Can you relate?

1. The information presented in this seminar is for information purposes only, and is not intended as legal or financial advice. The information does not amend or alter your obligations under your agreement with Fifth Third Bank, or under the Operating Regulations of any credit card or debit card association.

2. Can you relate? Your Profit

3. Agenda • What is Interchange? • Why is everything downgrading? • What are you really paying ???? • Statements: From Best to Worst • Convenience Fees • Risk & PCI • Fraud Protection • Choosing a business partner versus a processor

4. What is Interchange? • Interchange makes us the largest cost component for merchant transactions. • Does not include Dues & Assessments, Access Fees, etc. • Fee collected by Acquirer from the merchant for every Visa and MasterCard transaction. • The Fee is then passed through Visa and MasterCard to the issuing bank. • Depending on detail that is passed with the transaction (Level I, II or III), the transaction may qualify for lower interchange rates.

5. Issuers • Issue cards • Assume buyer’s credit risk • Generate reports • Provide customer service Acquirers • Sign up suppliers • Underwrite supplier risk • Provide processing • Authorization • Capture • Settlement • Generate reports • Provider customer service Three key entities manage the payment system Networks • Provides systems/operations • Develops products • Provides risk management • Provides advertisingand promotions • Sets standards and rules

6. Breakdown of Cost Total Cost = $0.94 Interchange represents 92% of the cost of this transaction. *Based on Average Ticket currently qualifying for the Visa Credit Retail Rate, 1.54% + 0.10

7. Interchange Management • Evaluate payment strategies within a framework that closely considers your unique customer demographics as well as your overall business strategies • Minimize the overall impact to your bottom line by monitoring the interchange qualifications affecting your transactions • Understand how interchange downgrades and surcharges increase your effective rates. Electronic payments continue to grow rapidly and at the same time the cost per transaction is increasing due to payment industry evolution

8. Why is everything downgrading? Consumer Cards • Some interchange surcharges are unavoidable • International, Rewards, World etc.. Most can be avoided. This should be your focus!!!!

9. One authorization per clearing message? AVS performed?* Yes Cleared within two days? Authorized through Intl. Automated Referral Service? Shipped within 7 days and transaction includes order number and MOTO/ECI Indicator? Standard Cleared within three days? Visa Consumer Card Not Present Consumer card transaction where card/ cardholder are not present Yes Electronically authorized? Yes No No Yes No No Yes No No No Yes Yes CPS Card Not Present EIRF • Transactions originating from a Visa Corporate or Purchasing card do not require AVS. Business Cards do require and AVS attempt for interchange qualification. • Recurring payment transactions do not require AVS as long as the transaction is not the first payment and the time between payments is less than a year.

10. MCC in auth and settle match? Authorized? MasterCard Consumer Card Not Present Consumer card transaction where card/ cardholder are not present Yes Yes Merit I Cleared within three days? Yes No No No Standard • For MasterCard MO/TO transactions, the authorization and settlement amounts MUST match unless the MCC is a Direct Marketing MCC. • If the transaction is properly identified as E-Commerce, auth and settlement do not have to match

11. Why is everything downgrading? Commercial Cards Level II and Level III Processing

12. Commercial Card Trends • Commercial payment solutions are emerging as the most efficient way to manage corporate payments and receivables. • With the recent increase for MasterCard Data Rate 2, merchants need to re-evaluate the cost/benefit of transmitting Level III data! Source: Packaged Facts – the US Market for Corporate an Purchasing Cards, January 2005

13. Authorization/Settlement Time Frames Visa – CNP & E-Commerce Interchange • Transaction Date must be within 7 days of the Authorization Date • Transaction Date should equal the Shipment Date • Transaction must be settled / cleared to your Processor within 2 days of the Transaction Date 1 7 9 2 3 4 5 6 8 Settle/Clear transaction to Processor by Day 9 Ship on Day 7 Tran Date = Day 7 Auth on Day 1 As Visa has the stricter requirements of the 2 networks, it is best to follow the Visa requirements as Best Practices.

14. Authorization/Settlement Variance • Depending on your Industry and MCC Code, the variance varies from 0-25% • MasterCard MOTO: Tran amount have a 0% Auth/Settlement tolerance and all transactions not matching will go to Standard if not set-up with the MCC codes below. • Visa MOTO: Tran amount may be different than the original auth amount. As long as the auth amount in settlement matches the original auth amount (and all other requirements are met), the transaction should qualify for the optimal rate. MOTO (Mail Order Telephone Order) MMC Codes 4816,5960,5962,5964,5965,5966,5967,5968,5969,6531

15. MasterCard Commercial Card This is not a complete description of all required data elements, but a high level overview NOTE: Dial Terminal and Host Capture applications cannot support Level III data transmission. The greater the amount of data provided… the better the interchange rate.

