Paynetsecure Blog

Financial ratios are an important part of the underwriting of a high risk merchant account.  Financial ratios help determine the strengths and weaknesses of company operations and judge the stability of a company.  Here are a few of the most commonly used financial ratios in underwrting a high risk merchant account.

1.  Profitability ratios determine the use of assets and control of expenses to generate a rate of return.

• Gross profit margin = (Net sales – Cost of goods sold) / Net sales
• Return on Sales (ROS) = Earnings before interest and taxes / Sales
• Net profit margin = Net profits after taxes / Sales
• Return on investment (ROI) = Net income / Total assets
• Current ratio = Current assets / Current liabilities
• Acid-test ratio (Quick ratio) = (Current assets – Inventories) / Current liabilities

2.  Activity ratios measure how quickly a company converts non-cash assets to cash assets.

• Average collection period = Accounts receivable / (Annual credit sales / 360 days
• Average payment period = Accounts payable / (Annual credit purchases / 360 days)

3.  Debt ratios measure an organizations ability to repay long-term debt. Debt ratios measure financial leverage.

• Debt to assets ratio = Total liabilities / Total assets
• Debt to equity ratio = (Long-term debt + Value of leases) / Stockholders’ equity
• Long-term debt/Total asset (LD/TA) ratio = long-term debt / Total assets

4.  Market ratios measure investor response to owning a company’s stock and the cost of issuing stock.

• Payout ratio = Dividend / Earnings
• P/E ratio = Price / Earnings per share
• Price/cash flow ratio = Price of stock / present value of cash flow per share

These days everyone is using plastic to pay.  And that “everybody” includes corporations.  More and more corporations are making purchases on corporate or purchasing cards.  It’s a wise decision for the company since record keeping and account reconciliation is a breeze.

Corporate cards provide an additional level of data to the purchasing business, allowing them avoid the costly administrative process of creating purchase orders, while still providing the data they need to reconcile, control and track expenses for smaller ticket items.

Any merchant with corporate clients will find that accepting corporate credit cards is essential to satisfying the payment needs of corporate clients.  Merchants accepting cards save the cost of invoicing and get better control DSO (Days Sales Outstanding).  Contingent liabilities are minimized, collections are easy and invoicing procedures are shortened or eliminated all together.

Corporate cards require a payment processor accept as Level II and Level III cards.  The extra levels refer to the additional amount of data captured from the cards known as Level II and Level III data.

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A merchant said he had a sales rep approach him, show him the card not present rate on on interchange table and told him that’s what he would be charged for all internet transactions.  It looked like a pretty good deal to him.  What the sales agent didn’t tell the merchant is that there are over 90 interchange rates.

And, the sales agent didn’t reveal to the merchant that interchange is based in large part on the type of card that is used to make a purchase.  That is, what card the buyer is using.  There are endless types of cards that people use to make payments online.  Lots of people use rewards cards.  A rewards card is lined to accruing airline miles, cash back, or other types of rewards that the issuing bank offers in order to encourage buyers to use a particular card.  And the interchange rates for rewards cards are much higher than cards that are not linked to any reward.   In addition, corporate cards are also assessed higher interchange fees.

One of the complaints merchants have been griping about for years is that the card brands and banks are essentially subsidizing card reward programs through the use of higher interchange rates.  And there is certainly validity to that argument.

Instead of looking at interchange rates, merchants should look at the effective rate of processing.  This simple mathmatical calculation yields a much more useful number in determining how much is really be charged for processing.

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Ecommerce is a bright spot among the recent dreary US economic news.  The number of online transactions increased by 11% in 2009.   Ecommerce now accounts for 5.5% of total US  retail sales.

According to Javelin

• Ecommerce sales in the US were $205 billion in 209, compared to $185 billion in 2008.
• Although ecommerce increased in 2009, total retail purchases declined.
• Credit cards are still driving purchase volumes and per transaction values
• Credit cards use for online purchases declined in 2009, with many people using debit cards instead.
• Debit card usage continues to grow as people keep tighter reins on spending.
• Prepaid cards, gift cards and alternative payments will have the largest increase in compound growth in the next few years.
• Security is still of paramount importance to consumers when making online purchases.

