Can card acquiring get cheaper?

I was recently asked this and leapt quickly to a “No”. Thinking more about it, my answer is "generally no, but with some exceptions". I discuss three points in this post:

1. Card acquiring cost levers 101
2. Possible ways for card acquiring to get cheaper (the exceptions)
3. Possible ways for card acquiring to get more expensive

1/ Card acquiring costs levers 101

Definitions

Card: Debit/Credit cards

Acquiring: the processing of card payments that enables merchants to accept online/offline cards payments

Merchant fees: Interchange, Scheme fees, and Acquiring and Processor fees

Players:

• Card networks (Visa, Mastercard) control scheme fees, and set interchange fees in partnership with banks.
• Issuing banks collect Interchange Fees (they also share interchange fees with schemes, but this is not the focus of this post).
• Payment Service Providers (PSPs) manage collect a spread on each transaction — this is their margin.

How the fees add up

See the diagram fees below on the fee components for merchant fees, which are

1. Interchange (IC)
2. Scheme fees / card network costs
3. Acquirer / processor fees aka PSP costs

Image is my own, please do not use without written permission

Possible ways for card acquiring costs to get cheaper

Here are possible ways to lower card acquiring costs by cost category:

1/ Interchange (IC) costs

• Government regulation: IC could decrease if governments regulate the interchange and put caps, like in Europe/Australia. Some governments have created competitive low cost debit networks (EFTPOS in AU).
• Card network decisions: Interchange could decrease if card networks decide to lower the interchange for certain merchant category codes, in order to encourage card vs cash spend. For example, grocery has discounted interchange in some markets.
• Merchant action: Moving to local card processing vs cross border processing could lower interchange costs, but that means operational costs like new entities, bank accounts, capital injections, and managing local compliance/regulations. Primer here.

2/ Scheme fees / card network costs

It is unclear to me why card networks would reduce scheme fees given their revenue opportunity, but curious to hear alternative views.

3/ PSP costs

PSP’s make a margin per transaction. The larger a merchant, the more likely they can negotiate better pricing (aka get PSPs to accept lower margins). However, smaller merchants have less leverage.

Possible ways for card acquiring costs to get more expensive

On the flip side, there are forces driving up card acquiring costs. Using the same costs framework:

1/ Interchange (IC) costs

Interchange rates tend to go up - see here for the 2022 rise in US interchange rates.

2/ Scheme fees / card network costs

For cross border payments, scheme fees are higher than domestic (~50-100% higher depending on market). Also, cross border transactions means FX costs and more fraud, so higher chargeback costs [1].

3/ PSP costs

Given the competitive PSP landscape, and that PSPs already have to raise prices to pass on increased interchange costs, PSPs may choose NOT to increase their margin per transaction, if it deters merchants from using them. PSPs have to be more creative in monetization, like more monthly fees, FX mark ups etc.

Credit to: DesignStripe

Ways to lower acquiring costs and the limitations

For a merchant, the ways to lower card acquiring costs could be:

1. Domestic processing: Local acquiring and using low cost domestic payment networks. However, this might increase operational costs (for overseas merchants entering new markets).
2. Cross border processing: For cards, there are less levers to lower costs, other than finding PSPs willing to give up more margin. However, accepting local payment methods might be an option. For example, accepting Alipay and WeChatPay is cheaper for merchants than accepting China-issued cards.
3. Growing larger and negotiating PSP fees down: Personally, I believe this has diminishing impact given fees are a smaller part of total merchant costs. An illustrative example — let's say: interchange is 2%, scheme 0.1% [2], PSP fees 0.5%. Even if an enterprise had a discounted fee of 0.2% PSP fees — total per transaction costs are still a 2.3% vs 2.6%. Yes, there’s savings that should be negotiated for (bps savings on hundreds of millions/billions matters! So please still re-negotiate), but interchange and scheme costs are still >2%.

So, can card acquiring get cheaper for merchants? Generally no, especially if it is cross border acquiring.

[1] Primer here on disputes/chargebacks. Merchants cover all the fees for losses and chargebacks. Moreover, if unable to control fraud, they face card network fines.

[2] This is a low estimate of domestic scheme fees, reach out to your acquirer for a detailed breakdown.