Processing Fees Are Lower, But Big And New Clients Benefit Most

Merchant acquirers and independent sales organizations are paying about 10% less for authorization and back-end transaction processing services than they did in 2007, according to new study by The Strawhecker Group. But, not surprisingly, big acquirers get the best pricing, and new clients of service providers are getting better deals from providers than are acquirers and ISOs that are older customers of the same providers. Those are some of the major findings from Omaha, Neb.-based Strawhecker Group's 2009 Merchant Processing Benchmark Study. The new survey, the fifth in a series last done in 2007, examined the pricing ISOs and acquirers pay when they purchase authorization, back-end or settlement, and other processing services from leading third-party providers such as First Data Corp., TSYS Acquiring Solutions, and Global Payments Inc. The Strawhecker Group (TSG) obtained data in July from acquirers and ISOs representing 43 separate front-end portfolios and 34 back-end (settlement) relationships. TSG divided the respondents into groups of small, medium, large, and “jumbo” ISOs and acquirers by number of monthly transactions. The small respondents generated up to 250,000 monthly transactions; medium, 250,001 to 1 million; medium, 1 million to 3 million; and jumbo, more than 3 million. “The main thing that we walked away from was the fact that we continue to see auth and transaction-processing costs come down,” Michael Goding, TSG senior associate, tells Digital Transactions News. The survey did not probe the reasons for the price changes (details of which TSG is releasing only to clients) but Goding has some suspects. “The cost for the large processors for purchasing telecom [services] … continues to go down,” he says. “And the second part of it, they [the service providers] are trying to maintain or grow market share in a largely commodity business. Price is probably one of the few areas where they can differentiate themselves.” By and large, the bigger the ISO or acquirer, the more it benefited from the decline in service pricing. “On the transaction-processing side, what we saw was that there does seem to be kind of a floor that people will go down to,” Goding says. The lower pricing mainly benefited the jumbo, large, and medium-size acquirers, “but the small guys pay a premium.” For dial-up authorizations, the jumbo acquirers obtained a 25% to 30% cost advantage over the other three categories, according to Goding. TSG found a slight increase in prices for chargeback processing for all but the jumbo acquirers. Acquirers and ISOs don't push as hard for price concessions on that service because they get less resistance to their chargeback-processing prices from merchants, according to Goding. “In the overall scheme of things, chargeback costs are a second-tier item,” he says. And the costs of BIN (bank identification number) sponsorship, a fee ISOs pay their sponsoring banks for access to the payment card networks, are hovering at about a penny per transaction for most acquirers, although small acquirers are paying 1.5 to 2 cents on average, according to the survey results. Besides size, an ISO's tenure with a services provider plays a big role in pricing, according to the 2009 results. “If you've got a legacy fee agreement with a processor, you are probably paying higher fees than the next guy in the door that would bring the same volume,” says Goding. The processors “fight tooth and nail” not to give up margin on contract renewals, he notes. But they will show leniency in order to get new merchant accounts onto their systems.