Acquirer's mark-up and pricing methods

What you will learn

  • What interchange is
  • What an interchange downgrade is
  • What dues and assessments are
  • What an acquirer’s mark-up is

What you should read first

Full article

This is part 3 of 4 of the fees article. Here are links to each part:

Introduction

In the previous two parts, we broke down interchange and dues and assessment fees that a merchant is charged when they accept a credit card. The cost of those two fees is mostly dictated by the issuing bank and the card association.

This part covers the acquirer's mark-up which is paid to the merchant's acquiring bank, acquirer processor, and ISO, collectively referred to as the “acquirer”. This fee is not regulated by any entity so there are many different ways that a merchant can be charged.

Acquirer
The acquiring bank, acquirer processor and ISO that collectively provide a merchant with a merchant account.

Acquirer's mark-up components

The acquirer's mark-up is the only negotiable fee within a merchant's cost of acceptance and the price is largely decided by the entity that does the merchant acquisition. For example, when an ISO signs a merchant up for a merchant account, the ISO determines what the acquirer's mark-up will be. To choose this price, ISOs take the following factors into account:

  • The fee charged by the acquiring bank (paid by the ISO)
  • The fee charged by the acquirer processor (paid by the ISO)
  • The ISO's own business costs and desired profit margin

Pricing methods

The three most common acquirer’s mark-up pricing methods are interchange plus pricing, bundled pricing, and tiered pricing. It is important to note that there are many opportunities for acquirers to charge unfair or even undisclosed mark-ups no matter the pricing method. We discuss these deceptive practices here.


Interchange plus pricing

“Interchange plus pricing” is a pricing method where the acquirer passes fees on to the merchant without inflating those fees. This means that the acquirer does not change the cost of the interchange and dues and assessments fees that is charged by the issuing banks and card associations. As a separate fee, the acquirer then adds their mark-up on top to cover their own costs and profit. This mark-up is some combination of the following:

  • A fee that is a percentage of the transaction size
  • A per transaction fee
  • An upfront fee
  • A monthly fee
  • An annual fee

An example quote to a merchant would be interchange and dues and assessments plus $0.05 per transaction and $20 per month.

Interchange plus pricing
A pricing method where the acquirer passes through interchange and dues and assessments fees at cost (i.e. exactly the price that the issuing banks and card associations charge) and then adds their mark-up on top. This mark-up is frequently some combination of a percent of the transaction size, a per transaction fee, and an upfront, monthly, and/or annual fee.

This is the most transparent method of pricing because a merchant can scrutinize their monthly bill, called a "merchant statement", and ensure that the acquirer is not falsely inflating interchange and dues and assessments. Scrutinizing merchant statements can be can very complicated and if the merchant is not wary of each line item, the acquirer can include hidden fees without the merchant knowing.

Merchant statement
A merchant's monthly bill from their acquirer. This bill breaks down the entire month's transactions and their costs.


Bundled pricing

“Bundled pricing” is a pricing method where the acquirer charges the merchant a flat rate for all transactions regardless of the interchange and dues and assessments costs. This rate is usually some combination of the following:

  • A fee percentage of the transaction size
  • A per transaction fee
  • An upfront fee
  • A monthly fee
  • An annual fee

An example of this pricing would be 2.75% of the transaction size.

Bundled pricing
A pricing method where the acquirer charges the merchant a flat rate for all transactions regardless of the interchange and dues and assessments costs. This rate is usually some combination of a percent of the transaction size, a per transaction fee and an upfront, monthly, and/or annual fee.

Bundled pricing fits all merchants into the same, predictable rate. The result is that this one rate works better for some merchants than others, depending on the factors explained above in the interchange and dues and assessments sections. For example, Square's current pricing of 2.75% on all transactions is very competitive, particularly for merchants with small transaction sizes like coffee shops. For merchants with larger transaction sizes (e.g. furniture stores), Square's rate is less competitive.


Tiered pricing

“Tiered pricing” is a pricing method that is similar to bundled pricing but instead of charging one rate for all transactions, the acquirer charges multiple levels of bundled pricing to the same merchant. An acquirer uses their own internal rules to decide which level each individual transaction qualifies for. Typically, these levels are called qualified, mid-qualified, and non-qualified. Below is an example of a tiered pricing structure:

  • Qualified: 1.40%
  • Mid-qualified: 2.20%
  • Non-qualified: 3.50%
Tiered pricing
A pricing method that is similar to bundled pricing but instead of charging one rate for all transactions, the acquirer charges multiple levels of bundled pricing to the same merchant. An acquirer uses their own internal rules to decide which level each individual transaction qualifies for.

The merchant has no visibility into what these qualification rules are so the acquirer can quote the merchant a very low rate for qualified transactions (oftentimes below interchange and dues and assessments costs) but decide that many or all of their transactions must be processed at much more expensive mid-qualified or even non-qualified rates.

Cost factors

Acquirers determine the mark-up they will charge (for all of the above pricing methods) based on the following factors:

  • Volume of the merchant: Larger merchants typically receive lower mark-ups (and vice versa).
  • Risk of fraud: The more likely a merchant is to put the acquirer at risk of fraud, the higher the mark-up they receive.
  • Merchant attrition: Merchants that seem more likely to go out of business or change acquirers before their contract ends receive a higher mark-up. Acquirers will sometimes also impose hefty termination fees.
  • Average transaction size: It costs an acquirer a similar amount to process a $10 transaction as it does to process a $500 transaction so for merchants with smaller transaction sizes, costs are a larger portion of their transaction size.
  • Additional services: Some merchants receive extremely low mark-ups because the acquirer generates revenue from the merchant through other products like bank loans or POS solutions.
  • Merchant's knowledge of payment processing: An acquirer's mark-up can vary significantly between identical merchants simply because acquirers have an unfair knowledge of payment processing. Merchants that are more knowledgeable are better equipped for the negotiation process.

What you should read next

References