By Ken Musante
Humboldt Merchant Services
Pass-through pricing is ever more prevalent. Once reserved for only the largest accounts, it is now being used regardless of merchant size. Mean-while, interchange is growing more complex.
New and evolving tiers are being applied to narrow vertical segments established to increase volume from specific merchant types, as well as to encourage specific transaction formatting from many merchant types. Examples include:
At the same time, interchange categories for reward and commercial cards are being expanded to encourage volume by certain cardholders such as high-end consumers. The Visa Preferred Card, for example, has interchange as high as 2.70% + $0.10.
Commercial and business cards have also seen new interchange categories. With slowing growth in the consumer rewards segment, Visa Inc. and MasterCard Worldwide are seeking other growth areas. Hence the push into the affluent end of the consumer market, as well as the increase in business and commercial cards.
The result of the increase in pass-through accounts and additional interchange tiers is an increasingly complex merchant statement. Also, because pass-through pricing mandates that all interchange categories be placed on statements (to show what the pricing is marked up from), merchant statements are lengthening to support the increase in categories.
True pass-through pricing passes on actual interchange and assessments plus an authorization fee. The markup above interchange is fixed, regardless of the interchange category.
This assists merchants in knowing an acquirer's margin is reasonable, regardless of card type or interchange category. Unfortunately, little financial incentive exists for acquirers to assist merchants in optimally routing transactions, but they do know that whatever interchange category a transaction falls into they will make a set margin, including transactions in new categories. Some acquirers have morphed pass-through pricing into a model that further marks up downgrades and has variable authorization costs, depending on interchange category. I expect to see more of this type of pricing as margins are compressed in tandem with the shift away from tiered pricing.
In addition, both Visa and MasterCard have network or acquirer surcharge fees. For Humboldt Merchant Services, these range from $0.0001 to $0.005 per item. The weighted average cost is $0.00329. Fees are paid directly to Visa and MasterCard and are in addition to assessments.
While these fees have always existed, they are a small percentage of overall transaction costs and not typically broken out of pass-through pricing. Even worse, effective April 17, 2009, MasterCard will increase its network access fee to $0.0185 per domestic acquired financial detail record. This is a huge increase (to 1.85 cents) and can no longer be ignored when pricing merchants - especially small-ticket retailers.
Additionally, Visa introduced a new acquirer fee called the Visa International Service Assessment fee. It is charged on all non-U.S.-initiated card transactions and is 40 basis points of cross-border volume. MasterCard has a similar fee, but there are three components as follows:
| Fee name | Basis points | Acquirer cross boarder fee | 40 |
| Credit for settling in U.S. dollars | (10) |
| Acquirer program support fee | 45 |
| Total for U.S. acquirer | 75 |
Such fees are over and above interchange and may or may not be priced into pass-through pricing. HMS' total cross-border fees add up to over 4 basis points of processing volume.
In a business with margins shrinking faster than polar ice caps, shouldn't we ensure these fees are recovered? After all, most of us have wording in our pass-through contracts to allow the collection of such fees from merchants. The margins on pass-through pricing are not sufficient to absorb this added cost.
Pass-through pricing is appropriate for many merchants. It is growing in popularity due to competitive pressure and the complex interchange structure. And it allows acquirers to earn a fixed margin regardless of the merchant's processing selections - provided, however, acquirers are indeed passing through all fees.
Ken Musante is President of Humboldt Merchant Services. Contact him by e-mail at kmusante@hbms.com or by phone at 707-269-3200.
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