Can card acquiring get cheaper?

  1. Possible ways card acquiring might get cheaper (the exceptions)
  2. Possible ways card acquiring might get more expensive

1/ Card acquiring costs levers 101

Definitions

  • 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 control scheme fees, and set interchange fees in partnership with banks. PSPs manage their margins, by collecting a spread on each transaction.
Image is my own, please do not use without written permission

Possible ways for card acquiring costs to get cheaper

I’ll breakdown 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 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

Conclusion

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

  1. 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 a solution. For example, accepting Alipay and WeChatPay is cheaper for merchants than accepting China-issued cards.
  2. 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 — lets 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 (0.1% savings on billions matters!), but interchange and scheme costs are still >2%.

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Celine Wee

Celine Wee

Musings are my own: a collection of learnings from Payments, Go To Market, Web3, Biz Ops across Stripe, Coinbase, Twitter.