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on investment. The numbers are pretty cut and dried. They
fall into three categories: transactional, flat and incidental. You are selling your wine at

Transaction fees comprise interchange and per-transaction around $10 a bottle, and the retailer
fees set by the card brands and the networks they own. is selling it for $20. What is wrong
Flat fees are for things like terminal lease, payment
gateway, PCI compliance, annual or monthly service, early with this picture? Or more to the
termination, monthly minimum, statement, network, and point, why would anyone do this?
online reporting, to name several. Incidental fees cover
things like Address Verification System, retrieval requests,
chargebacks, batching and non-sufficient funds.

Unlike making wine, these fees are known and will not It seems obvious that all brick-and-mortar merchants need
change except incrementally, perhaps annually. You to reduce their costs. And in spite of what you hear about
know what they are, and you can base your pricing to the the so-called "retail apocalypse," ecommerce is still only
merchant on them; you could call them "wholesale pricing 9.46 percent of total retail sales today, so brick-and-mortar
fees." As the processor and or reseller, you just have to is where it's at in retail. To lower the cost of sale, merchants
add your markup to the transaction fees and create and need to investigate new payment channels that are an
price your own markup fees. It is pretty tough to screw alternative to the card networks. Fundamentally, this
this up, but it is possible if you have an underperforming means consumers pay from their bank accounts rather
sales organization that just cannot generate enough sales than with a Visa card.
to sustain the business.
If a merchant's net margin is 3 percent, how can the
There is another complication: merchant attrition. You can business afford to pay 2.5 percent to process an electronic
count on 20 percent of your base leaving every year, and transaction? For years, Visa argued that this was a great
you are going to have to replace them. This is almost a deal because it brought increased sales to the store.
full-time job by itself. It would be disingenuous to pretend Consumers could spend money they didn't have by just
merchant pricing has always been equitable. The history revolving their card balances – a booster shot for retail
of the acquiring industry is replete with unethical sales therapy.
practices that do not need to be enumerated here. Many of
these practices are disappearing as larger players take over This argument, which might have held water 30 years
the market, but they are still out there: junk fees, hidden ago, is looking specious today. Furthermore, it would be
markups, unannounced price changes and outrageous difficult to justify why the bank that issued the credit card
lease rates. is entitled to a fee of 2.5 percent of the retail sales price to
clear an electronic transaction.
Slim merchant margins
The Sonoma County wine industry faced a similar
In addition to constantly re-evaluating the markups needed dilemma with distribution costs but found an alternative
to maintain your desired margin, you should be constantly solution: direct to consumer sales and in-house wine
aware of the margins your merchants need, because your clubs. Some smaller wineries sell their entire output direct
job is to helpyour merchants succeed. For example, did you to consumers and via their wine clubs. You can imagine
know that for its entire existence, Amazon's net margin what this does to their margins, particularly for premium
is less than 2 percent? Or that Walmart operates on a net wines. Instead of making a profit of $4 a bottle, they are
profit margin of less than 3 percent? making $14 a bottle. It is the difference between success
and failure for a small winery.
Some of the most profitable segments are building supply
and distribution retailers, who can achieve a 5 percent net Next month, I'll delve further into this topic and suggest
margin, but that is double what an online retailer might solutions you can offer to your merchants that will allow
achieve. Food and drug stores operate on a 1.5 percent them to improve their margins. Stay tuned.
margin. New car dealers are less than 2 percent.

One thing to think about as you put yourself in your Brandes Elitch, director of partner acquisition for CrossCheck Inc., has
merchant's shoes is how your merchants cover overhead. been a cash management practitioner for several Fortune 500 com-
For example, if a store has a monthly overhead of say $50,000 panies, sold cash management services for major banks and served
and makes 1,000 sales, the business need an average of $5 as a consultant to bankcard acquirers. A Certified Cash Manager
per sale just to cover expenses. But if something changes, and Accredited ACH Professional, Brandes has a Master's in Business
as it always does in retail, and the store made only 500 Administration from New York University and a Juris Doctor from Santa
sales, then it would need $10 per sale to cover costs. Clara University. He can be reached at brandese@cross-check.com.

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