ricing merchant services is a complex undertaking. Even as an industry veteran, I have difficulty understanding competitors' statements. Ordinarily, my response would be to make the statements easier to read; however, the complexity of this information stems from card Association pricing and additional cost components associated with merchant pricing.

To understand why a merchant statement is so byzantine, examine the cost components an acquirer must contemplate. Although cost and price are not directly correlated, there is a dependency. When determining pricing, all acquirers must cover the following variable costs: interchange, assessments, base II fees, processor costs, the bank sponsorship fee, and sales commission/residuals. Acquirers also like to ensure that they will be compensated for overhead and merchant loss with something left over for profit.

Interchange categories vary greatly between the lowest and highest cost categories. Some categories have a per-transaction charge as low as $0.02 and they can go as high as $0.15. Acquirers must also price for assessments, which are paid to the card Associations (unlike interchange, which is paid to the issuing bank). Assessments are paid on gross volume and not refunded for returns or chargebacks. Although rebates are available, the basic fees are: MasterCard 0.0950% of gross volume, and Visa 0.0925% of gross volume. Assessments compensate the Associations for their marketing and overhead costs.

The Associations also charge Base II or "switch" fees, which pay for the backbone of the Association's switch network. The fees vary with volume and by Association, but they start at $0.0055 per transaction and are reduced for larger volumes. Processor fees differ the most between acquirers. The results of a study by Strategic Management Partners show how much processor costs can vary:

	Low	High
Front-end authorization costs	$0.02	$0.13
Back-end settlement Costs	$0.014	$0.10

This does not imply that front- and back-end costs can be as little as $0.034 because the best front-end authorization pricing does not necessarily get paired with the most favorable back-end settlement pricing. The point: processor costs vary and might cost more than $0.15 per transaction, excluding a per merchant maintenance fee. In the small-merchant market, front- and back-end costs typically range from $0.06 - $0.11. In addition to transaction fees, processors will charge for postage, account on file, statement preparation and report fees. They usually base these fees on the number of merchants on file each month; the fees range from $2.50 - $4.50 per merchant per month.

Non-bank acquirers pay bank sponsorship fees because only a financial institution can be a member of Visa or MasterCard. Sponsorship costs can be as low as $0.01 per transaction or as high as $0.05. Certainly, with more security breaches and the ensuing liability, I expect this cost to escalate. Whether salespeople are acquirer employees or independent contractors, the acquirer will pay them a commission on every sale. Commission programs are complex, but it's safe to say that competition has forced most acquirers to pay relatively the same amount.

Overhead and losses also vary greatly by acquirer. Both of these depend on the type of business to which the acquirer is marketing. This determines portfolio risk level, desired service level and amount of touch points required for securing merchants.

Because risk and reward are correlated, a higher risk portfolio should have more charge off/losses and require more maintenance. At the same time, merchant level salespeople should expect a more liberal underwriting policy, thus approving more merchant files.

Risk is typically measured in basis points (bps) and ranges from 2 -10 bps of gross volume. Overhead is measured in cost per month per merchant and ranges from $2.50 - $6 per month in a national portfolio and $6 - $10 per month in a small merchant portfolio. Putting all this information together results in the following complex breakdown of pricing:

Merchant pricing = interchange + assessments (0.095% or 0.0925%) + Base II fees ($0.0055 each or less) + transaction processor costs ($0.06 - $0.11/trans.) + monthly processor costs ($2.50 - $4.50 per merchant per month) + bank sponsorship fee ($0.01 - $0.05/trans.) + sales commission + risk fee (2 - 10 bps) + overhead ($2.50 - $10 per merchant) + profit

Perhaps this is why merchants complain that their statements are confusing. At HMS, not only have we acknowledged that our statements are complex, but we have created a piece for merchants titled "How to Read Your Merchant Statement." Unfortunately, this solution is easier than changing the Association and industry cost components.

Ken Musante is President of Humboldt Merchant Services. E-mail him at kmusante@hbms.com .