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Article published in Issue Number: 070301

Street SmartsSM:
Transaction cost as commodity

By Michael Nardy, Electronic Payments Inc. (EPI)

The many advertisements in The Green Sheet magazine indicate a mini-trend is developing in the industry: lower and lower transaction/authorization costs. Companies share common points in highlighting their transaction costs: They are lowering them in an attempt to 1) bring on new ISO and merchant level salesperson (MLS) partners and 2) increase their ability to compete.

For years, the major players (First Data Corp., Chase Paymentech Solutions LLC, Global Payments Inc.) have solicited direct merchant business. They have done so at near-break-even rates. It isn't uncommon to solicit a merchant who is part of an association or trade group that has negotiated rates at just pennies above interchange.

The frustrations experienced by many ISOs and MLSs continually boil to the surface in such complaints as: "They are just driving down the profit margins in the market" or "It's ridiculous to see that $1,000-monthly merchant at interchange pass-through pricing."

Still, these frustrations haven't done much to curb larger processors and their direct sales departments from offering bare-minimum pricing.

How low can you go?

Transaction fees have always been a negotiating point in any processing agreement (or ISO/MLS agreement for that matter). They are one of the few costs not controlled by Visa U.S.A. and MasterCard Worldwide.

Front-end authorization costs are dynamic and can change not only with increased transaction counts, but also with the use of different methods of connectivity (Internet protocol versus dial up, for example).

The tendency toward decreased transaction fees isn't driving the industry into a frenzy over price. But it is bringing more ISOs and MLSs to the table of larger deals where they were previously excluded from the bidding. This is a positive development.

Imagine being able to bid against a direct processor such as Chase Paymentech or NOVA Information Systems, or match the rates of a Heartland Payment Systems Inc. or RBS Lynk Inc., and you can see the value in having a low transaction fee.

Recently, I have seen deals coming in at interchange pass-through and just $0.08 per transaction. On all occasions, our sales partners were able to beat the authorization costs and earn that account's business.

It was a small victory for the particular ISO or MLS and part of a much larger, ongoing fight. Hidden surcharges: Not so low after all

Still, no matter how low your transaction fees are, other fees may be inflated as a mechanism to mitigate any savings from lower transaction fees.

In any Schedule A, you might find things like sponsorship costs, downgrade fees, and credit and debit transaction costs levied as surcharges above the network authorization costs. In all of these fees, there is an increase in profits for the processor.

When looking at your true costs of processing, if you see there are transaction fees at zero to $0.05, for example, but you are paying excessive BIN fees or downgrade sponsorship charges, the actual cost to process a sale might be increased significantly. This would make your "low" transaction fees moot.

Transaction fees as profit center

The concept of transaction fees being a profit center for processors has been discussed on the GS Online MLS Forum. By profit center, I mean they have network and authorization costs of $0.05 but are charging their ISO and MLS partners a higher fee to authorize the sale, such as $0.08 or $0.09. Thus, they are padding their network fees by a few pennies before sharing the revenue with their partners.

I don't consider this practice to be bad; your ISO may not charge you for downloads, file builds, welcome kits and so on. But I do think it limits your ability to compete with other processors.

This article isn't designed to tell you, as MLSs, which company is best, but rather to give you an idea of some Schedule A negotiating points and how to obtain the best pricing.

The old-fashioned loss leader

A common misconception has been that the ISO you work with is padding everything before sharing the revenue with you. However, recent postings on the MLS Forum have proven just the opposite: New programs are advertising no transaction fees or significantly reduced costs. This is designed to appeal to anyone looking for the lowest possible fees.

Indeed, having a transaction fee set at zero (at the writing of this article, several ISOs/processors were offering such a fee) can give you the competitive advantage.

But on the ISO side, it could also hurt. Inevitably, the cost of authorizing transactions needs to be met. And whether it is paid by the MLS, ISO or processor, it will be accounted for.

My concern is when transaction fees are used as a loss leader, the MLS is the one who benefits, while the risk-holding ISO is left holding the bag with minimal profits to offset its losses on transaction fees. Recently, some math was done on the MLS Forum by member bbec to highlight this point:

"I do not know what your costs are ... let's just say $0.02. With your example of the deal you received from one of your sales reps _ that the merchant does 1.5 million _ you say the rep set him up with $0.05. Although I am curious what the ticket is for this; [it] is important as to the profit. ... Let's just say it is $20, which comes to 75,000 annual transactions.

"With this $20 transaction, you will (before the split) deduct the BIN cost of .0004 points or .80 or almost $0.01. This leaves a profit of $0.042 to you and the sales rep for each transaction.

By multiplying this by 75,000 transactions, it comes to an annual profit of $3,150. Now you do the split with the rep or $1,575 each.

"The rep puts the $1,575 in his pocket while you must deduct from your $1,575 the expense to [the processor] which I [estimated] above at $0.02. 75,000 transactions x $0.02 is $1,500. Thus you make $75, and $75 is a profit.

"You said that as long as there is a profit on the merchant account, you will take it. Do I have this wrong, or is the basic formula correct? If the ticket was $10, you would make $450 while the rep makes $3,450."

I think the MLS Forum member points out a common thought when looking at any cost as a loss leader: Why would the ISO want to take a loss and essentially make its split the equivalent of a 90/10 split in the MLS's favor?

With an operation to run, losses to mitigate in addition to technical, customer service and data entry personnel to employ, is there any risk of spreading oneself too thin financially?

Not the final word

As ISO and MLS programs continue to get more competitive, we will continue to see $0.00, $0.02, $0.03 and $0.10 transaction fees. They will be all across the board because they comprise one of the last areas of pricing that still has the flexibility to vary drastically - not only from network to network, but also from ISO to ISO.

One ISO doing 60 million transactions a year will command much lower transaction fees than an ISO doing just 6 million. Nevertheless, we will continue to see transaction fees take a front-and-center role in the recruiting of ISO and MLS partners.

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 070301

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