When It Comes to Acquirer Revenue, It Pays To Be Big—Just Not Too Big

By John Stewart

Experts in merchant acquiring have long pointed out that, when it comes to revenue, size matters. Now there are numbers measuring just how much it matters.

Acquirers processing the most annual volume, some $30 billion or more each, earned revenue at a rate of 41 basis points (0.41%) on volume in 2014. That’s worse than the overall industry average of 48 basis points, according to Adil Moussa, principal at Omaha, Neb.-based research firm Adil Consulting, which released the numbers last week.

All other volume tiers beat the industry average, according to the research, which involved responses from 37 acquiring processors and independent sales organizations. Indeed, after the largest tier, the next smallest one, at $10 billion to $29.9 billion, enjoyed the highest revenue rate, at 75 basis points. The other two tiers were $1 billion to $9.9 billion (65 basis points) and under $1 billion (63 basis points).

The reason the big-volume players don’t do as well as their smaller counterparts is hardly surprising. It has to do with the fact that they mostly deal with large merchants, which have more negotiating clout to drive down pricing. “On these merchants, you barely make anything,” Moussa tells Digital Transactions News. “It’s fractions of a penny.” Through sheer transaction volume, however, these merchants can deliver enough revenue to make the business worthwhile, especially if the processors can control costs effectively, he adds. Still, the result for the largest tier came in somewhat lower than Moussa expected, he says.

What may surprise some is how well the next tier down is doing, at 75 basis points. These are mostly acquirers that are big enough to have their own front-end and back-end processing capabilities, which allows them to avoid contracting with outside processors. They also tend to serve smaller, less price-sensitive merchants, Moussa says.

Much the same explanation accounts for the revenue rates for the smaller volume tiers, but here acquirers are often sharing revenue with outside processors, Moussa says, causing the somewhat smaller rates. “Their buy-in rates are really high,” he says, referring to pricing they must pay to processing partners. “They don’t have a lot of volume, and they don’t have their own front end or back end.”

These players also find competition can shave points off their pricing. “They also have to defend against other players coming in,” Moussa says.

Adil Consulting’s next project, Moussa says, is to gather these data yearly so the industry can get a sense of whether revenue rates are increasing or contracting. For this study, 60% of responding acquirers fell into the two smaller tiers, with the remainder in the two larger ones.