16. U.S. COMMERCIAL CARDS Current October 2007 BUSINESS CARD Commercial Standard 2.70% + $ 0.10 2.95% + $ 0.10 Commercial Data Rate 2 2.05% + $ - 2.32% + $ 0.10 - Commercial Face-To-Face 2.05% + $ - 2.32% + $ 0.10 CORPORATE CARD, CORPORATE WORLD, and CORPORATE WORLD ELITE Commercial Standard 2.70% + $ 0.10 2.95% + $ 0.10 Commercial Data Rate 2 2.05% + $ - 2.05% + $ 0.10 - Commercial Face-To-Face 2.05% + $ - 2.05% + $ 0.10 - - - - - PURCHASING CARD Commercial Standard 2.70% + $ 0.10 2.95% + $ 0.10 Commercial Data Rate 2 2.05% + $ - 2.33% + $ 0.10 - Commercial Face-To-Face 2.05% + $ - 2.33% + $ 0.10 - BUSINESS WORLD and BUSINESS WORLD ELITE Commercial Standard 2.85% + $ 0.10 2.95% + $ 0.10 Commercial Data Rate 1 2.80% + $ 0.10 2.65% + $ 0.10 Commercial Data Rate 2 2.20% + $ - 2.32% + $ 0.10 2.20% + $ - Commercial Data Rate 3 1.90% + $ - 1.75% + $ - Commercial Face-To-Face 2.20% + $ - 2.32% + $ 0.10 - MC Commercial Card Changes 2.20%+ $0.10 2.70%+ $0.10 2.20%+ $0.10 2.20%+ $0.10 2.10%+ $0.10 2.00%+ $0.10

17. Visa Commercial Card This is not a complete description of all required data elements, but a high level overview NOTE: Dial Terminal and Host Capture applications cannot support Level III data transmission.

18. Visa Business, Corporate, and Purchasing transactions that are CPS qualified, however do not meet Level 2 data requirements, will no longer receive the Commercial Electronic rates. • These transactions will be eligible for the new Commercial Card CNP,Commercial Card Retail, or Commercial Card B2B rates. • Fleet Purchasing card fuel transactions will now be eligible for the new Purchasing Retail rate under certain conditions. • These changes to the Commercial card interchange fee structure should benefit a number of tax-exempt merchants currently receiving the Commercial Electronic rates. Visa Commercial Card Changes April 2007 (Non-T&E Merchants) .20 .10 Fee Purchasing Business Corporate .25 Program Current New Current New Current New Standard 2.70% + $0.10 2.70%+ $0.10 2.70%+ $0.10 2.70%+ $0.10 2.70%+ $0.10 2.70%+ $0.10 2.45%+ $0.10 2.40%+ $0.10 Electronic 2.20% + $0.10 2.20%+ $0.10 2.20%+ $0.10 2.20%+ $0.10 2.40%+ $0.10 2.25%+ $0.10 2.20%+ $0.10 CNP N/A N/A N/A 2.20%+ $0.10 2.20%+ $0.10 2.20%+ $0.10 Retail N/A N/A N/A 2.10%+ $0.10 2.10%+ $0.10 2.10%+ $0.10 B2B N/A N/A N/A 2.00%+ $0.10 Level 2 2.00% + $0.10 2.00%+ $0.10 2.00% + $0.10 2.00%+ $0.10 1.90% + $0.10 1.80% + $0.10 Level 3 1.70% + $0.10 N/A N/A N/A N/A NOTE – Increases in Electronic, Level II and Level III .10

19. Sample Transaction Costs:Interchange Expense Visa Purchasing Card: $500 transaction • Purchasing B2B Rate (Level I): $10.60 • Purchasing Level II Rate: $10.10 • Purchasing Level III Rate: $ 9.10 14% reduction in cost by processing Level III versus Level I data MasterCard Purchasing Card: $500 transaction • Purchasing Data Rate I (Level I): $13.35 • Purchasing Data Rate II (Level II): $11.75 • Purchasing Data Rate III (Level III): $ 8.75 34% reduction in cost by processing Level III versus Level I data

