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Street SmartsSM:
Pricing adequately in the marketplace

By Michael Nardy, Electronic Payments Inc. (EPI)

Let's face it: Competition in this industry is fierce. There has been tremendous consolidation in the merchant services and banking industries over the last several years. Pricing has been steadily decreasing. And new programs, such as "free" or low-cost terminal placement, have given rise to decreased reliance on leasing and terminal equipment sales commissions to drive profitability.

ISOs and merchant level salespeople (MLSs), those independent sales representatives on the streets, are losing some ground to larger, "super" ISOs and direct-from-processor competition, which are increasingly going after the same merchant base but doing so from a call center hundreds or thousands of miles away.

Banks, too, are increasing their push for merchant services to be bundled with their service offerings. Many include a lean merchant service rate package as part of a loan or demand deposit account service, despite any gray areas of anti-tying violations. Still others, like Bank of America Corp., are pursuing next-day funding of settlements that they are able to offer their "on-us" clients.

The question of how low rates can go has been a hot topic on the GS Online MLS Forum recently and has been discussed by ISOs and MLSs alike. Rightly so, as portfolio profitability remains partially derived from the markup of interchange and authorization fees charged to the merchant.

Ultimately, learning the best ways to set yourself apart from the competition will help drive your sales up instead of in circles.

Published interchange rates

I'm going to clear the air and start with a question on many of our minds: Should the interchange rates have been published or kept a secret?

Not only is the above question a very hot topic on the MLS Forum, but it is also quickly growing in relevance both to the ISO/MLS community and the merchants it serves. I also think this is one of the larger issues facing the card Associations, merchants, ISOs and processors regarding pricing offered in the marketplace.

The question of publishing interchange, as done for the U.S. Treasury's prime rate, or keeping it for the exclusive use of banks, acquirers and the ISO community - while still up for debate - was unlikely to result in interchange being kept bottled-up: Recently, Visa U.S.A. and MasterCard Worldwide both posted variations of interchange pricing and rules on their Web sites.

Still, for years, a Google search of the term "interchange" and the like resulted in Web sites containing watered-down versions of the various interchange programs, many of which were easily available from government and university finance Web sites. This was especially so for interchange programs outlining the ability of various government and university departments to accept credit cards as a new form of payment.

Nonetheless, there are still several lawsuits (regardless of how much merit they have) dealing with the way in which interchange rates are set and the way in which the card Associations move to establish competitive interchange rates. This debate won't end here with this article. However, educated ISOs and MLSs will ultimately have to find ways to earn merchants' business that involve a cogent explanation of interchange rates.

Interchange-plus pricing

Despite any insistence to the contrary, many acquirers and ISOs have made a business of demonstrating how an interchange-based pricing structure would be the most beneficial to merchants. Several of our ISO and MLS partners only sell interchange-plus pricing and do so in a markup ranging from 10 to 40 basis points.

Interchange pricing certainly has hit a chord with many merchants as well. Some who have been priced on interchange plus for the past few years are requesting it. Many trade associations are recommending that type of pricing structure, and many banks are offering it to their customers.

It might be seen as a benefit to merchants to publish the interchange rates and programs available to them, but I see more benefit to the ISO and MLS pricing merchants at interchange-plus pricing and explaining to them the different qualification levels.

What's in a name? Fair pricing for all

I have a unique title for this article. Although many readers might gloss over and supplant the word "adequate" with "fair," that is clearly not the intention of the article.

In this industry, we are very price sensitive. A low transaction cost, reduced BIN fees, free terminals or even not using MLSs to solicit one's merchants can all be veritable strengths in a pricing model that generates profit. In other words, all the benefits of working with one company or another can give you the edge you need when soliciting business.

Too often, I hear the question, What is the fair pricing for x, y or z? or, What's it worth? I hesitate to make a quick retort to correct the person asking.

I really don't think there is a fair price for something. Imagine you are in a desert and need water. A $0.99 bottle of water you might buy in the supermarket could easily be sold for $5 or $10, far more than the going rate at home, but not something any of this article's readership would balk at paying under certain circumstances.

Unfair? Who's to judge whether $5 or $10 for a bottle of water is fair? Well, if "unfair" pricing kept you alive and increased revenue to the vendor some 500% to 1,000%, I'd argue that this pricing was adequate: It was adequate for the profitability of the salesperson, covering his expenses, costs of inventory, travel to the desert and refrigeration of the water. And it was certainly adequate for you, a traveler in need of water to keep you alive, someone whose money has no use in the desert other than to buy water or, better yet, a camel ride to the nearest bus depot.

In merchant services, we are very concerned with fairness, and it really isn't appropriate. I hear the comments about being fair to merchants, but does this move to being fair drive your profitability so low that it doesn't make sense to even solicit merchants away from their current providers?

Perhaps we have just hit upon the business model of some of our competition.

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 ISOs and MLSs profitable partnership programs and cutting-edge tools to help their portfolios grow. To learn more about partnering with EPI, visit or e-mail Michael at

Article published in issue number 061101

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