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SR-04-28-2015-3ECity it Report City of Santa Monica City Council Regular Meeting: April 28, 2015 Agenda Item: 34 To: Mayor and City Council From: Gigi Decavalles- Hughes, Director Subject: Merchant Account Processor Services -un•t!-! : .1 Staff recommends that the City Council: 1. Award RFP# 13 to TransFirst Health and Government Solutions, LLC, a Kansas based company, to provide merchant account processor services for credit card payments by members of the public to the City for fees and services; 2. Authorize the City Manager to negotiate and execute a contractual service agreement with TransFirst Health and Government Solutions, LLC for five years, with one additional three -year renewal option on the same terms and conditions, for an estimated total amount of $12.4 million over a five -year period, with future year funding contingent on Council budget approval. Executive Summary TransFirst Health and Government Solutions, LLC (Transfirst) has been providing merchant account processor services to the City since 2003. As a third party merchant processor, Transfirst performs the tasks associated with the processing of credit card transactions between the City, the credit card companies (Visa, MasterCard, Discover, etc.), and the financial institutions that issue the credit cards. The current contract with Transfirst has been in place since 2010 and expires in June 2015. Based on evaluation of responses to the RFP, staff recommends Transfirst as the best qualified firm and that the City negotiate a five year contract with one three -year renewal option in an estimated amount of $12.4 million for the initial five year term. The actual contract amount will vary based on credit card usage and interchange fees charged by the credit card companies and assumes annual increases of 5.5 %. Background TransFirst Health and Government Solutions, LLC, has provided credit card processing services under agreement with the City since 2003. The City's current contract with TransFirst (8886 CCS) was authorized by Council on January 19, 2010 (attachment A). The contract provided a term of five years. On March 19, 2013 (attachment B), Council 1 of 6 approved a first contract modification which increased the contract amount by $3,000,000 and resulted in an amended five -year agreement for a total amount not to exceed $6,350,000. On September 23, 2014 (attachment C), Council approved a second modification, increasing the total amount by $1,000,000, and resulting in a five - year amended contract with a new total amount not to exceed $7,350,000. The large increases reflect the growth in credit card usage, particularly in parking with the installation of parking meters that accept credit cards. On February 10, 2015 (attachment D), Council approved an extension of the contract term through June 2015 and increased the contract amount by $800,000, for a new total not -to- exceed amount of $8,150,000. The last extension allowed staff time to complete a competitive RFP process for selection of a merchant account processor. This contract does not include credit card processing fees from separate contracts with Activenet, for the Community and Cultural Services reservation and billing system, and with American Express, which together account for approximately $0.5 million in fees paid annually. Discussion As the City afforded members of the public the ability to pay for a broader variety of fees and services online, over the counter, by telephone and by mail using credit cards, the volume of credit card transactions has increased significantly. The City processes over 8,000,000 credit card transactions per year, an increase of 2,150% since the contract with Transfirst was executed in 2010. The primary reason for the increase is the installation of over 6,000 parking meters that accept credit cards for payment. Parking - related transactions now account for approximately 98% of total credit card transactions. The fees paid by the City are a combination of the fee charged by the merchant processor and interchange fees assessed by the credit card companies (Visa, MasterCard, Discover). The interchange fees are passed through by the merchant processor and represent the major component of fees paid by the City, accounting for approximately 93% of total fees. Interchange fees differ based on variety of factors including the credit card company, the type of card (e.g. rewards card, business card, etc.), and other elements including transaction size, with smaller transactions incurring a higher charge as a percentage of the transaction amount than larger transactions. 2 of 6 Parking - related transactions, which account for 98% of total credit card transactions, tend to be small and therefore incur a higher amount of processing fees as a percentage of the actual transaction amount. For example, credit card fees for parking meter transactions average about 10% of the amount of the transaction. The fees for other parking - related charges average about 5% of the transaction amount. Fees for non - parking - related transactions average less than 2% of the transaction amount. The interchange fees are updated twice per year by the credit card companies. The City has no control over the amounts of these charges. Vendor /Consultant Selection On November 06, 2014, the City published a Request for Proposals (RFP #13) for merchant processor services. The RFP was posted on the City's online bidding website and notices were advertised in the Santa Monica