By Ken Musante
Eureka Payments LLC
It has always been difficult to manage entities that transmit, process or store card data. Often acquirers are not aware of all the parties touching the data. Nonetheless, they are responsible for managing third parties, regardless of whether they have contractual relationships with those entities.
Recent pricing changes from Visa Inc. will increase the costs for most acquirers for managing these relationships. This could cause some acquirers to limit the number of third parties they work with, as well as increase the number of unregistered entities.
Currently, both Visa and MasterCard Worldwide have registration programs for third parties that touch card data, even if those parties have not established relationships with acquirers. Payment gateways, shopping carts and hosting sites are examples of such companies. MasterCard refers to these entities as Third Party Processors (TPPs) and classifies them as Type 2 TPPs. Visa refers to these entities generally as Third Party Agents (TPAs), but specifically as Merchant Servicers (MSs).
Both card brands require that acquirers register these third parties, but their fee structures differ. MasterCard doesn't require a fee for Type 2 TPPs. Currently, Visa requires all parties utilizing TPAs to register each TPA. But it only requires a fee from the first acquirer registering a given TPA. The first acquirer pays both the initial fee and the annual renewal fee.
Visa's system created inequities. As a result, the company is changing its fee policy, effective Nov. 1, 2013. The change is being implemented for many TPA types, but this article focuses on the MS category, which includes payment gateways, shopping carts and hosting companies.
The change in Visa's registration fees – for the MS category – are as follows:
Current Initial – first acquirer only $5,000 Renewal – first acquirer only $2,500
Effective Nov. 1 Initial – all acquirers $1,000 Renewal – all acquirers $1,000
Under the current system, each acquirer would rather not be the first to register a TPA. Those that wait don't need to worry about billing. Also, some acquirers can unknowingly become responsible for an annual fee. This occurs when the first registering acquirer either no longer wishes to continue registration or when the first acquirer is purchased by another company. The second acquirer automatically becomes responsible for the annual fee and may not have established a contractual ability or procedure to bill the TPA.
Many acquirers will work with unregistered TPAs, as long as the TPAs are listed as Payment Card Industry Data Security Standard compliant. However, this does not comply with card network rules. Should an issue occur at a TPA, the card networks want to know which acquirers are affected so they can fully address the situation.
Going forward, it will be even more costly for most TPAs and acquirers to comply with Visa's rules.
Perhaps a better way to incent compliance and enhance revenues would be to eliminate the initial registration fee and lower the renewal amount to a nominal level, while having a stated fee schedule for noncompliance. Though no one wants to build a revenue model on noncompliance, doing so would increase compliance and registration.
In today's environment, if a payment gateway is working with 50 acquirers, there is one $5,000 Visa registration fee and one $2,500 Visa renewal fee. After Nov. 1, each of those 50 acquirers will pay a $1,000 Visa registration fees (for $50,000) and a $1,000 Visa renewal fee (again for $50,000).
This is a significant increase in revenues for Visa and a corresponding cost increase to either TPAs or acquirers. And, if there are acquirers who do not register TPAs today, that number will grow with the implementation of the new fee schedule.
Perhaps a better change would be if more hosting companies, shopping carts and other related businesses would modify their processes so they do not touch cardholder data.
Regardless, unless the TPAs reimburse acquirers for the fees, small acquirers may opt to not work with certain TPAs. TPAs with significant market strength can simply tell acquirers they will not be paying TPA fees and leave it to the acquirers to determine whether they should proceed with those TPAs.
Likewise, new TPAs will have a harder time acquiring the customer base needed to justify the fee for every acquirer that may want to do business with the TPA. Now, translate this into the real world: existing payment gateways will have tremendous insulation against upstart competitors, which will need to vie for "shelf space" with every acquirer they wish to sell to.
Where an entrenched payment gateway could demand that an acquirer pay the $1,000 initial and renewal fee, a startup gateway will be in no position to do so. Certainly $1,000 is a small fee, but it's a tremendous hurdle for a startup payment gateway. Perhaps that is part of the fee's intention: to limit TPAs that are not significantly liquid. This disparity will be magnified when comparing a third-party gateway to an acquirer-owned payment gateway.
Jon Shipley, President of Select Bankcard commented on the difficulty in complying with the fee change. "This new rule is going to be a real issue because we will have to collect a fee from various entities that we have no direct relationship with," he said. "When considering the number of payment gateways, hosted shopping carts and other entities that should be registered through each acquirer, the aggregate fee amounts are going to be significant, and the billing allocation isn't going to be straightforward."
Although this new structure will likely change things incrementally for existing players, it will dampen the outlook for startup payment gateways. It will continue to marginalize tertiary TPAs such as hosting companies and shopping carts that have not been embraced or registered.
Most payment gateways are properly registered because the acquirer must know who the gateways are in order to properly populate value-added reseller sheets. Shopping carts and hosting companies, however are often unknown to the acquirer. This fee policy will not encourage acquirers or merchants to fully explore entities that touch card data. I suspect, too, that unless monitoring is increased, even more players will serve merchants without being registered with their acquirers. I know that is not the intent of this change.
Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at kenm@eurekapayments.com. For more information, visit www.eurekapayments.com.
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