By Ken Musante
Eureka Payments LLC.
Before e-commerce merchants existed, transaction aggregation was called factoring and was against the card-brand rules. It worked like this: one merchant processed transactions through another merchant's account, often paying the accountholder merchant a fee of 10 to 25 percent of the amount processed.
Businesses would pay this exorbitant rate either because they could not get accounts of their own or their chargebacks and returns were expected to be enormous. When returns and chargebacks came in, unsuspecting accountholders had to pay up – and often landed on the MATCH report, unable to get accounts themselves.
With the rise of e-commerce, aggregation became increasingly common despite the rules, which still prohibited it. Merchants were processing for other businesses; some even incorporated the practice into their business plans. The card networks couldn't keep up with the changes ignited by e-commerce, and when entities like PayPal Inc. stormed to the fore, they saw the need to regulate rather than prohibit aggregators.
Today, both major card companies have rules for aggregators. MasterCard Worldwide calls such entities "payment facilitators." Fortunately, Visa Inc. abandoned its "payment service provider" moniker in favor of "payment facilitator." Large and small payment facilitators must adhere to the same rules, despite the appearance that some "super" payment facilitators have their own set of rules. (I cannot attest to how they are regulated, merely that there isn't a separate set of rules, regardless of size.)
Generally, payment facilitators are merchants who:
In addition, sponsored merchants must not exceed $100,000 in either Visa or MasterCard volume annually (exceptions can be granted).
Payment facilitators perform services a regular merchant would normally have to handle, such as web development, integration and customer service. While this limits the work performed by sponsored merchants, they are forced into the confines of their payment facilitators. This works well for specialized merchant types such as elementary school registrations and school meal plans. Individual schools or sponsored merchants don't have to build their own payment modules or integrate payments into their websites. Nor do they have to independently attain Payment Card Industry Data Security Standard certification, which is done at the payment facilitator level.
In turn, they pay slightly higher variable fees but work with larger entities that deeply understand their business types and build modules and service plans tailored to the sponsored merchants' customers. Additionally, a sufficient number of elementary schools have a combined volume that payment facilitators find attractive. Although these merchants typically pay higher variable fees, they pay lesser monthly fees.
Sponsored merchants are meant to be smaller merchants, as they are restricted to only processing $100,000 per card brand annually. Consequently, they will gladly trade off a higher variable rate in exchange for a lower monthly fee, especially if they can ignore all the other requirements associated with a standard merchant account. It is less expensive for a payment facilitator to manage a sponsored merchant because the payment facilitator typically only provides an electronic statement and does not have to provide a form 1099-K to smaller sponsored merchants. Because of these reasons and because of the fee structure heretofore imposed by the card brands, payment facilitators have had a lower fixed cost structure to maintain sponsored merchants than traditional acquirers have had.
Thus, some payment facilitators do not charge sponsored merchants a monthly fee. The absence of this fee is one advantage offered by larger payment facilitators, like Square Inc. Traditional merchants, however, typically pay a monthly fee from their acquirer and a fee from Visa called a Fixed Acquirer Network Fee (FANF).
Visa implemented the FANF in 2012, and single location card-present merchants – defined as merchant account(s) with the same federal tax identification number and at the same physical location accepting card-present transactions – had a maximum FANF of $2.90. The FANF for card-not-present merchants, however, is more complex and scales upward in accordance with volume. (See accompanying chart.)
The FANF is meted out at the transaction level. If a single restaurant processes $1 million per month in card-present Visa volume and $100,000 per month in card-not-present Visa volume, its FANF would be $45 for card-not-present activity.
It would be impractical for a payment facilitator to only have card-present transactions, so in reality, the FANF would be more than $2.90 for any single payment facilitator, but it would be far less than the sum of FANFs if each of its sponsored merchants were charged individually. Even if the payment facilitator were completely card-not-present, the maximum current FANF would be $40,000 per month for Visa volume in excess of $400 million per month.
Unfortunately, according to an April 15, 2014, Digital Transactions article by John Stewart, FANF is set to change. Beginning in April of 2015, it will be based on merchants or sponsored merchants individually by their tax ID numbers. Payment facilitators will no longer aggregate their volume to determine FANFs. The smallest card-present and card-not-present merchants and sponsored merchants, processing less than $200 in Visa volume, will not incur FANFs.
This is a monumental impact on the systems and costs of payment facilitators and their sponsored merchants. Because FANFs will now be based on sponsored merchants' tax ID numbers, payment facilitators will now incur separate FANFs for every sponsored merchant processing in excess of $200 monthly Visa volume. Further, payment facilitators will need to report volumes by tax ID and MCC.
I anxiously await the public forecasts from Visa to determine estimates of the increase in its revenues and corresponding increase in costs to payment facilitators. Until then, I expect payment facilitators will adjust their pricing to align with their cost structure, which unfortunately, with the stroke of a pen, indelibly shifted.
Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at firstname.lastname@example.org. For more information, visit www.eurekapayments.com.
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