By Ken Musante
Napa Payments and Consulting
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.
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.
Visa, Mastercard, Discover, American Express and the PIN debit networks each have their own interchange schedule. Visa and Mastercard’s are available at https://vi.sa/3FbGpFE and https://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 Because they do not publish their Associated Interchange Qualification guides, the schedules lack the "decoder ring" needed to properly assess, in advance, how transactions may qualify.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.
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 firstname.lastname@example.org, 707-7656 or www.linkedin.com/in/ken-musante-us/.
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