20. Level III Incentive Interchange Rates Case Study • Visa: 15% Purchasing, 16% Corporate, 69% Business • MasterCard: 11% Purchasing, 89% Corporate/Business • Merchant does Level I, but not Level II or III • Visa Commercial Card • $10,000,000 sales • 100,000 transactions • $100 average ticket • MasterCard Commercial Card • $7,500,000 sales • 75,000 transactions • $100 average ticket Visa FeesMC Fees MC Purchasing $22,688 (Data Rate I: 2.65% + $.10) Visa Purchasing$34,500 (Purchasing Retail: 2.20% + $.10) Visa Corporate $36,800 (Corporate Retail: 2.20% + $.10) V/MC Business $158,700 $183,563 (Business Retail/Data Rate I) (Visa: 2.20% + $.10, MC: 2.65% + $.10) TOTAL$230,000 $206,250 Current Effective Interchange2.30% 2.75% *Optimal Effective Interchange 2.07% 1.75% Interchange Improvement % 0.23% 1.00% Interchange Savings = $98,000 Visa Commercial Cards Corporate/Business Level II – 2.00% + $.10 Purchasing Level III – 1.80% + $.10 MasterCard Commercial Cards Corporate/Business Data Rate III – 1.75% Purchasing Data Rate III – 1.75%

21. Why Upgrade to Level III Support? • Retain current customers requiring Level III detail • Fortune 500 companies • Government • Universities • Gain new customers with competitive edge • Realize interchange savings opportunity • For MasterCard, Data Rate III (Level III) interchange is 58 basis points lower than Data Rate II (Level II) interchange and up to 90 basis points lower than Data Rate I (Level I) interchange! • Significant interchange savings opportunity available on Large Ticket commercial card transactions greater than $4,105 (Visa) & $7,272 (MasterCard)

22. Purchasing Card Usage:Buyer Benefits Streamlines the Purchasing Power Eliminates Paperwork Increases Employee Productivity Reduces Costs Provides Automated Controls Offers Customized Reporting

23. Card Acceptance:Supplier Benefits Increased Sales Volume Increased Productivity Improved Cash Flow New Sales Channel Less Paperwork to Process Enhanced CompetitivePosition Fewer Credit Approvalsand Collection Activities Customer Acquisitionand Retention Improved CustomerService Reduced Costs

24. Common myths to dispel... There are misperceptions and misunderstandings about Level III enhanced line item detail information for Commercial Cards... • Level-3 is hard for a supplier to implement • It’s expensive - the supplier will have to pay more to the banks and will just pass the cost along to buyer • Level-3 requires significant volumes to be worthwhile • The supplier has to write an interface directly to the processing bank OR, the related... • The supplier has to purchase expensive software in order to provide Level-3 data • The supplier only has limited need for this... Historically, there was some truth to these generalizations. For the last several years they have not been accurate and yet their persistence holds back many organizations from participating with enhanced data.

25. Credit Card Fees: What are you really paying ????????????

26. Effective Rate Calculations Per Item Effective Rate: • To convert a Per Item Fee into a %… 1) Take the total Per Item Fee and divide it by the Average Ticket 2) Multiply the result by 100 • This will assist in determining the effective rate for a transaction or converting from a “rate + transaction fee” model to a model “rate only” • Example 2: • Discount Rate: 1.95% + $0.25 • Auth Fee: $0.20 • Average Ticket: $75 • Effective Rate: • $0.45/$75 X 100 = .60% • 1.95% + .60% = 2.55% • Effective Rate 2.70% • Example 1: • Discount Rate: 1.95% + $0.25 • Average Ticket: $75 • Effective Rate: • $0.25/$75 X 100 = .33% • 1.95% + .33% = 2.28% • Effective Rate 2.28%

27. Some processors do not charge interchange fees as “pass through”, meaning that in addition to paying the surcharge on a downgraded transaction, they mark-up or “pad” the surcharge • Be on the look out for “hidden” or “padded” fees on your processing statement What is Padding? Processor AProcessor B (re-seller/ ISO) Swiped Transaction 1.75% Swiped Transaction 1.55% EIRF Transaction .76% EIRF Transaction 1.20% Total Total .44% Pad 2.75% 2.51% Processor AProcessor B (re-seller/ ISO) Swiped Transaction 1.75% Swiped Transaction 1.55% Keyed Transaction .31% Keyed Transaction .61% Total Total 2.16% .30% Pad 2.06%

28. Statements From Best to Worst Sometimes things are not as they appear

29. Best This one requires a little work. It does not show the downgrade rate, only the base rate; however, it gives all the information needed to calculate your rate as well as manage your Interchange. While it is not misleading, it could be improved by giving the downgrade rates as long as partial rates are not located in several places. This one is an overall favorite for the novice (98% fall into the novice category). We call this one a “Factual Statement” while it could give more facts, it does give all the necessary information without becoming the dangerous “Lawyer’s Statement”.

