ISOs’ Authorization Costs Decline, But Other Processing Expenses Are on Their Way Up

Good news for independent sales organizations: authorization costs continued their long-term decline over the past two years, according to a recent industry survey. Not-so-good news: clearing and settlement costs have stopped declining, customer-service costs are rising, and processors are eyeing new fees to generate revenues from ISOs.

Omaha-based The Strawhecker Group (TSG), a consultancy specializing in the payments industry, reported the findings in its 2013 bi-annual study of ISO processing costs. The firm obtained its data in the first quarter by surveying 54 ISOs ranging in size from 100,000 authorizations per month up to 17 million. TSG then divided the respondents into four groups based on size for analysis. The ISOs typically buy a host of services from large merchant processors.

TSG senior associate Mike Goding says costs for Internet-based Secure Sockets Layer (SSL) authorizations declined 14% since the firm’s 2011 survey, and dial-up costs fell 10%. (TSG didn’t disclose actual cost figures publicly.) While TSG did not investigate the reasons for the price changes, Goding attributes the falling prices to industry competition and the movement of Internet-based authorizations from cutting edge technology to the commonplace.

“In the early years SSL was priced at a premium to dial,” Goding tells Digital Transactions News, noting that SSL technology is much faster than dial-up. “They were exotic at first so people could premium-price them. Now I think we’re getting close to seeing parity” with dial-up costs.

In contrast to authorizations, ISOs’ clearing and settlement costs appear to have stopped declining after being “ground down” for the past decade, according to Goding. “Those have pretty much plateaued,” he says. “I think the processors have said, ‘This is pretty much how far we’re going to go, we’re not going to go lower.’”

Other costs are going up for most ISOs. For the three smallest groups in the analysis, general customer-service costs rose 12% and terminal help-desk charges increased 25%. Goding speculates prices for those services are rising because many ISOs ignore them, instead concentrating on authorization and settlement expenses when thrashing out contracts with processors. “My guess is that these are items that are not focused on in negotiations, they’re things processors can get a little bit of margin on,” he says.

One fee some processors began charging a few years ago and which attracted much criticism, a fee for providing Payment Card Industry data-security standard (PCI) compliance services, still isn’t all that common, according to Goding. “I thought we’d see more incidence of those, but only about 20% of acquirers incur that fee,” he says.

But Goding predicts that more ISOs will see PCI fees in new contracts after their old ones expire, in addition to new fees for meeting recent Internal Revenue Service reporting requirements. That’s because processors have ISOs against the wall on those matters: all merchants must meet the PCI standards, and it’s hard to escape the IRS. ““It’s a new revenue stream for the processors, it’s hard to negotiate these,” he says.