For any entity that wants to offer payment processing, the essential question is what does it cost?
Most merchant acquirers such as ISOs, payment facilitators, and integrated software vendors (ISVs) rely on third parties for front-end authorizations and back-end settlement services. These third parties have spent years investing into major technology platforms that are needed to process transactions. These players include global brands like Elavon, Fiserv, FIS, Global Payments, JPMorgan Chase & Co., and others. Every merchant acquirer that does not have these in-house systems, partners with a company that does. For example, Square leverages JPMorgan Chase & Co. to process its transactions.
To solve for the question of what these entities pay for third party processing services, The Strawhecker Group (TSG) recently completed the ninth edition of its Processing Pricing Benchmark Study. This study provides a credible benchmarking tool for comparing the primary costs of third-party processing services.
TSG connected with the merchant acquiring community to collect, analyze, and harmonize over 75 separate third party processing pricing examples. In 2020 for the first time, TSG classified the ISOs into two categories: wholesale ISOs and retail ISOs. With the addition of the “retail” pricing category, the application for the results expands the usefulness of the report dramatically as the third-party processing ecosystem has moved toward more retail arrangements over the past five years.
Classification of Wholesale vs. Retail
Wholesale Acquirer
- Typically manages risk-monitoring and owns the risk associated with merchant processing
- Provides its own back-office services with a direct processor and bank sponsorship relationship
- Has a broad product offering, utilizing in-house and third party solutions
Retail Acquirer
- Primary focus is the sale of merchant accounts
- Utilizes a third-party processor for most back-office support
- Generally, has no liability for merchant fraud and losses
- New acquirer relationships are mostly retail arrangements
The data was also classified into size categories, in terms of transactions processed per month, as the number of transactions processed is the main driver of cost differentiation. Tiers included Small, Medium, Large and Jumbo, ranging from under 250,000 transactions per month for Small to over three million per month for Jumbo.
Pricing Varies Widely
Third party processors have a unique approach to pricing their acquiring partners, with very little similarities between these players. This lack of comparability is intentional and a key pricing strategy within the industry.
Pricing is generally made on a case by case basis depending on the relationship, the number of merchants, the dollar volume, the number of transactions, and the revenue opportunity. Some processors have a single price for all authorization types, a different line item for settlement, and some combine them. The study also found that secondary processing agreements may have lower pricing that do not correspond with transaction volumes.
Drops in Certain Fees
Certain fees have seen drops in cost since 2016. For example, authorizations have dropped due to the continued shift from dial to IP. Also, gateway service fees have dropped to compete with third-party and in-house gateways.
Increases in Other Fees
Since 2016, third party processors have charged fees for additional items such as the American Express OptBlue program. This program allows small merchants to accept American Express without a direct relationship with American Express branded cards.
Integrated Software Players are Pushing into the Mix
More than ever before, many ISVs are becoming merchant acquirers. This is happening globally with the U.S. market leading the trend.
This trend is influencing processor pricing and distribution. An ISV’s influence on a merchant reaches beyond the software and into payment processing. Payment processors have identified the opportunity and are aggressively chasing these relationships in every industry. This includes offering pricing terms that are very favorable, and a higher revenue share compared to a traditional ISO.
Conclusion
Though third-party processing pricing is complex, there are ways to organize and benchmark in meaningful ways. TSG’s Third-Party Processing Pricing Benchmark Study is a standout resource for any provider on either side of a processing arrangement.