30. Best The transaction volume is $10.00 the adjustment amount .11is the surcharge from MC and passed on to the merchant. To calculate your percentage, divide the fee by the transaction volume 0.11 divided by 10.00 This shows the merchant the percentage they are paying for the Data Rate I downgrade .11%

31. Good Like the best statement it shows the number and volume of transactions which is crucial in managing your cost as well as your Interchange. What’s very dangerous is, at first glance, it looks like the merchant is only paying 1.95% + a ten cent transaction fee. After further review; the merchant is also paying a sales discount of .002200 as well as a Dues and Assessment fee of .000950 (on second page of statement not shown). Not counting the transaction fee can be a crucial oversight. The effective rate of 2.27% versus 1.95% is very misleading. This one is nicknamed the “Lawyer’s Statement” because they data dump to the point you can’t find the truth buried in the pile of evidence. This one is a favorite for those highly skilled in Interchange

32. Bad This one is nicknamed the “Political Statement”. It says a lot while saying nothing. It shows a ton of data while leaving out one key element - the downgrade transaction volume. With this missing you have no way to calculate your rate. Yes, it shows the base (contract) rate which is usually a lowball rate. Seeing how it is the only rate disclosed they typically give you a very low rate while making up their losses (and a whole lot more) in the non-disclosed rates on the downgrades (which usually make up the bulk of the merchants transactions). Transaction Volume

33. Worst This statement shows your rate but does not show the Interchange category (QUAL, MID-QUAL and NON-QUAL are not Interchange categories). In other words, you know how much you’re paying; you just don’t know for what.This is especially dangerous because you have no knowledge of how your transactions are qualifying (keeping in mind that Interchange makes up 92% of your cost). You can not improve when you don’t know what’s wrong. We call this the “No Comment Statement” because it tells you nothing.

34. Commercial Card Compliance • Merchants and processors have historically “enhanced” some of the commercial card data obtain better rates • The networks have the ability to edit on certain fields such as Customer Code, Sales Tax Indicator, Sales Tax Amount and Line Item Data • The Networks have begun active compliance efforts to ensure the integrity and validity of the data Merchants must insure that data submitted is valid and accurate.

35. Watch for hidden or padded fees in your processing proposals. Manage You Cost of Acceptance! • Many processors will surcharge or “pad” downgraded transactions and charge you higher fees! • Many processors do not have Level III solutions! • Keep an eye on your rates and fees and ensure your locations are properly configured on your processor’s system! Ensure you take advantage of the best interchange rates by processing Level III data. Review your merchant statements!

36. Convenience Fees Rules of Engagement

37. Convenience Fee Definition • Charged for a bona fide convenience in the form of an alternative payment channel outside the merchant’s customary payment channels. • Example: A face-to-face merchant allows customers the convenience of paying by phone or Internet. • Disclosed to the cardholder as a charge for the alternative payment channel convenience. • The fee must not be disclosed as a processing fee or fee to cover merchant costs associated with card acceptance. • Added only to a non face-to-face transaction. • Merchants who only operate exclusively in a MO/TO or Internet environment may not assess a convenience fee, as there is not an added convenience to pay through the current payment channel. General Visa rules as they tend to be the strictest

38. Convenience Fee Definition (cont.) • Added as a flat or fixed amount, regardless of the value of the payment due. • The fee may not be assessed as a percentage of the transaction amount. • There are certain exceptions to this rule for specific pilots in specific industries (e.g. tax, government, schools) • Applicable to all forms of payment accepted in the alternative payment channel. • The fee may not be assessed only to customers paying by debit or credit card through the alternative payment channel, but rather to any kind of payment accepted through that channel. • Disclosed prior to the completion of the transaction and the cardholder is given the opportunity to cancel. • Included as part of the total transaction amount, with the exception of certain industries like utilities and tax pilot General Visa rules as they tend to be the strictest

39. Convenience Fee Usage • Regulated Industries • Typically Utilities, not allowed to pass the cost of Interchange through normal costing methodologies • Convenience Fee often broken out separately • Un-Regulated Industries • Typically government, education, or other businesses who offer a non-traditional payment channel • Typical alternative channels include IVR, Website, etc. • Taxing Authorities • The networks have created special “pilot” programs for tax payments that allow percentage based convenience fees