Daily Press in accordance with the City Charter and Municipal Code provisions. A total of 190 vendors were notified and 29 vendors downloaded the bid; the City received eight proposals (Bank of America Merchant Services, Bank of the West/Elavon, JetPay Corporation, JP Morgan Chase, Kubra America West, Inc., TransFirst Health and Government Solutions, LLC, U.S. Bank Payment Solutions /Elavon, and Wells Fargo Bank). An evaluation panel composed of representatives from the Finance and Information Systems departments reviewed and ranked the proposals using the criteria set out in the RFP (i.e. financial stability of the firm, PCI -DSS compliance, online reporting, vendor's ability to meet operating requirements, conceptual plan, experience and qualifications, and pricing). Staff thoroughly reviewed and analyzed each proposal, looking for ways to improve efficiencies, reduce costs, and take advantage of new technologies. The panel short- listed three firms to participate in an interview process; TransFirst Health and Government Solutions, LLC, U.S. Bank Payment Solutions /Elavon (U.S. Bank), and Wells Fargo Bank (Wells Fargo). After the interviews were conducted, staff selected Transfirst as the best qualified firm. Although Transfirst's proposed processing service fees were the second lowest of the three finalists, staff believes that Transfirst provided the best response in terms of meeting the RFP requirements including the quality and scope of services offered. A major factor in the selection involved the creation and maintenance of interfaces or connections between various third party payment platforms (both on -line and face -to- 3of6 face) that the City uses to accept credit card payments. Some examples of interfaces are payment platforms in the Library, parking, and utility billing. During its contract term with the City, Transfirst has worked directly with these third party entities to create the necessary connections /interfaces at no cost to the City. Selection of a new vendor would require reestablishing these connections, and neither of the other bidders could commit that these connections /interfaces could be established without a cost impact on the City. Next Steps Staff will examine potential ways to mitigate the huge burden of credit card fees that has developed over the last several years. As noted above, nearly all of the fees paid relate to interchange fees. Several years ago, antitrust legal action was brought against MasterCard and Visa claiming that they conspired to fix interchange fees. A preliminary legal settlement was reached, but the final order has not yet been approved. One of the provisions of the preliminary settlement agreement required MasterCard and Visa to negotiate with buyer groups on the amount of interchange fees, something the two firms have never been willing to do. Staff will explore the possibility of forming a buyer group with other jurisdictions for the purpose of attempting to negotiate the interchange fees. Other options to be considered will include: ® Establishing a "convenience" or "service" fee to be applied to certain types of credit card transactions, which would have the effect of passing a portion of the fees on to the service user; ® Setting maximum or minimum amounts for the use of credit cards; and ® When setting rates, particularly for parking, ensure that the cost of credit card fees is considered. Payment Card Industry (PCI) Compliance Merchants that accept credit cards for payments are subject to strict compliance standards referred to as PCI data security standards (DSS). There are four different PCI DSS levels, each with specific compliance validation requirements. The levels are based on the annual volume of transactions with higher levels (based on higher volume of transactions) requiring more stringent validation requirements. The City has been notified that it is now in PCI Level 2 and could soon be in PCI Level 4of6 1, mostly due to the large number of parking - related transactions. Entering these levels will require the City to take additional actions which will likely require contracting with a third party to conduct required annual security assessments. These actions will most likely result in additional expenditures not currently budgeted and not part of the merchant services contract discussed here. Staff is in the process of researching these requirements and will return to Council at a later date with a recommended course of action. 5of6 Financial Impacts and Budget Actions The contract to be awarded to Transfirst is for an estimated amount of $12.4 million over the initial five year term of the contract. Funds are available in the FY 2014 -15 budget in the Finance Department, and the contract will be charged to account numbers 01221.522230 (general credit card charges) or 01224.556010 (utility billing credit card charges) for the remainder of FY 2014 -15. Future year funding is contingent on Council budget approval. As part of the proposed FY 2015 -17 biennial budget, staff will propose to allocate credit card charges from non - General Fund operations to the appropriate fund. This would save the General Fund $100,000 4200,000 annually. Prepared By: David Carr, Assistant City Treasurer Approved Forwarded to Council L., - gi Decavalles- Huoes, irectoi4/14/2015 Attachments: A. January 19, 2010 Staff Report B. March 19, 2013 Staff Report C. September 23, 2014 Staff Report D. February 10, 2015 Staff Report Elaine M Polachek, Interim City M9 WO6r15 - Reference: Agreement No. 10053 (CCS)