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Education

Knowledge is (still) power lack the "decoder ring" needed to properly assess, in
advance, how transactions may qualify.
Interchange incentivizes issuing banks to issue cards.
Visa and Mastercard compete by raising interchange
to encourage more issuers to issue their product.
Issuers relish interchange increases; acquirers abhor
them. As this is the single largest cost component, you
can see why so many attempt to circumvent the card
networks in their quest for a more efficient payment
method. Interchange will ultimately be the demise of
the card networks.
• Card brand fees: When Carr wrote his articles, card
brand fees were "assessments." Today they comprise
a host of fees including penalty, cross-border, non-
By Ken Musante compliance, authorizations, volume and usage fees.
Napa Payments and Consulting Fees may be annual, monthly, volume-based and/or
authorization based. They are paid to the card networks
n 1997, long-time industry leader Robert O. Carr and are not reversed when credits occur. While some
expertly summarized the costs behind payment large members have negotiated special dispensations
processing. The series, titled Knowledge IS Power, and, at the margin, some of the components are
I was published in this magazine. Carr summarized volume based, these fees are largely identical for all
each individual cost component and delineated the fees acquirers. They have risen substantially since Visa
by category. This was powerful information. At the time, and Mastercard became publicly traded, for-profit
most merchants were on tiered or bundled pricing, and enterprises. Wells Fargo Bank summarized these fees
many ISOs and agents were not privy to the cost drivers. as of October 2021 here: https://bit.ly/3F6L.

Cost drivers • Processor fees: Because so much of a transaction's cost
is preordained as described herein, even the smallest
Given the passage of time, I thought it appropriate to ISOs can effectively compete. Processor fees have the
update our arsenals within the existing landscape. greatest variability and are volume dependent. They
Payment processing cost drivers are sponsorship fees, have several sub-components: front-end costs, back-
interchange, card brand fees and processor fees. Following end costs, chargeoffs, operational costs and profits.
is a summary of each. Front-end or authorization costs are for routing and
• Sponsorship fees: Only card network members may adjudicating each transaction. They include end-to-
sponsor an ISO or third party. Merrick Bank is a end encryption and telecommunication costs for each
member. Fiserv, Paysafe, Humboldt Merchant Services authorization. They may include gateway costs. Back-
and Square are not; they all require a member bank end costs are processor fees for maintaining merchant
to sponsor them. Visa and Mastercard allow only accounts. Statement processing and merchant portals
financial institutions to be members and to register are included as well as settlement processes.
third parties. A member bank makes a fraction of a Chargeoffs are losses processors may take and
basis point, or a fractional cent, from each transaction. correlate to the type of merchants boarded.
This fee is the smallest among the four components, Operational costs include staffing costs, FF&E, R&D,
and is always present, even when the processor is also rent, telecommunications, capital expenditures,
the bank. professional fees, marketing, and other costs needed
• Interchange: Interchange is the single largest cost to support a processors' operations. Profits or losses
component for every acquirer, but it differs based on are what is left over.
card type, card method, MCC and data submitted with
the transaction. This fee is paid to the issuing bank When examining a Schedule A, recognize that all
for extending the risk and funds (for credit) to the these fees are included. Some ISOs bundle certain
cardholder. It is reversed in the event of a chargeback fees; others itemize each. Regardless, know how they
or credit but at the credit voucher rate, not the rate it will impact your residual. Despite all the changes to
was cleared at. transactional costs since 1997, one constant remains:
“Knowledge IS Power.”
Visa, Mastercard, Discover, American Express and the
PIN debit networks each have their own interchange As founder of Humboldt Merchant Services, co-founder of Eureka
schedule. Visa and Mastercard’s are available at https:// Payments, former executive at WePay, and founder of Napa Payments
vi.sa/3FbGpFE and https://bit.ly/3meZorh, respectively. and Consulting, Ken Musante has experience in all aspects of success-
Because they do not publish their Associated ful ISO building. Contact him at kenm@napapaymentsandconsulting.
Interchange Qualification guides, the schedules com, 707-7656 or www.linkedin.com/in/ken-musante-us/.
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