40. Risk and PCI Payment Card Industry Standards… What Is It?

41. Types of Risk • Systemic Risk • Primarily Risk associated with large scale data breaches • Increasingly sensitive due to PR impact and potential for civil litigation • Often associated with organized crime and sophisticated IT “break ins” • PCI ( Payment Card Industry Data Security Standards) meant to address major challenges • Operational Risk • Normal fraud risk associated with individual transactions • Can often be prevented by operational best practices

42. PCI – Merchant Levels • Merchant Level 1 • Any merchant processing 6,000,000 Visa or MasterCard transactions per year, or identified by another card brand as Level 1, or compromised in the last year • Merchant Level 2 • Any merchant processing 1 million to 6 million Visa or MC transactions per year • Merchant Level 3 • Any merchant processing 20,000 to 1 million Visa or MC E-Commerce transactions per year • Merchant Level 4 • Any merchant processing less than 20,000 Visa or MC E-Commerce transactions per year, and all other merchants processing up to 1 million Visa transactions per year.

43. PCI ComplianceMerchant Compliance Validation

44. Key PCI Considerations • Do not store magnetic-stripe data after transaction authorization • Merchants must not retain full-track magnetic-stripe data on any of their systems once a transaction has been authorized. • Per PCI DSS requirements, merchants can retain only cardholder names, account numbers, and expiration dates. • Do not store PIN blocks after transaction authorization • Merchants should examine all transaction journals and logs to verify that their payment systems do not retain PIN block data – even if it is encrypted – after transaction authorization. • Avoid CVV2 Storage • When requesting cardholder CVV2 online or in mail order/telephone orders, merchants should not document this information on paper or store it in their databases after transaction authorization.

45. Key PCI Considerations (cont.) • Guard against SQL injection attacks caused by insecure shopping carts (primarily an E-Commerce phenomenon) • Test SQL vulnerability using automated tools or manual techniques • Ensure that all payment applications were developed using secure coding practices that included independent code reviews • Validate that all merchant payment software includes all applicable up-to-date security patches • Protect against remote access vulnerabilities • Implement a policy prohibiting group-shared passwords • Determine from your software vendor how to securely configure your payment application. • Never use vendor-supplied defaults • Visa encourages merchants to change vendor-supplied defaults – remove or disable features, set specific parameters, etc. – before installing payment application systems in your networks.

46. Fraud Best Practices for Merchant Protection (Card Present)

47. Check the card security features. • Hologram, matching 4 digits under embossed 4 digits, CVV2 value, etc. • Make sure that the card has not been altered. • Swipe the stripe. • Swipe the card through the terminal in one direction only to obtain authorization. • Check the authorization response. • Take appropriate action for the specific response: Quick Steps to Card Acceptance Approved Ask the customer to sign the sales receipt Declined Return the card to customer and ask for another Visa card Call your voice authorization center and tell the operator that you have a “Call” or “Call Center” response. Follow the operator instructions. Note: In most cases, a “Call” or “Call Center” message just means the card Issuer needs some additional information before the transaction can be approved. Call or Call Center Pick Up Keep the card if you can do so peacefully No Match Swipe the card and re-key the last four digits. If “no match” response appears again, keep the card if you can do so peacefully. Request a Code 10 authorization.

48. Quick Steps to Card Acceptance (cont.) • Match the numbers. • Check the embossed number on the card against the four digits of the account number displayed on the terminal. • Request a signature. • Have the cardholder sign the transaction receipt. • Check the signature. • Be sure that the signature on the card matches the one on the transaction receipt. If you suspect fraud, immediately make a Code 10 call to your voice authorization center.

49. Fraud Best Practices for Merchant Protection (Card Not-Present)

50. CNP Payment Acceptance Take these steps to accept Card Not Present payments: • Obtain an authorization • Verify the card’s legitimacy: • Ask the customer for the card expiration date, and include it in you authorization request. An invalid or missing expiration date might indicate that the customer does not have the actual card in hand. • Use fraud prevention tools such as Address Verification Services (AVS), Card Verification Value 2 (CW2) • Look for general warning signs of fraud • If you receive an authorization, but still suspect fraud: • Ask for additional information during the transaction (e.g., request the financial institution name on the front of the card) • Contact the cardholder with any questions • Confirm the order separately by sending a note via the customer’s billing address rather than the “ship to” address.