Digital Transactions Authoritative, insightful and timely information for payments professionals
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Debit card interchange expenses will eventually come down for merchants thanks to the Durbin Amendment. But, continuing a long-term trend, authorization and transaction processing costs also are declining, largely due to market competition, according to new findings from merchant-acquiring consulting firm The Strawhecker Group. On the other hand, acquirers’ non-transaction costs are going up, TSG found in its latest benchmark study of merchant-processing expenses.
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Omaha, Neb.-based TSG in the late spring surveyed 39 acquirers that buy authorization and processing services from third-party processors. The acquirers, which in total had 58 front-end authorization relationships and 50 back-end settlement relationships, were asked to report pricing they paid for the services in the second quarter. TSG then compared results from its similar survey for the second quarter of 2009.
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According to TSG senior associate Mike Goding, costs for authorization and transaction processing, which together account for about two-thirds of acquirers’ expenses, are down by more than 10% since 2009. TSG declined to reveal actual expenses publicly. The decreases can be largely attributed to the price sensitivity of acquirers to authorization and transaction-processing expenses. “Those are still the two key items that get all the attention when people are negotiating contracts,” Goding tells Digital Transactions News. “Those are the two big headlights that people see.”
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Acquirers and independent sales organizations that have locked themselves into long-term contracts with third-party processors may find themselves at a competitive disadvantage when trying to add or renew merchant accounts because they won’t be able to pass on vendors’ lower costs as quickly as acquirers with new or short-term contracts. “They’re likely to have better pricing than you are,” says Goding. “I would say that three-year agreements are a safer way to go than a five-year agreement or longer.”
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On the flip side, processors are raising prices for non-transaction services. Medium-sized (those with 250,001 to 1 million monthly transactions) and large (1 million to 3 million transactions monthly) acquirers are paying 76% and 104%, respectively, more for so-called “merchant-on-file” fees than they did two years ago. In part, that’s because some processors are now bundling into that fee formerly separate charges for customer service and merchant statements, Goding says. But he adds that efforts by suppliers to recover some of the revenues they negotiated away to win authorization and transaction-processing business also are driving prices higher. Such fees, depending on the acquirer’s size, can range from $1 to $6 per merchant each month.
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TSG’s report also says customer-service and terminal help-desk costs are up “significantly” for medium, large, and “jumbo” acquirers, those with more than 3 million monthly transactions. Processors are passing on higher labor costs, says Goding, adding that, “I would guess that in some cases the calls are getting more complex.”
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A fairly new fee that has stirred controversy in the merchant community is one acquirers charge for compliance with the Payment Card Industry data-security standard (PCI). TSG asked about such fees for the first time in the recent study and thus does not have comparative data. Goding says only 15% of his respondents reported being charged such a fee from their processor, though he expects TSG’s next benchmark study will show an increase.
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Processors do have a legitimate case in charging a security fee because PCI compliance is complex, according to Goding, but he says some processors do pad their margins with PCI fees. “It’s a way to increase revenues,” he says.
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Another uncommon fee is the annual “per-merchant” fee, which fewer than 15% of acquirers currently pay. “This may be due to processors’ reluctance or inability to impose this new fee except upon contract renewal,” the report says.
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