Visa’s New Network Fee Favors Aggregators, a Top ISO Executive Argues

A network fee introduced this year by Visa Inc. hands so-called merchant aggregators like PayPal Inc. an unfair cost advantage relative to traditional acquirers and independent sales organizations, a top executive with one leading ISO contends.

The fee, known as the fixed acquirers network fee (FANF), is a complicated affair but generally speaking mandates that acquirers pay a monthly charge tied to the number of locations maintained by each client merchant. The rate schedule for card-not-present merchants, fast-food outlets, and aggregators, however, requires a fee linked to merchant volume. In nearly all cases, acquirers are expected to pass the new fees on to merchants.

Because the schedule for aggregators tops out at $40,000 monthly, regardless of additional volume, ISOs that serve thousands of locations could end up paying substantially more and could be at a competitive disadvantage, says Henry Helgeson, president of Merchant Warehouse, a Boston-based company. “It begs the question, why wouldn’t every ISO become an aggregator?” he says.

A merchant aggregator processes transactions for merchants on its own merchant account, rather than establishing an account for each seller. This allows these merchants, which are often very small, so-called micro-merchants, to begin accepting transactions much sooner and with less underwriting and other process work. PayPal and Square Inc., the mobile-acceptance startup, are prominent examples of aggregators. While aggregation was once restricted to card-not-present merchants, recently enacted rules changes at Visa and MasterCard Inc. extended the practice to physical points of sale. Merchants that exceed $100,000 in annual card sales for either brand, however, must establish a conventional merchant account.

Visa’s FANF became effective in April but the network won’t start collecting it until next month. Visa argues the fee’s reliance on a fixed component means most merchants will pay less than was the case with an older network participation fee that included a larger variable component, particularly if they pump more volume through the network. Indeed, the fee is widely seen as a way for Visa to maintain transaction share at a time when Federal Reserve rules have given merchants more freedom to route transactions to alternative networks. The Fed rules are an outgrowth of the Durbin Amendment to the Dodd-Frank Act of 2010.

Under the FANF schedules, the levy for a single location is $2 a month, but the fee rises by tiers so that an ISO serving merchants that account collectively for a total of 1,001 locations is liable for a monthly charge of $40,040, or $40 per location. From there, the fee goes up to a maximum of $65 per location for 4,001 locations or more. For so-called high-volume merchants, which include retailers like supermarkets and discount stores, the fee is higher: $55 per location at 1,001 outlets and $85 at 4,001, for example. By contrast, the fees for aggregators rise by tiers of monthly gross volume, starting at $2 for volume of $50 or less and reaching a maximum of $40,000 at $400 million.

Because ISOs pay by location, some argue they will be liable for substantially higher payments than aggregators with the same volume. Helgeson, for example, expects Merchant Warehouse’s annual FANF toll will exceed $1 million, or roughly double the maximum fee for an aggregator. “This is a net positive for aggregators,” he says. “They will have an advantage over ISOs and the [traditional] merchant account.”

What’s more, the new Visa policy hands this advantage to competitors like PayPal, which work to divert volume away from higher-cost card networks to the lower-cost automated clearing house, Helgeson argues. “A lot of those [PayPal] transactions are clearly falling off of Visa and MasterCard cards,” he notes.

In response to an inquiry from Digital Transactions News regarding FANF pricing for aggregators and ISOs, Visa issued this statement: “Visa is aware of the situation and is reviewing options to ensure that no participants are unfairly disadvantaged.”.

But not all ISOs agree that the FANF hands aggregators a chance to undercut ISOs for new business. Unlike ISOs, aggregators absorb fees like the FANF rather than passing them along to merchants, so merchants aren’t affected while the aggregators’ costs increase substantially, says Jeff Fortney, vice president of ISO channel management at Clearent LLC, a Clayton, Mo.-based ISO that published a FANF explanation on its Web site. At the same time, aggregators are serving a merchant market most ISOs would consider uneconomical for a conventional merchant account, he says. “They’re going into a market with somebody we wouldn’t sign any way, and sooner or later they’ll be big enough that we will sign them,” he says.

In any case, the apparent pricing advantage for aggregators may well prove short-lived. “I think you’ll see a closing of the gap over the next several quarters,” says Todd Ablowitz, chief executive of Double Diamond Consulting Group in Centennial, Colo. He argues the FANF was intended to encourage mobile payments through micro-merchants that might otherwise have been uneconomical to sign, but that pricing advantage was never meant to be permanent.

Ablowitz, whose firm advises ISOs on how to adopt the aggregator model, says he tells them to seek reasons other than the FANF’s pricing differences to move into merchant aggregation. “We’re advising clients that if aggregation is effective for you, there may be some added incentive to do that short-term,” he says. “But I wouldn’t do it for that reason.”