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Insights and Expertise

Cost components • Gateway fees

• Losses and loss reserves
and consolidation • Reconciliation

• Engineering
drivers • Product development

• Security (data and physical)
• Reconciliation
• Rent and FFE
• Underwriting and risk monitoring
• Collections and legal
• Operations

I specifically excluded sales and marketing. Sales is a dis-
tinct activity, but it is outside the cost of managing an ex-
isting portfolio. Also, operations is a catch all to encom-
pass any additional activities such as HR and compliance.
As I stated, these fees are the least transparent and are
the least likely to track from one organization to the next.
Center A may build their own gateway and have cost X,
By Ken Musante but Center B may buy their gateway services and have a
Napa Payments and Consulting completely different cost structure. So too with every oth-
here are three broad costs for card processing; er referenced fee. They vary and are highly dependent on
the DNA or core competency of the underlying company.
interchange, non-interchange pass through fees
and processor fees. Interchange is publicly Years ago, conventional wisdom held that larger compa-
T available. It may be managed, but it is the same nies would always enjoy a cost advantage and, ultimately,
schedule for all providers. Some will creatively price dominate the market. Industry consolidation seemed in-
refunds, others will take advantage of Level II and Level evitable, and many believed scale would determine the
III optimization savings and others will creatively classify winners. Companies such as Worldpay, and others, dem-
MCC’s, but the costs and network rules are applied uni- onstrated that execution, distribution and specialization
formly and transparently. could create competitive advantages that rivaled pure
scale.
Non-interchange pass through fees (NIPTFs) are not pub-
licly posted, but they are widely distributed within the The need to distribute value efficiently
industry. With narrow exceptions, most participants are
operating from the same underlying cost structure. Today, the more important question is not who can achieve
the greatest scale, but which combination of services de-
Because NIPTFs generally represent only about 10 percent livers the most value and how to efficiently distribute. Can
of the cost of interchange, they are often deprioritized payments and software continue to exist as separate offer-
when considering processing costs. I find that ironic. These ings, or is deeper integration the future? My wager is on
fees have been increasing at a faster rate, have greater vari- the banking app becoming the primary hub for financial
ability, and in many cases, merchants and providers have services. The real question is: what path will the industry
more ability to influence them—often with far less effort. take to get there?

A closer look at processor fees Consider the traditional sales agent selling a legacy pay-
ments stack consisting of three separate components: the
Processor fees are less transparent and variable than in- processor, the gateway and the POS. Each layer carries its
terchange. And that is why this category should be more own economics and cost structure.
thoroughly interrogated. First, here’s what makes up pro-
cessor fees: Inevitably, that model will be more expensive than one
• Authorization and capture costs in which the ISV also provides the POS solution and cap-
• Processor costs including card-on-file fees, state- tures a greater portion of the value chain. Think further
ment fees, reporting fees and customer service fees about the distribution costs of the traditional ISV, along
with the controlled distribution versus the efficiency but
• Dispute processing fees impersonalization inherent in the ISV.

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