|June 26th, 2019|
Making top-notch merchant services available to your bank customers may sound like a brilliant business move as it does have potential of augmenting clients and profits both. Nevertheless, these dreams of any businessman can shatter in the glimpse of eye if merchant account services are not availed at competitive rates.
For those who do not know, the payment processing industry is notorious for using ambiguous agreement language and unprecise fee structure and most importantly, there is a very thin line between the term ‘competitive’ and what is not.
It is obvious that you do not want low profit, stagnant portfolio growth and high rates of attrition but for maintaining a merchant account you will have to run through the associated hard costs.
What do you mean by interchange?
Merchants and banks, they all should know that it is necessarily important for any business accepting card payments to pay interchange fees. Interchange fee is charged by customer (cardholder’s) issuing bank to the merchant’s acquiring bank for processing every single transaction. This fee is passed on to the merchant and the issuing bank is compensated for the risk involved in payment approval, revenue lost and handling costs.
It is the card brands that monitor the interchange rates but they remain the same with change of processors. But that does not make the estimation of interchange easy. It is so because these rates are computed on the basis of multiple factors that include card type, industry and type of transaction. These rates are subject to alter twice annually, but the brands websites can be referred to confirm the current interchange rates.
Which are the other costs involved with merchant account services?
Unlike interchange fees, other hard costs are not standardized as they rely upon a handful of factors which include, processing method, products or services provided, pricing plan etc. Some B2B merchants will succeed in qualifying for level II/III processing, which means they will receive lower interchange rates and would possibly lead to bigger profits if priced accordingly. On the other side, online gateway charging a monthly fee of $10 from an e-commerce account will add to the bottom line.
More than anything what will influence your merchant services program financially is the agreement with processing partner. There are two factors that are used for calculation of your bank’s share on an account namely- buy rate and revenue share. Staying suspicious of a potential processor that proffers something too good to be believed is favorable for you. Oftentimes, a higher percentage does not reciprocate in more money. Before dwelling it in deep, let us discuss the essentials of buy rate and revenue share.
What is meant by revenue share?
A revenue share is the percentage of the profit generated by a merchant account that is received by your bank. For generating profits, each account within your portfolio is supposed to exceed the hard costs suffered by the processor. Hard costs are usually linked with the processor, the credit card associations and interchange fee paid to issuing banks.
A potential partner offering your bank 100% revenue share would resonate in your ears like a perfect deal. Stop and think before rushing to sign the contract-which sustainable business would give up on 100% of their profit. It is therefore needed to assure what exactly you are going to receive.
What is buy rate?
Buy rate is the cost associated with opening a running merchant account every processor has to bear. A processor proffering your bank a huge portion of profit, possibly all profit for your revenue share, might be compensating it with buy rates.
For example, two processors with the same actual buy rate. Processor A reveals lower buy rates and your revenue share is 70%. On the contrary, Processor B, for offering you a 100% revenue share has padded their buy rates.
In the latter case, a bank would have to charge higher price from your merchants as your costs are higher but the profit is low. This situation would not be very favorable for retaining business and it would eventually lead to higher attrition as the rates your bank is offering to merchants are not competitive enough.
Processor while remaining indifferent to your bank’s growth or business will be making money. There will be no incentives for growth of your merchant services program. Inflated buy rates would leave no room for a healthy and mutually beneficial association. Your bank should ensure that it does not get webbed in such predacious kind of business practice.
Things to take care of
Before finalizing which provider can give you the best merchant services program, it is essential to look into the base hard cost that will be exceeded on each account before receiving mutually agreed upon revenue share. Right merchant account provider will have ways to accelerate profits for you. Don’t hesitate in asking for a fair comparison with your current processor to comprehend the current revenue share and evaluate the offered program.
Takeaway for banks
Processors know very well how to take advantage of lack of knowledge on the part of banks and merchants. Credit card processing is complex and hard to understand. For success of your merchant services program it is utmost important for the processor to maintain transparency.
Numerous processing services in the industry are predatory and you have to have a team of experts that work to take best care of your interests. Inconsistent growth and attrition ought to have some solid underlying reason behind them. Let your bank not suffer any longer as you deploy best team of payment professionals. They can scrutinize the whole set up and tell you whether it is worthwhile to continue the endeavor with existing processor or it is time to switch the processing services.
Not only your bank will take an educated decision but it will also assist you in finding the genuine and competent merchant services.