Archive for Susan Alvarez

Are Visa and MasterCard Overpriced Dinosaurs?

The past few years have witnessed a revolution in retail payment processing. New options in payment processing have emerged from a landscape consisting almost entirely of credit cards, debit cards and store branded cards. Also during this time period, amounts charged for merchant processing of charge cards have continued to rise, which has been a hotly debated topic between processors and retailers. The $7.25B proposed settlement in early July between Visa/MasterCard and a class action group of retailers is the latest development in this conflict.

To give some background to the controversy, credit card processors claim that the processing fees themselves have not really increased, but because more consumers are paying with plastic, the dollar amount of fees charged have increased as cash sales have fallen. Retailers claim that fees have increased as well. Without argument, dollars paid by retailers for credit/debit card processing have risen, regardless of the reason.  Given the thin margins most retailers operate on, 100 extra basis points paid for credit card processing represents a 10% or more profit decline. Overall, US retailers are estimated to pay $40B a year in processing fees, so the numbers at stake are huge.

In determining a method of payment to use and accept, perspectives from customers and merchants differ. For the customer, it’s about ease of payment, perception of security and the ability to pay as desired (over time versus as a direct bank debit). For merchants, after accommodating customers as much as possible on how they want to pay (let’s not make it hard to be our customer, please), it’s about cost of processing, security and the ability to control fraud (avoid chargebacks from processors).

Unlike American Express, which has historically low complaint ratios for its market share, Visa/MasterCard comes from a splintered network of bank issuers, with varying customer satisfaction scores. That means that fewer customers are as tied to Visa/MasterCard as a preferred method of payment as they might be to American Express (and Discover, which has similarly high satisfaction scores, though with a much lower market share). If you further factor in customers who are using their Visa/MasterCard as a debit card, their real objective is simply to transfer money from a personal bank account to a merchant to complete a purchase.

Much press has been given to Google Wallet, ISIS, Square, Inc. and Groupon as new players in the retail payment arena, but these options all represent better, mostly mobile, ways for payments to be processed via existing customer credit cards (such as Visa, MasterCard, American Express and Discover). This may make paying for purchases more convenient and sometimes more economical for merchants due to economies of scale, but the end processor of the charge is still the major credit card companies.

With all the elements above aligning, the landscape is ripe for competition and some actual new methods of payment have surfaced in response:

  • Individual bank initiatives already enable person to person payments and may allow direct person to merchant payments in the future. Almost all of the larger players offer a person to person payment option including US Bank, Wells Fargo, Chase and Bank of America.
  • Social networking site Facebook is currently testing person to person payments in Australia in a move that, if successful, is expected to transition to a wider market. Again, this technology could enable person to merchant payments in the future.
  • PayPal is experimenting with acceptance at physical stores with aggressive pricing for merchants. PayPal as a form of payment is currently being accepted at Home Depot and is planned at many other retailers, including Office Depot, Abercrombie & Fitch, Aeropostale, Barnes & Noble and American Eagle Outfitters. Note that about half of the payments processed by PayPal are directly from user bank accounts or PayPal prepaid accounts (with almost -0- cost to PayPal, allowing very aggressive pricing). The remainder of PayPal-processed payments is via a linked credit card, such as a Visa or MasterCard.

Note that these options actually represent new ways to pay for purchases, not new ways to funnel purchases through existing payment methods. All the players are in a position to either offer directly or facilitate pay over time (meaning that they could offer customers both debit and credit services). While most of these payment methods are early in the marketing and acceptance phase, the draw is ease and convenience on the part of customers and lower costs on the part of merchants.

Though Visa/MasterCard settled in the retailer initiated class-action lawsuit, as noted above, the settlement leaves Visa/MasterCard in the position of determining and passing off costs very similarly to before, after an 8-month 10 basis point hiatus on swipe fees. The settlement further allows merchants to charge a surcharge for accepting credit cards, which was previously prohibited. Do customers like their Visa/MasterCard enough to pay a 2-3% surcharge for the privilege of using it? If being used as a debit card (really just to effect a bank transfer), probably not. If being used as a form of credit (a credit card at a favorable rate), it’s more debatable.

