The supply chain that provides merchant account services is complex.  It helps if you know how much money each company in the chain  is making off of you so that you can be a savvier negotiator and get a better deal.

Keep in mind that these are rough averages based on data that we dug up from several sources, each situation is a bit different but we believe this view is representative.

Interchange is the amount that is passed through VISA and Mastercard to the issuing bank (big credit card issuers like MBNA, Capital One, Chase),  this is the biggest part of the total and is completely non-negotiable.

Visa and Mastercard take a 10bps cut called an assessment.  Historically VISA and Mastercard were cooperatives owned by the issuing banks.  Now that there are fewer issuing banks VISA and Mastercard are becoming independent companies.  Judging from Mastercard’s financial statements , they make quite a lot of profit from that 10bps.  This part is also completely non-negotiable.

Only banks are allowed to process transactions through the Mastercard and VISA networks.  However, the majority of merchant account providers are not banks, but are independent companies called Merchant Acquirers, specializing only in merchant accounts.  They are allowed to do that if they get a bank to “sponsor” them, for which they pay a small part of their fees.  There are only a few banks that provide most of the sponsoring activities, HSBC, Chase, Key Bank, etc.  This is basically a fixed cost to your processor, so don’t expect them to charge you less than a 5 bps markup unless you are really special.

Processor / processing costs – sometimes merchant account providers (merchant acquirers) do their own processing (usually these are the larger ones), but usually they outsource the processing, for which they pay a fee to the outsourced processing company.  The processing company usually makes pretty large profits off of this fee, so consider these 18 bps to be within your negotiating scope.

Merchant acquirer – this cost covers their cost to support you, their selling costs, and their profit. It is a big chunk of the total and you should negotiate it down.

The reason this data is useful is that you know there is basically 68 bps of profit built in to the processing, underwriting and selling of your merchant account.  If you are diligent you can negotiate the original quote down by 30 bps.  If you have been in business for a wihle, do strong (>$1M / year) volume, or are really committed to getting the best deal, you can negotiate the original quote down further.  Even if they are only marking it up by 10 bps, that is still revenue for the person you are negotiation with, revenue they wouldn’t have if you weren’t their customer.

One of the best ways to negotiate is to negotiate on an interchange plus basis because it makes totally clear the size of the cut that your merchant account provider is taking.

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