitor using "3 Tier Pricing". What is important to note is that hotels always have the option of changing their current credit card processing provider, without changing their credit card equipment, and without changing their depository bank. Hotels should also note that if instead of a POS System, they have a magnetic stripe reader and POS Software, such as IC Verify or PC Charge, they may change processors without changing their software. The point is that they are not "locked in".

In the past, when a hotel swipes a credit card through their credit card terminal or magnetic stripe reader that is hooked up to their POS System or through their Property Management System with a POS module, and the transaction is approved electronically, that is said to be a "Qualified" transaction. If the magnetic stripe on the credit card terminal does not read correctly, the hotel front desk clerk inputs the credit card number on the front of the card manually, and if that transaction is approved it is often times called a "Keyed" or "Key Entry" transaction, which does not receive the same "Qualified" rate. It receives a "higher rate". In fact, there are dozens of rate classifications. What is important to note here is that there are secondary factors that will determine the actual rate, such as the "card type". The most recent change to "card type" pricing by Visa and MasterCard is that Merchants pay a higher rate when you are accepting what are called "Loyalty Cards", also known as "Rewards Cards" (i.e. credit cards where the customer who is presenting the credit card receives frequent flyer airline miles).

If hotels are under "3 Tier Pricing", they are likely to be paying the highest "Non-Qualified" rate, because again under "3 Tier Pricing", this rate is generally much higher than it would be if the hotel were on "Interchange Pricing", where "all" card types are charged at the "real cost", plus a "set profit margin" negotiated by the hotel and the credit card processing company.

As I had mentioned earlier, another "card type" are "Check Cards". It is these "Check Cards" for which Visa and MasterCard lost one of the lawsuits. Simply put, a "Check Card" acts in the same way as an ATM/Debit card used to be "entirely" separate from "Check Cards". The key point here is that "Check Cards" have a lower "Interchange Rate" than regular credit cards. However, most credit card processing companies charge the same higher rates on a "3 Tier Pricing" schedule for these "Check Cards" which can comprise 30-40% of transactions.

The least expensive method of accepting payment from a customer is when they pay by their bank issued ATM/Debit cards. If a hotel does not currently accept ATM/Debit cards, I strongly recommend that they purchase a "Pin-Pad", so that they can accept this form of payment. ATM/Debit transactions cost hotels less than credit sales, because they are not charged a percentage fee. Rather, the hotel pays a nominal per-transaction fee of somewhere between 52-65 cents a transaction; but, depending on the geographic area, rates could be 40-50 cents a transaction, as there are over a dozen major ATM/Debit service providers in the Country.

Another area of potential cost savings is credit card equipment. If a hotel is renting its credit card equipment, they are usually paying $35 per month for a credit card terminal and a printer; or, a unit that has a printer integrated on the credit card terminal itself. This is costing the hotel $420 per year. Because of the competitive nature of the credit card processing industry in recent years, there are numerous vendors who have come out with "Free Credit Card Terminal" programs. These vendors would be somewhat unbeknownst to the hotel industry, as they target "new businesses" in general, rather than hotels. The best type of these programs simply consigns as many credit card terminals, printers, and ATM/Debit pin-pads to the hotel "for free" (you just pay a security deposit). You have to be careful here, as many of these purveyors tack on hidden costs such as "batch header fees" (you pay a surcharge every time you transmit a batch of transactions to your processor for settlement). This "Free Terminal" program is also quite useful for anyone "Leasing" or "Owning" their equipment. Why? Credit card equipment is, in reality, just small computers. They break down. In the past, if this happens, the hotel has to pay $800-950 for new equipment. With this program, you save the expense.

For full-service hotels, or better yet, Convention hotels, one of the recent changes in credit card processing creates a compelling case for "Interchange Pricing". Specifically, hotels that have caf?or deli type eateries. Here is why. Under $25, the rate charged to any type of food establishment can be programmed to recognize "Small Ticket" transactions. These transactions incur a significantly lower per item rate than regular pricing. Additionally, it is important to note that in credit card pricing, the percentage rate charged, which is called the "Discount Rate" has a lower impact than the per item fee. Cafe and Deli's generally run a high volume of transactions. And, their transactions under $25 are called "Low Ticket". So, for these "High Volume, Low Ticket" accounts, hotels would be advised to obtain a separate "Merchant Account" and receive a separate MID Number (Merchant I.D. Number). This is an acceptable business practice. And, because of the different pricing, the Caf?will pay less credit card processing costs than what is charged to the Hotel. Furthermore, there is even a great adjunct to this "Small Ticket" program that allows Merchants to not have to capture a signature on all credit card sales under $25. Can you imagine what a great time saver this is during busy meal periods for any eatery where the customer just wants to get their food, and get out of the food line as quickly as possible? This program saves eligible restaurants about 8 seconds on each credit card transaction.