Regardless, with Visa/MasterCard currently controlling about 70% of the total charge card market, will we look back in 10 years and note that this was the height of Visa/MasterCard’s market share? Unless something fundamentally changes in the value that Visa/MasterCard brings to both customers and merchants, it seems a credible outcome.


Susan Alvarez is the Vice-President of Consulting Services at ITK Solutions Group. ITK Solutions Group is a retail-focused consulting firm specializing in retail enterprise resource planning (ERP) solutions. 

Does Your Retail Implementation Have the ROI it Should?

It’s budgeting time and you are evaluating capital expenditures for next year. One project that has been put off for several years is a new, better integrated retail system.

This is sometimes a hard sell with the operations and financial segments of the company. Retail systems touch almost every part of the company and can be expensive. After all, you are getting timely sales information, your customers are able to pay out promptly and efficiently, system uptime is reasonable (maybe not great) and loyalty information is being gathered. That’s really all you need, right? Maybe, maybe not.

Here are some ideas about what you should expect from a new system and how to evaluate whether such an expenditure would have an appropriate payback for your organization.

1. What is your current inventory out of stock percentage and how can your new implementation improve that?

Measuring out of stocks from a web portal is easy; the number of times customers look for products that are not in stock can be electronically captured. In a brick and mortar store situation, the numbers are not so straightforward. You don’t have the dress in the right size or style. Does the customer tell the manager? Usually not. Would it convert to a sale if you did? Often, but not always. A current assessment of your out of stock ratio is important here, if your new system is supposed to integrate more closely to provide better inventory tracking, ordering and replenishment.

Let’s consider some numbers at work here. If your out of stocks run 10% of all transactions and you believe that you could convert half of those out of stocks to a sale with better inventory integration and metrics, you should expect to increase your sales by about 5% if the new system fully realizes the potential here. Even a 50% realization of the potential capture would result in a 2.5% increase in sales, which would often fully fund a retail project.

2. How can your new system reduce the amount of dead inventory and deep discounting that’s required to move slow selling items?

The flip side of not having the right items in stock (#1 above) is having the wrong items in stock. What is the cost of your dead inventory disposal? How many items are put on clearance because you had the right items at the wrong time, or in the wrong size? Shelf and rack space is wasted on items that will not sell, with an opportunity cost of displaying items that would sell.

How many items are sold at clearance for 50-75% off that should never have been purchased in the first place? Choosing styles involves human judgment, and so it is an art (rather than a science), but a good system can ratchet up the science side and improve the buyer’s chances of nailing down the art side.

Again, the numbers in play are large. If your inventory is sold at 70% of suggested price, on average, and your new system could increase that to 75% by better anticipating demand flows and seasonality, a 5% increase in sales could be realized.

3. Can a new system enable new revenue streams?

For example, the best new retail systems enable pick, pack and ship functionality at the brick and mortar store level. That is, customers can place an order over the web that your system automatically routes to a store when your fulfillment warehouse is out of stock or low on stock for that item. The store that has the right item in the right color and the right size receives a notification to ship the item directly to the customer. You have not lost a sale, the customer’s needs have been fulfilled and your store manager’s volume goes up, all positive trends. To quantify the possibility, what amount of out of stocks from your web orders could have been filled with store inventory? 1-2 transactions per store per day could increase sales substantially.

Some things to consider:

• All the above initiatives increase inventory turnover. In a leveraged situation (where money for inventory is borrowed), the reduction in borrowing costs should be quantified as a project payback (increases your Return on Investment or ROI for the project).
• The above initiatives should also increase customer satisfaction which, while more difficult to measure, is intrinsic to the success of the company.
• The above initiatives should be wrapped into project objectives with the before and the expected ‘after’ metrics so that you can measure the project success and tune areas where the project is falling short.
• Finally, when quantifying project objectives, don’t take all the upside out of the numbers. If you feel the project could get a 10% increase in sales, should get a 7% increase in sales, and a 4% sales increase is a surety, use the surety number. If the ROI justifies from that, the project should be a ‘go’.



Susan Alvarez is the Vice-President of Consulting Services at ITK Solutions Group. ITK Solutions Group is a retail-focused consulting firm specializing in retail enterprise resource planning (ERP) solutions.