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Despite all the negative news about the US economy, average credit scores for US consumers are still pretty good.  According to Credit Karma, the average credit score for U.S. consumers has stayed fairly steady, dropping only 8 points within the last few months.

The average credit score of US consumers now stands at 669.  Miami consumers have the lowest credit scores, with an average of 654, or 15 points below the national average.

Consumers lowered their credit card debt in January, 2010, decreasing debt 2% over December 2009.  The average credit card debt in January was $7,925, a decrease for from $8,079 in December 2009.  Consumers in four states – Kentucky, Minnesota, Oregon and West Virginia reduced credit card debit even more, decreasing amounts owed by 5%.

Ken Lin, Credit Karma’s CEO, predicted that credit scores will hold steady in 2010.   Lin believes people are getting a handle on their finances and have a greater sense of how credit scores affect their lives.

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American Express Company reported third-quarter income of $642 million, down 25 percent from $861 million a year ago. Diluted earnings per share from continuing operations were $0.54, down 27 percent from $0.74 a year ago.

Net income was $640 million for the quarter, down 21 percent from $815 million a year ago. Consolidated revenues net of interest expense was dropped 16 percent to $6.0 billion, down from $7.2 billion a year ago. Consolidated provisions for losses were $1.2 billion, down 13 percent from $1.4 billion a year ago.

The company’s return on average equity (ROE) was 11.7 percent, down from 27.8 percent a year ago. Return on average common equity (ROCE), was 10.4 percent, down from 27.6 percent a year ago.

U.S. Card Services reported third-quarter net income of $109 million, compared to net income of $244 million a year ago.  Total revenues net of interest expense for the third quarter decreased 16 percent to $2.9 billion, due to reduction in card member spending, lower securitization income, net and lower loan balances.

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Provisions for losses totaled $850 million, a decrease of 10 percent from $941 million a year ago. The decrease was due to lower loans and receivables. Total expenses decreased 11 percent. Marketing, promotion, rewards and member services expenses decreased 16 percent from the year-ago period, reflecting lower rewards costs and reduced investments in marketing and promotion.

International Card Services were brighter with reported third-quarter net income of $127 million, compared to $67 million a year ago.

Interchange fees are a percentage of each credit or debit card transaction paid by the merchant’s bank and paid to the card user’s bank Interchange makes up most of the fees that merchants pay to their banks for processing card transactions.

Issuing banks frequently use a portion of interchange fee revenue to encourage card use by offering cardholders rewards, such as cash rebates, airline miles, or other incentives. The more the card is used, the more rewards can be earned by card holders.

As payments by debit and credit cards have increased and become the preferred method of payment for most buyers, interchange fees have increased. As a result, merchants, essentially subsidize the issuing banks that make money both on interchange and from charging cardholders fees to use the cards.

For years, merchants have complained that interchange fees are unfair. Merchants allege that interchange allow banks, which would normally compete on fees, collude on fees instead.

Banks say if merchants do not want to pay interchange fees, merchants can chose not to offer cards as a payment option. Merchants counter that not accepting cards is no longer a viable option because buyers expect to cards to be accepted everywhere. As a result, merchants claim interchange rates can be set artificially high leading to excessive profits for the card issuing banks and are punitive to the merchants footing the fees.

There are some excellent payment processing providers that offer good merchant account services.

United Airlines has terminated some travel agents’ right to process credit card transactions through United Air Lines merchant accounts. For travel agents selling United Airline tickets, the termination is a shockwave which will drive down profits and threaten business operations.

The termination will force the travel agents to absorb credit card processing merchant fees and shoulder the burden for potential chargebacks. That is, if the travel agent can even get its own merchant account or get an account with a volume high enough to accommodate ticket sales.

Travel agents also have to modify back office, mid-office, front office and consumer facing booking tools. Reprogramming all the systems is a big expense and takes time to do.

Travel agents usually access merchant services through the Airlines Reporting Corporation’s (ARC) Travel Agent Service Fee (TASF) program. However, this program processes service fees, not airline tickets. ARC has a $500 limit on transactions processed through the TASF program. Even agents with their own merchant accounts are at risk to lose their merchant status with a substantial increase in average transaction price.

High risk merchant accounts are still available for the travel industry.