The Green Sheet Online Edition
December 12, 2021 • 21:12:02
Knowledge is (still) power
In 1997, long-time industry leader Robert O. Carr expertly summarized the costs behind payment processing. The series, titled Knowledge IS Power, was published in this magazine. Carr summarized each individual cost component and delineated the fees by category. This was powerful information. At the time, most merchants were on tiered or bundled pricing, and many ISOs and agents were not privy to the cost drivers.
Cost drivers
Given the passage of time, I thought it appropriate to update our arsenals within the existing landscape. Payment processing cost drivers are sponsorship fees, interchange, card brand fees and processor fees. Following is a summary of each.
- Sponsorship fees: Only card network members may sponsor an ISO or third party. Merrick Bank is a member. Fiserv, Paysafe, Humboldt Merchant Services and Square are not; they all require a member bank to sponsor them. Visa and Mastercard allow only financial institutions to be members and to register third parties. A member bank makes a fraction of a basis point, or a fractional cent, from each transaction. This fee is the smallest among the four components, and is always present, even when the processor is also the bank.
- Interchange: Interchange is the single largest cost component for every acquirer, but it differs based on card type, card method, MCC and data submitted with the transaction. This fee is paid to the issuing bank for extending the risk and funds (for credit) to the cardholder. It is reversed in the event of a chargeback or credit but at the credit voucher rate, not the rate it was cleared at.
Visa, Mastercard, Discover, American Express and the PIN debit networks each have their own interchange schedule. Visa and Mastercard’s are available at vi.sa/3FbGpFE and bit.ly/3meZorh, respectively. Because they do not publish their Associated Interchange Qualification guides, the schedules lack the "decoder ring" needed to properly assess, in advance, how transactions may qualify.
Interchange incentivizes issuing banks to issue cards. Visa and Mastercard compete by raising interchange to encourage more issuers to issue their product. Issuers relish interchange increases; acquirers abhor them. As this is the single largest cost component, you can see why so many attempt to circumvent the card networks in their quest for a more efficient payment method. Interchange will ultimately be the demise of the card networks.
- Card brand fees: When Carr wrote his articles, card brand fees were "assessments." Today they comprise a host of fees including penalty, cross-border, non-compliance, authorizations, volume and usage fees. Fees may be annual, monthly, volume-based and/or authorization based. They are paid to the card networks and are not reversed when credits occur. While some large members have negotiated special dispensations and, at the margin, some of the components are volume based, these fees are largely identical for all acquirers. They have risen substantially since Visa and Mastercard became publicly traded, for-profit enterprises. Wells Fargo Bank summarized these fees as of October 2021 here: bit.ly/3F6L.
- Processor fees: Because so much of a transaction's cost is preordained as described herein, even the smallest ISOs can effectively compete. Processor fees have the greatest variability and are volume dependent. They have several sub-components: front-end costs, back-end costs, chargeoffs, operational costs and profits.
Front-end or authorization costs are for routing and adjudicating each transaction. They include end-to-end encryption and telecommunication costs for each authorization. They may include gateway costs. Back-end costs are processor fees for maintaining merchant accounts. Statement processing and merchant portals are included as well as settlement processes.
Chargeoffs are losses processors may take and correlate to the type of merchants boarded. Operational costs include staffing costs, FF&E, R&D, rent, telecommunications, capital expenditures, professional fees, marketing, and other costs needed to support a processors' operations. Profits or losses are what is left over..
When examining a Schedule A, recognize that all these fees are included. Some ISOs bundle certain fees; others itemize each. Regardless, know how they will impact your residual. Despite all the changes to transactional costs since 1997, one constant remains: “Knowledge IS Power.” 
As founder of Humboldt Merchant Services, co-founder of Eureka Payments, former executive at WePay, and founder of Napa Payments and Consulting, Ken Musante has experience in all aspects of successful ISO building. Contact him at kenm@napapaymentsandconsulting.com, 707-7656 or www.linkedin.com/in/ken-musante-us/.
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