By Ken Musante
Napa Payments and Consulting
Although I wrote about card network non-interchange pass through fees (NIPTFs) in the fourth quarter of last year (see www.greensheet.com/emagazine.php?article_id=7388), given the amount and increases in these fees, I thought it appropriate to provide this companion piece to elaborate on those changes and their impacts on acquirers. For brevity, I'll limit this discussion to the acquiring, and although Discover and American Express have similar fee structures, I'll focus on Visa and Mastercard. Also, to recap, NIPTFs are paid directly to the card networks and, unlike Interchange, are not returned in the event of a return or chargeback.
Before 2006, when Visa and Mastercard were associations, the NIPTFs were simple and lower: nine basis points of gross processing volume for U.S. acquirers. Since then, they have nearly doubled. For some merchants selling cross-border and lacking authorization fidelity, they have skyrocketed.
Some fees, such as the APF, NABU and the monthly fees, came about because of the Durbin Amendment and a reaction to the income the card networks would be losing because of traffic migrating to the alternative debit network. These increases are typically not factored in when studies are done on the impact of the Durbin Amendment on costs. Because Visa and Mastercard are duopolies, merchants are price takers and not able to avoid the impacts. There are four types of NIPTFs. All directly impact the profitability of single rate acquirers as they pay one rate, regardless of the NIPTF. Consequently, the acquirer or payfac must absorb the costs or raise the end pricing. Acquirers with cost-plus (pass-through) merchant pricing may also be incurring expenses, if they're not ensuring that new and revised fee rates are being passed through when appropriate.
Unless behavioral fees are set up for direct pass through to merchants for non-compliance (with an understanding of the offending behavior), merchants aren't incentivized to modify behavior.
Pass-through merchants should absorb 100 percent of these cost increases. That’s what they signed up for and that is what their acquirer expects. However, because some of these fees are new, processors aren't properly billing them to merchants and are inadvertently absorbing these cost increases. Also, is a disproportionate impact on CNP transactions, so different acquirers are impacted differently.
Martha Rhine www.linkedin.com/in/martha-rhine-a05395, a colleague and Director at Consulting Resource Group recently conducted acquirer audits. She found differing reasons for acquirers' failure to pass these NIPTFs along. Some were not validating card network increases coded for in the card network release packages and unknowingly absorbing the costs. Others didn't understand they could be passed along to merchants. Specific to the behavior modification NIPTFs, an entire campaign could be set up to minimize these items and provide acquirers and merchants a competitive advantage.
Rhine mentioned the first step is to undertake a comprehensive analysis of validating all the incoming NIPTFs by card network. From there, the costs should be incrementally tracked by use case and decked out against merchants in accordance with their pricing scheme. As needed, behavior modification and educational programs should be implemented. Rhine will be publishing a white paper on this topic at www.consultingresourcegroup.com/niptf.
Interchange continues to garner the lion’s share of merchant consternation. It should. It's larger and more impactful than NIPTFs. But, in a game of scale, NIPTFs are meaningful and should be further understood and managed to optimize profitability for processors, platforms and payfacs assisting pass-through and single-rate merchants alike. NIPTFs are large, complex and growing. Acquirers must ensure they are managed correctly or their margins will suffer. 
As founder of Humboldt Merchant Services, co-founder of Eureka Payments, and a former executive for such payments innovators as WePay, a division of JPMorgan Chase, Ken Musante has experience in all aspects of successful ISO building. He currently provides consulting services and expert witness testimony as founder of Napa Payments and Consulting, www.napapaymentsandconsulting.com. Contact him at kenm@napapaymentsandconsulting.com 707-601-7656 or www.linkedin.com/in/ken-musante-us.
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