hite hot competition in the U.S. market continues to drive great experimentation in pricing among acquirers, according to research recently completed by First Annapolis Consulting. As price competition continues to put great pressure on discount rates, acquirer use of creative discount calculation methodologies has increased. In addition, acquirers are broadly increasing their reliance on non-discount sources of revenue. Greater uniformity in acquirer pricing, however, might signal that competitive differentiation through pricing innovation represents a limited window of opportunity.

First Annapolis' research investigated pricing practices of U.S. acquirers specifically with respect to merchants with annual volumes of less than $5 million in Visa/MasterCard sales. The research updated similar research completed in 1999 and 2001 and included 33 acquirers, accounting for more than 67% of industry market share.

Like interest and average-balance calculations among issuers, U.S. acquirers long have used various discount calculation methodologies, each of which has a significantly different impact on total revenue collected from a given merchant.

• Net Discount means the application of the discount rate to gross purchases less refunds. Historically, this has been the most common pricing approach in the U.S.

• Gross Discount means the application of the discount rate simply to gross purchases; therefore, acquirers effectively get to keep returned interchange on refunds.

• Gross-Gross Discount means the application of the discount rate to gross purchases plus refunds, so not only do acquirers keep the returned interchange on the refunds, they also charge discount on the refund.

Sixty percent of U.S. acquirers now use Gross Discount as their primary discount calculation method with respect to small merchants, an increase from 36% in 1999. The use of Gross-Gross Discount has remained near constant, actually declining by two percentage points (within the margin of error of the research) to 17% in 2002.

Considering industry average refund rates, the increased usage of the Gross Discount calculation method alone increased total industry revenue approximately 2% to 4% annually over the past three years.

Acquirers are more conservative, on the margin, with transaction fees than in the past. The median transaction fees for Visa, MasterCard and American Express are unchanged from 2001 and 1999 at $0.10 to $0.25. However, the percentage of acquirers that charge no Visa/MasterCard transaction fee has increased from 9% in 1999 to 21% in 2002, and the percent that charge $0.25 or greater has declined from 26% to 6%.

Statement fees are even more prevalent than a few years ago with 88% of acquirers charging between $5 and $10 and only 3% of acquirers not charging the fee at all. In 1999, 43% charged a statement fee between $5 and $10 and 22% did not charge the fee. Annual fees are still rather uncommon with 67% of acquirers electing not to charge such a fee, down insignificantly from 1999 and 2001.

Finally, chargeback fees have become nearly as prevalent as statement fees with only 6% of acquirers not electing to apply the fee, down from 19% in 1999. Moreover, the percentage charging a chargeback fee greater than $20 has doubled since 1999 to 30%, though the median fee of $10 to $20 remains unchanged.

Termination fees, downgrade surcharges, application fees: In total, 64% of U.S. acquirers charge 10 or more discrete fees in addition to discounts to merchants with volume less than $5 million. First Annapolis estimates revenue from these fee sources represents greater than 30% of U.S. industry-wide revenue.

However, the absence of significant increases in fee levels in 2002 was noteworthy. The only fee that had an increase in median value was the application fee, which now averages more than $50.

All other median fees remained unchanged, and, in most cases, acquirers are pricing very similarly to each other; the percentage of acquirers charging the median fee has increased over time.

We take this as a sign that acquirer pricing innovation may have peaked, and most of the industry has now followed the more aggressive, early acquirers who lead the move to unbundled pricing. We do not believe acquirers are gaining significant advantage from these pricing tactics any longer, and in some of the data we see the beginnings of price competition that is already common in discount-rate pricing.

Marc Abbey is a partner at First Annapolis and is responsible for the acquiring practice area for the Baltimore consulting and M&A advisory firm.

This report summarizes research on acquirer pricing that was recently completed by First Annapolis Consulting. The Green Sheet is collecting data for our annual Bankcard Acquiring Report. Watch for our further analysis of pricing and other issues in the acquiring marketplace in the January 2003 issue of GSQ.