Visa’s FANF Revision Could Take a High Toll on Aggregators When It Kicks in Next Year

A revised set of network fees from Visa Inc. could hit merchant aggregators hard when the revisions take effect next April, according to payments-industry sources. Depending on the size and number of aggregators’ sponsored merchants, the revisions could significantly boost actual fee payments as well as drive up programming and administrative costs.

The revisions, part of a package of changes Visa released to acquirers last week related to the network’s 2-year-old fixed acquirer network fee (FANF) regime, reduce costs for most small merchants but effectively eliminate what has been a $40,000 monthly cap on FANF fees for aggregators, according to documents obtained by Digital Transactions News and industry sources.

With that cap no longer in place, major aggregators like PayPal Inc. and Square Inc. will no longer enjoy an upper bound on their FANF liability. The news comes as Square lost $100 million last year and has held talks with Google Inc., Apple Inc., and eBay Inc.’s PayPal unit about a possible sale, according to a story this week in The Wall Street Journal.

Square did not respond to a request for comment regarding the Visa fee revisions. Via email, PayPal said it met with Visa to better understand the purpose of the FANF revisions. “There will be no direct impact to PayPal merchant fees due to this FANF expansion and no material impact to our business financials,” the company says.

Visa refused to comment beyond a statement it released to Digital Transactions News last week. Acquirers pay the FANF fees to Visa and then choose whether to pass them on, in whole or in part, to their merchants. Aggregators typically absorb the fees, building them into the rates they charge their sponsored merchants.

Some independent sales organizations that use aggregation will likely feel some pain, as well. “I believe it\'s going to hit a lot of ISOs, besides PayPal and Square,” says Adil Moussa, principal of Omaha, Neb.-based Adil Consulting, via email. “There are ISOs out there that specialize in [multilevel marketing] that use an aggregation model. Right now, all of their customers are receiving small payments on credit cards, but as an aggregate, they have a huge volume.”

Sometimes called payment-service providers, aggregators sign up merchants on their own merchant account rather than setting one up for each seller. The method allows small merchants to begin accepting cards sooner than if they had to undergo standard underwriting. (With the changes released last week, Visa has designated aggregators as payment facilitators rather than payment-service providers.)

Under the new FANF regulations, which will take effect April 1, 2015, merchant aggregators will be required to track and report sponsored merchants individually by their tax ID numbers, rather than treat their volume in the aggregate. At the same time, aggregators will no longer be part of a separate table of fees that also applies to card-not-present merchants and fast-food restaurants and that caps the monthly FANF toll at $40,000. The cap occurs when monthly volume reaches $400 million, a lofty level not likely to be reached except by very large aggregators. The revised fee table covers card-not-present merchants, fast-food outlets, and unattended terminals.

Acquirers contacted by Digital Transactions News interpret these developments to mean that aggregators will have to sum up the fees called for by the FANF schedule that applies to each of their merchants and then pay the total. In addition to the card-not-present/fast food/unattended terminal schedule, two other FANF tables cover physical merchants, one for so-called high-volume stores and one for all others.

The impact on super aggregators like PayPal and Square is hard to predict precisely, since neither company releases details on their merchant makeup. But observers figure the loss of the cap is likely to mean they will face a monthly FANF toll significantly greater than $40,000, given the volume levels they process.

But the new FANF rates also include a break for small merchants, and that could work in aggregators’ favor, since they typically process for micro-merchants and slightly larger sellers. Merchants with less than $200 in monthly volume will be subject to no fee, regardless of which table they fall into (though their tax IDs will still have to be reported to Visa individually). Those with $200 up to a penny under $1,250 in monthly volume will pay 15 basis points (0.15%), again regardless of schedule. That results in a fee of 30 cents up to $1.87, compared to the $2 minimum fee under the existing FANF tables.

Still, an aggregator serving thousands of very small merchants and having to compute and total the fees for each one could easily exceed $40,000 in monthly fees. For example, 25,000 merchants each incurring the $1.87 levy would total to $46,750.

Todd Ablowitz, whose consulting firm, Centennial, Colo.-based Double Diamond Group LLC, advises processors on aggregation, argues most aggregators will adjust, probably by repricing their portfolios. “I absolutely do not see this stifling the aggregator model,” he says. Instead, he says, Visa’s move “levels the playing field” for acquiring. “This will hit aggregators more than someone who’s not aggregating, but two years ago the opposite was true,” he says.

Visa introduced FANF in April 2012 in response to new debit card routing flexibility handed to merchants under the Durbin Amendment to the 2010 Dodd-Frank Act. Under the new law, merchants must have a choice of at least two unrelated networks. To encourage merchants to concentrate their credit and debit card volume with Visa, the network structured FANF’s fee schedules so that, within any given volume tier, merchants pay less per transaction as they add stores and volume. When they grow large enough to jump to the next tier, they incur a higher fee but can bring their per-transaction cost down by adding yet more volume.

FANF provoked controversy among merchants, many of which complained about the new cost coming on top of interchange costs and what they perceived as a lack of information about the fees. Unlike interchange, which is set by the networks but collected by card issuers, FANF revenues flow to Visa.