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Street SmartsSM:
What's in a BIN?

By Michael Nardy

Lately I've read spirited, contentious and informative posts about BIN sponsorship fees on the GS Online MLS Forum. To shed light on the topic, I'll give an overview of how BIN fees play an important part in the payments industry.

Introducing the players

In this business, there aren't that many players muddying up the field. They fall into three categories:

1. The ISO/merchant level salesperson (MLS) solicits merchants for a merchant processing program. The MLS is often tied to a larger, registered ISO/merchant service provider (MSP) that has either contracted directly with a network or has established itself with a unique bank identification number (BIN) from Visa U.S.A. or an interbank card association (ICA) number from MasterCard Worldwide.

2. The Visa and MasterCard Associations are the most powerful parts of the acquiring business. They consist of member banks that market card brand acceptance to merchants. They are responsible for compliance and overseeing the way their card brands are marketed on both the issuing (issuing cards to cardholders) and acquiring (accepting payments at the POS) sides of this business.

3. The authorization networks (Global Payments Inc., Chase Paymentech Solutions LLC, First Data Corp., TSYS Acquiring Solutions, etc.) process sales. They electronically settle sales tickets to a back-end network for eventual funding to a merchant's bank account. This is done through the automated clearing house (ACH) system by way of the sponsor bank. Front-end networks can be tied to back-end networks; they can also be separate.

Global, for example, may offer a front-end and back-end package to an ISO/MSP. Or the ISO/MSP may bring its own front-end contract with a network like TSYS and settle those transactions to the Global and HSBC (Hong Kong Shanghai Bancorp) back end. In this case, HSBC is the sponsor bank.

The merchant and customer, while essential, have very little to do with the process.

Show me the money

Visa and MasterCard are paid a portion of interchange, called dues and assessments, on every sale that takes place through their systems. ISOs or MLSs derive profits from lease commissions, equipment sales and application fees. But by far the greatest source of profit for them is their portion of the markup above interchange.

The registered ISO/MSP (the processor and acquirer - the entity with the bank relationship) also typically shares in that revenue. But it also assumes 100% of the risk on the portfolio, provides customer support and service, and manages the portfolio and its ISO base. The ISO/MSP is usually the entity with which the network and bank contracts, enabling it to acquire merchants.

Finally, the sponsor bank (also called the settlement bank or BIN bank) is a crucial part of the acquiring relationship. In the Global example, HSBC is the sponsor bank. Global's ISO/MSP partners have their merchant contracts boarded into a BIN and an ICA.

At the end of this process (which includes merchant acquiring and boarding, risk management, portfolio and underwriting services and ongoing customer support) comes the funding of ACH transfers of monies for merchant POS transactions. This is done by the sponsor bank.

Funds brought to you by ...

All transactions ultimately end with the sponsor bank. This bank funds the merchants, holds ultimate liability on merchant portfolios and all the transactions processed, sponsors third-party processors (TPPs) - like gateways and networks - and sponsors ISOs and MSPs to the card Associations. In addition, the bank is responsible for any fines Visa and MasterCard levy on its ISOs, networks and TPPs. The sponsor bank is liable for all of the processing activities of its merchants as well as its agents.

I've explained how the MLS and the ISO/MSP get paid. The sponsor bank needs to be paid, too. Essentially, the bank charges BIN fees for the ongoing transfer of money. Paying BIN fees doesn't necessarily mean you have your own BIN, however, or that you are a party to the merchant contract. ISOs and sub-ISOs alike charge these types of fees, packaging them differently. They might also be called reserve fees, loss fees or no-risk fees. They ensure the bank is paid for funding merchants' transactions.

Overworked, underpaid

Interchange is paid directly to a bankcard's issuing bank. Dues and assessments are paid directly to the Associations. In the acquiring business, the sponsor bank is the most underpaid entity in the acquiring entity.

Often going into a negative float waiting for Visa and MasterCard to reimburse it for providing funds for merchant transactions, the sponsor bank is paid very little for its service. In the larger scheme of things, a handful of basis points is not too much for the bank to charge given its crucial role in merchant acquiring. Keep in mind a basis point is equal to one hundredth of one percentage point, or the equivalent of $0.01 on $100.

Sponsor banks are certainly at the low end of the payout structure; they are due some compensation for the tasks they oversee and perform.

BIN basics

There are many different types of BIN relationships in our industry. These include shared or "rent-a-BIN," direct BIN access without assignment, BIN assignment with portability and BIN assignment without portability. Let's say an agent of an ISO or an ISO of another ISO/MSP is bringing accounts to a sponsor bank. This might be a shared BIN-type relationship. On the ISO level, it might be considered a rent-a-BIN relationship. The ISO doesn't have direct access or control of the BIN, but it still might be taking 100% liability.

However, it is unable to transfer accounts elsewhere by way of a portfolio conversion. And if the ISO grew larger, it wouldn't necessarily be able to manage the chargeback and retrieval process in-house.

When you contract direct with a member bank, you may be assigned the use of a dedicated BIN, but you may not be given exclusive access to that BIN. For example, many Global ISO/MSP partners share a BIN. The BIN hasn't been assigned to these ISOs, per se. Hundreds of MSPs could share a BIN and experience no negative repercussions. However, one rogue ISO could affect the other ISOs participating in the shared BIN.

When many ISOs share a BIN, it isn't possible to assign that BIN to another sponsor bank without all other parties to that BIN agreeing to it. ISOs/MSPs in this situation cannot easily move a portfolio of merchants from one sponsor bank to another.

Another alternative is the assignment of a BIN for exclusive use but without the right to transfer it. Often ISOs are granted a BIN for their own use, but the bank reserves the right to use that BIN for other purposes if the need arises. The BIN may be assigned to the ISO, but the ISO still may not assign that BIN to another sponsor bank.

In some cases, a member bank may assign a BIN and give an ISO the right to transfer the BIN to a new sponsor bank. This right does not, however, imply the ISO owns the BIN. No one but a bank owns a BIN. When a BIN is transferred, it is assigned from one bank to another, not from a processor or ISO to a bank.

The ability to assign a BIN is called BIN portability. To be valid, this ability must be written into the contract. And the sponsor bank receiving the BIN must agree to the terms of the merchant contracts that have been boarded into that BIN. All fines, fees, chargebacks and retrievals are processed at the BIN level, so it makes sense to request a unique BIN when your volume and financial stability allow for it.

I hope this clears up some of the confusion surrounding BIN sponsorship fees. It's up to the ISO/MSP to pass them through to the MLS, or to pad authorization fees or settlement fees in lieu of charging BIN sponsorship fees. But no matter what you call them, BIN fees make certain a crucial part of the acquiring equation gets compensated for the critical services it provides.

Michael Nardy is Chief Executive Officer of Electronic Payments Inc. (EPI), a founding sponsor of the National Association of Payment Professionals and one of The Green Sheet magazine's Industry Leaders. EPI is one of the nation's fastest growing privately held payment processing companies offering ISO and MLS profitable partnership programs and cutting-edge tools to help their portfolios grow. To learn more about partnering with EPI, visit www.epiprogram.com or e-mail Nardy at mike@elecpayments.com

Article published in issue number 060902

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