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Table of Contents

Lead Story

Checks have staying power, paper not so much

Patti Murphy
ProScribes Inc.


Industry Update

Public, private effort to secure systems, reduce cyber crime

Appeals court revives ATM price-fixing case

Appeals court gives green light to CFPB challengers

First Data opens new chapter


Bridging the EMV divide

The Mobile Buzz: Diners' technology wish list


The very point of sale: Think big, go bold

Dale S. Laszig
DSL Direct LLC

Impact of scale on cost and margin in the U.S. merchant acquiring industry

Brooke Ybarra
First Annapolis Consulting


Street SmartsSM:
The power of residual income - Part 1

Jeffrey I. Shavitz
TrafficJamming LLC

Who wins with AmEx full-service acquiring program?

Ken Musante and Jon Shipley
Eureka Payments LLC, Select Bankcard LLC

Legal ease: Choosing a lawyer for your payment business

Adam Atlas
Attorney at Law

Endemic lack of protection for card data in stores

Brand Barney

Company Profile

AP Technology

New Products

Free online security learning center

SecurityMetrics Learning Center

Business-driven video storytelling

Video Storytelling
Board Studios Inc.


The 'do' in the doldrums


Readers Speak

Letter from the editors

Resource Guide


A Bigger Thing

The Green Sheet Online Edition

August 24, 2015  •  Issue 15:08:02

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A reprint from the First Annapolis Navigator, July 2015 edition.
Impact of scale on cost and margin in the U.S. merchant acquiring industry

By Brooke Ybarra

Editor's Note: This article was first published in the First Annapolis Navigator, July 2015 edition. Reprinted with permissions. Copyright © First Annapolis Consulting. All rights reserved.

As competition in acquiring increases, cost is one variable over which acquirers have some measure of control. Conventional wisdom is that acquirers benefit from scale economies. We have found that premise to be true, to a point, but cost alone does not explain or predict an acquirer's success. Moreover, scaled acquirers may be approaching an end-game on scale efficiency, suggesting the largest players will need to find variable cost reductions or employ differentiated strategies (or both) in the face of increasing competition.

Managing to a low cost structure is not the definitive element in competition in acquiring, but it is true that acquirers generating higher profit margins tend to have lower expenses on a per transaction basis (see Figure 1). Although the highest profit margins are frequently associated with low cost players, high cost acquirers have also been able to generate attractive profitability.

Figure 1: Relationship between expense and profitability (benchmarks from 2009 – 2015)

Returns on Net Revenue

Source: Acquirer financial statements, First Annapolis Consulting research and analysis.

Our analysis indicates there is a correlation between cost per transaction and scale (see Figure 2). Among our sample, the range between the lowest and highest cost provider decreases as scale increases, suggesting there are fewer outliers among larger acquirers, and the simple average expense per transaction is higher for small acquirers than large acquirers.

Figure 2: Relationship between expense and scale (benchmarks from 2009 – 2015)

Annual Volume (in billions)

Source: Acquirer financial statements, First Annapolis Consulting research and analysis.

The nature of expense in acquiring (whether fixed or variable) varies based on certain business decisions the acquirer makes. For example, an acquirer that has transaction processing platforms and technology in-house incurs expense through a series of technology investments and recurring maintenance costs that are largely fixed, whereas an acquirer that contracts with a third-party processor for transaction processing likely has more variable technology expenses.

It tends to be the largest acquirers that can support the large, one-time investments required to in-source processing, and the ability to spread these fixed costs over a large base of transactions contributes to the scale economies shown in Figure 2.

Expenses associated with sales, boarding, customer service, and back-office functions tend to be driven by headcount and are variable costs. However, there are capacity considerations inherent to these functions that benefit scaled players as well.

There is a wide range of expense structures among smaller acquirers, likely reflecting the various operating models employed by ISOs. Most ISOs with less than $20 billion in annual bankcard volume outsource processing, but their models vary in terms of what other functions they rely on their processors to perform (e.g., underwriting and customer service). In addition, they vary in their lead-generation practices, and some incur incremental variable costs from referral sources in addition to traditional sales expenses.

Increases in scale at a given acquirer tend to benefit that acquirer from a cost perspective. Though there are exceptions, as shown in Figure 3, most acquirers experience a decrease in expense per transaction as they increase scale. The decrease in expense per transaction is more pronounced for smaller acquirers than for larger acquirers, suggesting there may be a floor for fixed expense per transaction.

Figure 3: Relationship between expense and scale changes

 Relationship between expense and scale changes

Source: Acquirer financial statements, First Annapolis Consulting research and analysis.

This analysis confirms that there are advantages for acquirers to manage to a low cost structure. One way to achieve a low cost structure is to gain efficiencies from scale. This method is more effective for smaller acquirers, as there appears to be a floor to the cost structure gains an acquirer can experience through scale. When that limit is reached, acquirers will need to seek other cost efficiencies, such as lower variable costs, in order to further reduce their expense per transaction.

For more information, please contact Brooke Ybarra, Manager,, specializing in Merchant Acquiring.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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