Fees are the heartbeat of the payments industry. When money moves between different people and across various networks, fees are typically required to process the transaction. Due to the large number of participants, roles, business relationships, rules, regulations, and transaction types, the fee landscape can be incredibly complex.
It’s important that the players in the payments industry, especially processors, understand the complex world of fees. And since the profitability of financial transaction networks is intimately linked to the successful application and recovery of fees, it’s important that processors have the proper software to effectively administer fees.
Since fully understanding fees in the payments industry can be daunting, BHMI—an industry leading company which has created primary business applications since 1986—published “Fees & Commissions in the Payments World,” a comprehensive white paper on the topic. The document describes the different fees and commissions, and offers some best practices for developing solid, effective fee structures.
The paper also outlines how BHMI’s Concourse — Fees & Commissions™ software allows for the creation of an almost unlimited range of fee configurations, thereby accommodating the needs of any processor involved in a financial transaction.
“There’s no free lunch when it comes to the cost of financial transactions.”
There is a central fact in the payments industry: All participants involved in the entering, routing, authorizing, and settling of payment transactions either charge fees or receive fees. As the paper points out “there is no free lunch when it comes to the cost of financial transactions.”
Although there are some variations, the following are generally the types of fees which occur during the payments cycle:
- Interchange Fees
- Assessment Fees
- Payment Gateway Fees
- Issuing Bank Processor Fees
- Payment Service Provider Fees
Interchange fees are paid by the payment service provider (PSP) to an issuing bank or the issuing bank processor through a payment network. Fee rates are set by the payment card networks and depend on a variety of variables, including the transaction amount, payment card type, and acceptance method, among other factors. Typically, the fee is set to a fixed amount per transaction type, in addition to a percentage of the total transaction amount. It’s important to note that the fee is only assessed on approved transactions.
This type of fee is paid by either the PSP or the merchant to the payment card network handling the purchase. Similar to an interchange fee, assessment fees are normally based on a fixed amount per transaction type as well as a percentage of the transaction amount. However, unlike interchange fees, assessment fees are charged regardless of whether the transaction is approved.
Payment Gateway Fees
Merchants connected to a PSP via a payment gateway provided by a third party are subject to a separate set of fees charged by that payment gateway provider. While the fee structure varies by provider, it can consist of a monthly fee, a flat fee per transaction, a percentage of the transaction amount, or some combination of the three. Terminal fees can also be charged if the payment gateway provider also supplied the card scanner used by the merchant.
Issuing Bank Processor Fees
Since issuing banks often outsource their processing responsibilities to an issuing bank processor, or license a processor’s software, they frequently face related fees. When outsourcing processing entirely, the issuing bank will pay its processor an operations fee, which can vary depending on the fee structure. In cases where the issuing bank licenses processing software, that bank faces a license fee, fees for necessary customization of the software, and maintenance fees.
Payment Service Provider Fees
PSPs also include a variety of fees to cover their cost of doing business. These can consist of flat fees on a per-transaction basis, a percentage of the total transaction amount, or a combination of both. The BHMI white paper also identifies four additional fee structures that a PSP can adopt, including tiered pricing and differential pricing.
PSPs and payment gateway providers also charge non-transaction fees
In addition to the above transaction-related fees, BHMI identifies another 22 unique fees that are potential fee components of plans offered by processors, from terminal lease fees to payment gateway setup fees. For the complete list of non-transaction fees and their definitions, consult the BHMI white paper.
The sheer number of fees underscores how integral fees are to the payments industry. “Fees are an important part of the payments industry and serve as a core component of a processor’s revenue stream,” explained David Nelyubin, a research analyst with Mercator Advisory Group, a research and consulting firm focused exclusively on the payments industry.
The paper also notes that in addition to fees, many processors utilize commissions and rebates to further drive revenue. For example, a processor may reward a customer with a share of processor revenue if the revenue exceeds a target level.
Fees can be overwhelming
Given the amount of fees, the differing fee structures, and the various players contained therein, coupled with the added wrinkle of rebates and commissions, understanding fees can be overwhelming. As the white paper notes, “the number of feeing ‘rules’ that guide the actions of significant processors can exceed 35,000. And the number of variables that can be incorporated into a single rule can exceed 6,000.”
In such a complex environment, “a comprehensive overview of the fee landscape is an invaluable resource for payments professionals,” Nelyubin added.
Meet BHMI’s Concourse — Fees & Commissions
Beyond providing a detailed look at the different types of fees across various payment transactions, the BHMI white paper outlines a potential solution: Concourse — Fees & Commissions. BHMI’s software simplifies the task of creating and managing complex feeing configurations, allowing processors to increase revenue and stay competitive.
Since Concourse — Fees & Commissions is a rules-based platform, all fee calculations are expressed using configured rules, instead of needing to re-write software to express the logic of a fee calculation. Rules can be configured using a point-and-click graphical interface, making it easy to set up or change fee logic when needed.
Such an approach makes fee tiering easier than ever. Fee pricing can automatically be changed based on the number and type of transactions over any given period of time. And since the platform works in near real-time, clients can view the ongoing status of fees positions.
The software supports any fee-related participant in financial transaction processing, including (but not limited to) third party processors, P2P networks, issuing banks, and card networks. To learn more about the world of payment transaction fees and how BHMI’s Concourse — Fees & Commissions can aid processors no matter their needs, access BHMI’s white paper here.