One of the biggest costs for any hotel, especially full service properties, is credit-card processing fees. Some owners process through the brand platform, others use their bank, or they let the management company choose the processor.

Joel Ross

What few at the merchant level understand is that it is not the transaction fees, or even the quoted interchange fee that are the keys to savings. It is the way transactions are processed by the processor’s interchange software platform that accounts for most of the real expense. It is all about how the processor handles each transaction, and if it is downgraded, classified incorrectly or reclassified.

The decision on downgrades and reclassifications are made by the processor’s interchange platform at the time of the transaction. For example, in one major casino, the software was set so that when a guest checked out through the TV, the transaction was labeled as “card not present,” even though the card information was at the front desk at check-in. The transaction was, therefore, downgraded and the interchange fee was significantly higher than it should have been. The cost to the casino for just that minor downgrade was US$132,000 per month in excess interchange fees, but the casino never knew it. The new processor discovered this, and made a minor software adjustment at the casino and eliminated this fee. This helped the casino increase cash flow US$1.5 million per year.

It is not what you think you are being charged it is what you are really being charged that matters. The real costs often are intentionally difficult to decipher when the monthly statement arrives. Transactions get downgraded or reclassified for a wide variety of reasons, and unless you are a real expert at analyzing the statements, you will not see it.

There are actually more than 500 different levels of interchange fees. In a hotel there can be different fees depending if the transaction is the front desk, the restaurant, the gift shop or spa. A customer can charge his room, but if he has a change of home address or some other minor item related to his card account, then the merchant might get charged a higher downgrade fee because the information does not perfectly match up at the processor.

Some processors are the real issuers of those bank cards in your wallet, not the bank. Some processors who are major card issuers use that information to clear the downgrade. Others do not. If the front desk clerk manually inputs the card number instead of swiping, that is a downgrade and results in higher fees for every transaction by that guest during his stay. There are all sorts of these hidden changes to the interchange fees that you never see.  You are told you are paying 1.84 percent or whatever, but that is not the effective rate when all the reclassifications and downgrades are run through your system. It may really be 2.2 or some other amount. These 35 basis points equal $.35 for each US$100 of credit card purchases. In short, it is thousands, if not hundreds of thousands, of dollars per year hit to your cash flow depending on the size of your hotel and what type of property.

Some brands require you to process through their platform which is really their contracted interchange company. Just be aware that the brand may or may not be doing the processing themselves in many cases. They are contracting the processing out to a third party who is doing the actual transaction processing. You may or may not be getting the best credit card charges when this happens. You have no control over what is happening.  What may sound like a deeply discounted transaction fee may not be the overall lowest total cost that you could be paying when all downgrades, additional fees and other interchange reclassifications are taken into account.  It all depends on who is actually doing the processing, and how their platform handles the information when the card is entered into the system.

Security

Another major issue is security. For many, the full credit card information stays on-site at the front desk and in the accounting department for any dishonest employee to see and for hackers to grab. This happened last year when a number of hotels of one brand got hacked. There is a program called tokenization, which upon the original card swipe transmits the card information off-site.  Hotel employees only have a randomly computer generated 16 digit number with no details. There is nothing the criminal can do with this number if it is stolen or hacked it is worthless to the thief. Some processors offer this program.

For multiple-property owners, there is a substantial amount to be saved. These savings are available if you fully understand how the credit card processing system really works. You will be told you are getting a deeply discounted fee, but that is not the real issue. The real issue is how the transactions are processed. Since the savings results in dollar-for-dollar increases in cash flow with zero capital or other costs to the owner, the value increase is potentially 10 times that, assuming a 10-percent cap rate on NOI.  The benefit of the right credit card processing is increased cash flow and additional value to the owner, at no additional cost. This is likely the easiest and most readily available savings to capture in 2010.