The evolution of innovative, aggressive business models in payment services, and the current market consolidation trends are forcing banks to explore and regain its leadership in this space. The potential to build customizable payment solutions aligned with customer’s business needs and the ability to achieve bank’s revenue goals alongside makes this LoB more attractive.

The new model is not about acquiring or processing, but about addressing merchant needs in new holistic ways – Flexibility to its customers irrespective of who the sender is (Individual / Business / Government) and what the source is (CASA / Digital Wallet / LoC or even Blockchain) and the ability to route it through multi-rail (ACH / RTP / UPI/ Card network /Wire / Chain) and finally delivering to different category recipients (Individual / Business / Government) located Locally / Domestic or cross-border / country.

Let’s explore one of the platform services – ‘Merchant Services’, a bit more detail from a billing point of view.

Merchant acquiring, the basic element in payment processing, has transformed into a software-first business -driver to enable faster growth in payment industry. Enabling customers with Innovative payment methods for the products or services are becoming the priority for merchants to stay ahead in their business.

The intricacy linked with payment processing has stimulated niche business models to emerge including the ‘all-in-one’ platform. The emergence of multiple parties – Merchant Acquirers – PSPs, Payment Processors, Aggregators and Orchestrators are evolving into full-stack service model, which banks are now eyeing for. Major factors to consider while offering merchant services are:

(a)     Shifts in consumer payment behavior.

(b)    Changes in retail industry including its convergence trends.

(c)     Innovations in payment technologies including new payment rails.

(d)    Payment regulatory changes

(e)     Competition within the industry.

The ability to unbundle and reconfigure transaction processing services drives the competition in this space. Transparent and smooth transaction experience – from point-of-sale through reconciliation, with transparent and straight forward pricing structure holds the key in winning the market.

Managing the Merchant Service Revenue stream

It needs a well-connected multi-party eco-system to manage the payments, right from making sure the availability of funds, mitigating fraud, and moving money from customer to merchant. It needs a proper revenue management system to make sure everyone involved is getting their revenue share and ways to plug any leakages.  Let’s take the case of a payment made in the multi-party eco-system, say customer C1 pays, $100 to a retail merchant M1.  In the system, the retailer M1 will not see $100 in his account as some portion gets allocated as acquirer service provider’s share. Usually this portion will be a % of the transaction value plus a flat amount. This can vary for different service providers and based on various performance oriented contracting terms. Underwriting risk and payment instruments also play a major role in deciding the service cost.

For customers who use merchant services, it is crucial to plan and manage the expenses.

Merchant services costs mainly fall into following categories.

(1)   Per Transaction

For every card transaction (credit or debit card), merchants need to pay an interchange fee, which is the significant component of card processing Fee.

Interchange fees are set by the card scheme governed by regulatory authority and paid to Issuer – normally a bank. Based on the card type – debit / credit there can be cap set for consumers.

The challenge in computing the interchange rate is that many variables can affect the fee amount and it is difficult to determine upfront how much the charge will be.

Per Transaction rates can be based on the monthly processing volume, which is the total dollar amount of credit or debit card transactions across merchant locations in a month. Card schemes controls the interchange fees and are non-negotiable – Typically around 0.3 to 0.4% of the transaction amount in Europe and 2% in the US.

Let’s have a quick look at the variables that control the interchange Fee and how the fees are calculated:

CP Vs CNP Transactions

In face-to-face transactions where card presented (CP) physically – Swipe / Dip / Tap, the underwriting risk is considered as low, so the risk-based rates are low for such transactions compared to card not present (CNP) through Phone/ online / e-commerce websites.

Payment Instrument: Credit Vs Debit Vs Reward Cards

Credit cards and Deferred type debit cards are considered as high risk involved category compared to Instant debit and pre-paid cards. Rewards cards will have even higher rates to cover the exact cost offered by the reward programs.

MCC (Merchant Category Code)

The four-digit Merchant Category Codes plays an important role in identifying the merchant’s business sector/ type and in turn on the pricing.

Interchange Fee Variation: The interchange fee computed by the card processor for a fuel station classified under the MCC will be different from a Car Rental Merchant under another MCC category. Here MCC codes translates into the underwriting risk level for the transaction.

Settling Loyalty Reward redemption: A customer using a credit card that offers x% cashback for specific transactions (example: MCC Code 4511) let’s say, air ticket can be rewarded as part of loyalty program to specific transaction types like for only future air tickets (MCC Code 4511). Such pricing schemes are defined based on the Merchant Category codes.

While generating the Ledger entries post transaction pricing, amounts are grouped based on MCC category codes and fed to the GL systems – Business Type- Services Vs Product Selling etc.

Consumer Vs Commercial, Merchant Type – B2C Merchants Vs B2B Merchants

Higher rates are changed for commercial cards compared to cards issued to an individual.

B2C merchants which includes restaurants, retailers, health practitioners, and any businesses that accept payments from consumers will be priced at a lower rate while compared to B2B merchants which includes distributors, medical/dental suppliers, industrial suppliers, and any businesses that accept most payments from other businesses.

Transaction Territory

Domestic transactions attract low rates as both the card-issuing bank and the business are in the same country.  Whereas the cross-border transactions are on higher rates.

Pricing Structure: Interchange++ vs. Blended pricing

Pricing transparency is the key differentiator between the two models.

For Interchange++, The 3 cost components – acquirer markup, card scheme fee, and interchange fee are calculated & presented separately as detailed breakdown.

The Blended pricing methodology computes the charge based on an average processing cost with a fixed markup. Though the markup remains constant for every transaction, the total fee is presented as a single component – no split of the costs hence low transparency but looks simple charging.

(2)   Monthly Service Charge / Subscription Fee

Regardless of the transaction processed, merchants will be charged a fixed monthly fee or a recurring fee in every invoice period. This mainly covers the cost for services like 24/7 support, any reporting or analytics needs, risk and fraud monitoring, dispute management and Payment gateway access for e-commerce payments.

Some of the monthly charges may be applicable per business location and some charge covers all locations. It is possible to have personalized rates and discounts tied to business performance / Transaction turnover.

(3)   Equipment Charges

As part of merchant services, various equipment like POS terminals, software plans, apps and portable devices are offered to accept card payments through various methods – onsite, online, or on the go. The cost for the same is covered through associated fees. This can be a one-off Fee or even it can be collected as installment fee – collected in ‘n’ installments.

(4)   Commitment based Fees.

There can be other Fees involved based on the contract types. Some of them are

• Monthly minimum Fee (Revenue Target)
• Processing Commitment Fee (Transaction Volume Target)
• Statement Fee
• Gateway Fee

(5)   Event / Incidental Fees

There can be other fees involved based on the contract types and charged based on occurrence of a particular event. These are one-time fees triggered based on the event.

Some of them in this category are :

• PIN debit Transaction Fee
• Address Verification System Fee
• Retrieval request Fee
• Chargeback Fee
• Batch Fee
• Cancellation / Termination Fee
• PCI non-validation Fee
• Application / Setup Fee
• Red Flag Merchant Fee

Banks should equip themselves to handle minimum flexibility in offering services to merchants in order to get themselves prepared for the new age digital disruptions. Basically, banks need a revenue management solution that can interact with multiple systems with-in bank’s landscape to offer customized products, services to merchants and monetize the new and upcoming business models.

Infosys Revenue Management Platform is a highly configurable Billing & revenue management system for banks with inbuilt business functions and pre-defined interfaces to handle the merchant services.