The payments industry is constantly evolving, driven by technological advancements, changing consumer behaviors, and regulatory updates. For acquirers and payment service providers (PSPs), effectively navigating pricing structures while managing costs is critical to maintaining margins and delivering value to merchants.
In this article, we delve into the key cost components impacting acquirers and PSPs, explore the role of card scheme fees, and introduce a phased capability approach to optimize profitability while enhancing merchant relationships.
Understanding the Key Cost Drivers for Acquirers and PSPs
Acquirers and PSPs operate at the intersection of merchants, card schemes, and issuers. Their ability to manage costs and maintain efficient pricing structures determines their competitive edge. The primary cost components include:
- Card Scheme Fees:
- Volume and assessment fees: Tied to transaction volumes and geographic factors (domestic, intra-regional, or cross-border).
- Market development and innovation contributions: Supporting technological advancements and market expansion.
- Switching and network fees: Covering transaction processing through card scheme networks.
- Interchange Fees:
While interchange fees are paid by the acquirer to the issuer, these fees are a key component in determining merchant pricing. Managing the pass-through of these costs efficiently is vital for maintaining margins.
- Operational and Compliance Costs:
- Transaction processing costs: Including authorization, clearing, and settlement fees.
- Compliance expenses: Adhering to regulatory requirements such as PCI DSS, AML, and card scheme rules can lead to significant costs.
- Fines and penalties: Non-compliance with card scheme rules, such as incorrect authorization or delayed clearing, can result in hefty fines.
- Value-Added Services: Acquirers and PSPs often provide additional services to merchants, such as reporting tools, fraud management systems, and analytics dashboards, which come with their own cost considerations.
The Challenges: Balancing Merchant Needs and Internal Margins
Managing the above costs while staying competitive and profitable presents unique challenges for acquirers and PSPs:
- Complex fee structures: Card schemes frequently update pricing models, introducing new fees or adjustments that require constant attention.
- Non-compliance risks: Ensuring that both the acquirer and their merchants meet regulatory and scheme standards can be resource-intensive.
- Merchant pressure for transparency: Merchants increasingly demand clarity and fairness in pricing, putting pressure on acquirers to optimize their own cost structures.
The Capability Approach to Pricing and Profitability
Navigating complex pricing structures requires a phased and data-driven approach to profitability. By leveraging a capability approach, acquirers and PSPs can transition from simple estimates to realistic, actionable assessments. This approach consists of three stages:
- Pre-Qualified Estimates
- Uses high-level pricing quotations based on basic assumptions.
- Relies on inputs such as acquirer contractual pricing and ASF (Acquirer Scheme Fee) tables.
- Provides a starting point for understanding pricing dynamics but lacks granular accuracy.
- Advanced Service Model Estimates
- Incorporates more detailed inputs, including actual acquirer scheme billings and ASF tables passed to merchants.
- Refines estimates using transaction-level data, ensuring greater precision in profitability assessments.
- Realistic Profitability Assessments
- Delivers a factual, detailed view of the flow from merchants to acquirers to card schemes.
- Utilizes real transaction data, including clearing timelines and scheme-specific charges, to provide a complete profitability model.
- Supports expert consultancy, customization, and ongoing maintenance for real-time pricing adjustments.
This phased approach allows acquirers and PSPs to scale their capabilities as they gather more data and refine their cost management strategies.
Strategies for Acquirers and PSPs to Optimize Costs and Margins
Building on the capability approach, acquirers and PSPs can implement the following strategies:
- Proactive Card Scheme Fee Management:
Regular reconciliation of invoiced scheme fees against expected costs to identify discrepancies, such as mismatches in volume fees or cross-border surcharges.
- Dynamic Merchant Pricing Models:
Using flexible pricing models like Interchange++ to transparently pass through costs while applying targeted markups for changes in scheme fees.
- Compliance and Risk Mitigation:
Strengthening compliance frameworks to avoid fines and penalties. For instance, ensuring transactions are cleared within specified timelines (e.g., seven days of authorization).
- Currency Conversion Optimization:
Reducing FX-related scheme fees by optimizing currency conversion flows and negotiating better rates.
- Leveraging Card Scheme Incentives:
Collaborating with card schemes to access market development funds, fee waivers, or promotional incentives that offset operational costs.
- Operational Efficiency Enhancements:
Automating processes like fee reconciliation and merchant onboarding to minimize overhead and improve service delivery.
Why the Capability Approach Matters
The capability-driven framework enables acquirers and PSPs to move beyond estimations toward realistic profitability assessments. By understanding the flow of costs across the value chain, businesses can:
- Protect Margins: Gain precise control over pricing structures to maintain competitiveness.
- Enhance Merchant Relationships: Offer greater transparency and tailored solutions for individual merchant needs.
- Drive Long-Term Growth: Equip themselves with data-driven insights to anticipate changes and adapt quickly.
