The Messiness of Money in Merchant Acquiring

It has been a long while since I wrote a LinkedIn article, and what follows was not meant to be one. Rather it was to be a response to a post from Brandi Gregory about how much money merchant acquirers make from what they charge merchant.

Alas just as I was getting on a roll, LinkedIn told me I’d exceeded the character limit for a post response. Thus was this article born.

Brandi’s recent post elicited a storm of comments, many of which emphasize the complexity of the payments business— in particular interchange vs. merchant discount and how different parties make money in that business.?

So I’ll try an recap good nuggets from the comments on that post and add to them what I know.? If you know most of this already (and I reckon many of you do), forgive the tedium and correct me when I err.

1. What a merchant pays to accept card payments is often called the “merchant discount”. It comprises there parts: Interchange (set by V/MC, a flow merchant to issuers, and non-negotiable, unless you are a monster merchant); network fees (aka assessments; set by V/MC; flow to their pockets; non-negotiable), and acquirer fees (set by the entity who works directly with the merchant—an agent, ISO, PSP like Square, or someone else; negotiable).? Very roughly, interchange makes up about 75-85% of the total discounts, the rest being split between Network and acquiring? fees. ? Hence merchants cannot negotiate for ~85-90 % of what they pay.
2. Merchants can shop for the best deal when deciding who they want to provide them payment acceptance; for most small to mid-sized merchants, it is not hard to change providers.? Thus is is a price-value game.? Some merchant will go for the lowest possible cost even if it complicates their operations.? Others will pay for convenience: a flat rate makes accounting easy, and many of those who offer flat rate pricing (e.g. Square) build other services into the pricing.?A merchant that pays a flat rate may be getting good value in return. Drew Edmond made this point well in the comments to Brandi’s original post
3. Merchant acquirers typically don’t make their money from pricing to merchants (the are exceptions; there are always exceptions in this business) While there are many configurations between acquirers, ISO, and PSPs (indeed the definitions of those terms can be fluid), in most case the merchant acquirers work with other parties (generally ISOs) who sell to merchants and determine what the merchants pays. The acquirer offers the ISO a price (often called the “buy rate”), and the merchant-facing party marks the rate up to determine what the merchant pays. Therefore regardless of what the merchant pays, it doesn’t affect how much the acquirer makes.
4. Surcharging customers is a bit of the Wild West at the moment. The payment networks have clear rules around it, but they are often flouted in practices. Some ISOs and sales agents are complicit in this. But as noted earlier, any extra money made through generally doesn’t flow to the merchant acquirer.
5. Payment cost regulation has not, to my knowledge, resulted in fattening acquirers bottom lines. It can be argued it has done the opposite.? Under Durban, with debit Interchange regulated, the portion of the merchant discount becomes proportionally larger, and subject to greater scrunity and negotiation.? Sorry Matt Herren , I don’t see how this has benefitted merchant acquirers

This article only touches on one aspect of the acquiring business—- it does not address topics such as compliance, liability, and the myriad parties that can be involved in providing payment processing to merchants. It is indeed a complicated business. But I trust this post has made one aspect— how merchant acquirers make money— more clear.