The following discourse is intended to provide hoteliers information regarding the difference in Member Banks of Visa and MasterCard, and "where all the money goes" when they see a charge for a customer transaction on their monthly statement. In the credit card processing industry, you have four types of Banks: 1) Issuing Banks - These Banks are authorized by Visa and MasterCard to issue credit cards to their customers. Every time their customer uses a credit card at any Visa or MasterCard location, the Issuing Bank makes a commission. That commission comes out of the monies that are "below" the "Interchange" pricing percentage rate that Visa and MasterCard charge those Merchants (in our case, Hotels, etc.). 2) The next type of Bank is called an "Acquiring" Bank. In this case, the word "Acquiring" is akin to the word "Accepting". In other words, these Banks are allowed to provide any business with the ability to accept major credit cards.

In order to "mark up" each transaction, these "Acquiring Banks" take the "Interchange Rate" on each type of transaction, and build in their profit with enough of a margin to cover their operating expenses. As Banks themselves need marketing partners to sell these credit card processing programs, they rely on Visa and MasterCard to screen organizations and provide them with "Certification" on being able to resell their services. These organizations are called "ISO's" (Independent Sales Organization). So, for example, if HSBC Bank from Buffalo, New York enters into an Agreement with a hypothetical ISO named "Buffalo Credit Card Services", that organization would represent itself as an "authorized Merchant Service Provider", called an "MSP" of HSBC Bank, Buffalo, New York, which is a "Member" of the Visa and MasterCard "Associations".

As an aside, one of the lawsuits that Visa and MasterCard lost in Court was one brought by American Express, in which case they won the right to have these "Member Banks" of the Visa and MasterCard "Associations", have the right to do "Issuing Bank" programs with American Express.

Now, we come to a new competitor to the major credit card processing companies, by using their Drivers License to pay for their purchases of goods and/or services. By simply registering with any of the service providers Merchants, in a manner of seconds, the customer can now use their Drivers License to pay for their purchases at any of the service provider's location. This program can be done using any existing credit card terminal. The compelling reason that a Merchant (hotel) would want to do this is that: 1) Every time that their customer uses their Drivers License to pay for their hotel stay, they pay a rate that is lower in 99% of cases than either credit card processing or even ATM/Debit cards, 2) The hotel (or any business) can use this program as a "Gift Card" program. This is a big deal. The typical "Gift Card" program requires a costly set-up fee to print the cards, as well as a cost of $1-1.25 per card. Here, there are no "start-up" costs for any hotel to be able to obtain a "Gift Card" program. Wow! 3) The program can be used as a "Loyalty" program (stay at the hotel for 10 nights and receive the 11th night free). But; that's not all. This program can also be used as a "person to person" Money Transfer program where the cost is $1-2 per transaction, versus $30 per transaction. Finally, hotels can actually make a new revenue stream when the Customers that "they" sign-up for this program use the card in certain situations.

Finally, unlike all the other services that my company provides, whenever I am making any formal representations in credit card processing, I have to present myself as an individual representing authorized Independent Sales Organizations who are authorized Merchant Service Providers of the credit card processing organizations. There are literally hundreds of these companies, and I affiliate myself with a half dozen, so that I can handle every possible situation for my clients. For example, if you have a hotel that has had a bankruptcy, or has bad credit, there are organizations that actually can provide the credit card processing for these properties. Similarly, you might be surprised to know that Travel Agencies and Tour Operators have a tough time getting credit card processing, as they are on the "High Risk" list of the credit card processing organizations.

� 2006 Permission granted to 4Hoteliers.com to print this article.

Ron Feldman has been recognized by Who's Who In Lodging and Who's Who In California, and holds a U.S. Patent for an automated hotel reservation processing method and system. He has taught business services marketing at the undergraduate and MBA levels.

Since 1994, Ron has been president of World Business Services, Inc., a consulting firm which help businesses improve efficiencies, and increase sales. He can be contacted through his office at 718-240-5142 Monday-Friday. Or, Ron can be reached by e-mail at bizamerica@aol.com.