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Education

The realities of margin

compression – and what to do about it

The reality is that price-based selling is a dead end. The
accelerating consolidation of the payments industry,
along with brutal competition around interchange-plus
pricing, means there's no margin that won't be undercut.
To compete with super ISOs, smaller ISOs and MLSs need
an alternative to interchange-plus.
Finding a fix

There is one number you can be confident won't be
undercut: zero.

Thanks to recent changes to card brand rules and state
laws, businesses in 45 states are now able to do what
has long been the standard practice in government
and education: pass on the fee when customers choose
By Evan Weese credit for convenience or rewards (see www.cardx.com/
compliance#statelaws for further details).
CardX
Passing on the credit card fee in the form of a surcharge
f you are in the payment processing business, allows businesses to maintain listed prices while
your merchants are surely getting inquiries from processing cards at a true 0 percent cost.
competitors asking such quesitons as: How much
I are you paying? Can you send me statements to This is a tremendous change for ISOs, MLSs and merchants
review? How much longer does your contract run? This alike. MSPs can protect margins and retain valued
usually ends one of two ways. Either you get an angry call accounts by ensuring that the business keeps 100 percent
demanding you reduce your pricing, or the merchant tells of all credit card sales. Unlike traditional processing, in
you he or she is switching to another provider. which a service provider may be undercut by a competitor
offering to slash 5 basis points off the existing processing
For even the best ISOs and merchant level salespeople cost, there's no underselling 0 percent cost.
(MLSs), also referred to as merchant service providers
(MSPs), with excellent service and merchant-friendly Of course, while the cost to the business can be 0 percent
terms, the payments business is becoming increasingly through a surcharging model, the customer bears the cost
commoditized. Price competition is a never-ending race of credit card acceptance. These costs must be handled
to the bottom. fairly and consistently to abide by the card brand rules

Pressure on profits mandating that surcharges not exceed 4 percent and that
no surcharges are assessed to debit cards.
Many merchants faced with the costs of rising interchange
believe that the "plus" in "interchange plus" is a windfall, For ISOs and MLSs seeking to sell merchants on the
rather than an essential charge to keeping a merchant surcharging opportunity, these rules can be an asset. The
service provider (MSP) running. As the payments industry maximum surcharge of 4 percent means that offering a
continues to evolve and margins tighten further, MSPs are lower fee, such as 3.5 percent, allows the MSP to maintain
increasingly reliant on miscellaneous fees, especially for a strong profit margin while also emphasizing customer
accounts for which the interchange-plus pricing doesn't friendliness, as the fee is lower than the cap set by the card
even cover operating costs. brands. Furthermore, by not assessing a surcharge to debit
cards, businesses ensure their customers always have a
In the face of intense competition, providers are seeing no-fee payment option.
their profitability erode by 2 to 3 percent per year, with
profitability on smaller SMB accounts being reduced Opportunity and upside
even more dramatically, according to a recent report by This new model for payments represents a remarkable
McKinsey & Co. titled Innovation and disruption in U.S. opportunity for ISOs and MLSs to improve their retention
merchant payments. and compete with even the largest acquirers for new
accounts.

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