The Green Sheet Online Edition
August 10, 2026 • 26:08:01
Cost components and consolidation drivers
There are three broad costs for card processing; interchange, non-interchange pass through fees and processor fees. Interchange is publicly available. It may be managed, but it is the same schedule for all providers. Some will creatively price refunds, others will take advantage of Level II and Level III optimization savings and others will creatively classify MCC’s, but the costs and network rules are applied uniformly and transparently.
Non-interchange pass through fees (NIPTFs) are not publicly posted, but they are widely distributed within the industry. With narrow exceptions, most participants are operating from the same underlying cost structure.
Because NIPTFs generally represent only about 10 percent of the cost of interchange, they are often deprioritized when considering processing costs. I find that ironic. These fees have been increasing at a faster rate, have greater variability, and in many cases, merchants and providers have more ability to influence them—often with far less effort.
A closer look at processor fees
Processor fees are less transparent and variable than interchange. And that is why this category should be more thoroughly interrogated. First, here’s what makes up processor fees:
- Authorization and capture costs
- Processor costs including card-on-file fees, statement fees, reporting fees and customer service fees
- Dispute processing fees
- Gateway fees
- Losses and loss reserves
- Reconciliation
- Engineering
- 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 distinct activity, but it is outside the cost of managing an existing portfolio. Also, operations is a catch all to encompass 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, but Center B may buy their gateway services and have a completely different cost structure. So too with every other referenced fee. They vary and are highly dependent on the DNA or core competency of the underlying company.
Years ago, conventional wisdom held that larger companies would always enjoy a cost advantage and, ultimately, dominate the market. Industry consolidation seemed inevitable, and many believed scale would determine the winners. Companies such as Worldpay, and others, demonstrated that execution, distribution and specialization could create competitive advantages that rivaled pure scale.
The need to distribute value efficiently
Today, the more important question is not who can achieve the greatest scale, but which combination of services delivers the most value and how to efficiently distribute. Can payments and software continue to exist as separate offerings, or is deeper integration the future? My wager is on the banking app becoming the primary hub for financial services. The real question is: what path will the industry take to get there?
Consider the traditional sales agent selling a legacy payments stack consisting of three separate components: the processor, the gateway and the POS. Each layer carries its own economics and cost structure.
Inevitably, that model will be more expensive than one in which the ISV also provides the POS solution and captures a greater portion of the value chain. Think further about the distribution costs of the traditional ISV, along with the controlled distribution versus the efficiency but impersonalization inherent in the ISV. Taking the concept a step further, how does an ISV that relies on a third-party gateway compete against a model that eliminates the gateway altogether? Every intermediary in the stack introduces cost, and competitors that can remove those layers gain a structural advantage.
Some ISVs will choose to build their own gateway to address this challenge. However, that path is neither simple nor inexpensive. Gateway development requires significant investment in integrations, security, compliance and card network certifications. As a result, the economics typically work only for providers serving a narrowly defined vertical or those with sufficient transaction volume to justify the investment.
Fewer layers with fewer intermediaries
Because processor fees are largely a function of organizational design, the most successful providers are increasingly those that can eliminate layers from the payments stack. Stripe, Adyen and Square offer a completely integrated solution and have the scale to justify said investment.
Funny now, however, that in the age of AI, even their tech is now dated. But they each have an integrated stack. Each too is inching closer to residual payouts for sales professionals, which was unthinkable just a few years ago.
The next challenge may not be payments economics but software economics. As AI reshapes software development and deployment costs, today's integrated leaders may face a new generation of competitors with dramatically different cost structures.
In the near term, providers should examine every layer of their technology stack and ask whether it creates differentiated value relative to the cost. The organizations that can deliver more services through fewer intermediaries will likely enjoy both a pricing advantage and stronger customer retention.
Whether that destination ultimately becomes a banking app, a software platform or something entirely different remains to be seen, but the direction of travel is increasingly clear. 
As founder of Humboldt Merchant Services, co-founder of Eureka Payments, and a former executive for such payments innovators as WePay, a division of JPMorgan Chase, Ken Musante has experience in all aspects of successful ISO building. He currently provides consulting services and expert witness testimony as founder of Napa Payments and Consulting, www.napapaymentsandconsulting.com. Contact him at kenm@napapaymentsandconsulting.com, 707-601-7656 or www.linkedin.com/in/ken-musante-us.
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