Is The Middleman Inflating Your Rates?
If you’ve been shopping for a merchant account recently, you might have heard the following pitch from a few sales agents:
- “As a direct processor with Visa/MasterCard, we can offer true wholesale pricing.”
- “By cutting out the middleman and processing directly with Visa/MasterCard, we’re able to offer rock-bottom rates.”
- “The only way to get the lowest per-transaction rates is to go with a direct processor like us.”
This is a frequent refrain within the industry, and it seems to make sense. After all, if direct processors are the only companies that can process directly through the card networks, then any ISO, reseller, or independent agent beneath them will have to add a hefty markup just to make any money, right? Well, not exactly—it’s a little more complicated than that. By taking a moment to understand how the merchant services industry is really structured, you can begin to make good decisions for your business and see through empty sales-speak.
What Is A Direct Processor?
When people use the term “direct processor,” they’re referring to any payment processing company that has direct access to Visa and MasterCard’s credit networks. The simple truth, however, is that Visa and MasterCard only allow large banks to directly access these networks. In fact, Visa originally grew out of a program created by Bank of America, while MasterCard was originally created by Wells Fargo. In other words, Visa and MasterCard were created by large banks in order to facilitate payments between large banks. For this reason, every “direct processor” in the industry is either a direct subsidiary of a bank or a company that was at some point tightly integrated with a bank. Below are a few prominent, modern examples:
- First Data was incorporated in 1971 when the Mid-America Bank Card Association (a non-profit network of local banks) was rebranded as First Data Resources. The company would go on to be acquired by American Express in 1980 (and spun off again via an IPO in 1992), and it also worked with Bank of America to create Bank of America Merchant Services in 2009.
- Elavon is a subsidiary of U.S. Bancorp.
- Vantiv was the payment processing division of Fifth Third Bank until it went public in 2012.
- TSYS started as a division of Columbus Bank & Trust in 1959. It has since become a very large publicly-owned company, but it was 81% owned by Synovus Financial (the parent company of Columbus Bank & Trust) until 2011.
- Chase Paymentech is the payment processing division of JPMorgan Chase, the largest bank in the U.S.
Simply put, the only “direct processors” are either banks or divisions of banks. There are fewer than a dozen such companies in the country, and the vast majority of the merchant account providers in the U.S. are resellers or subsidiaries of these huge corporations.
So, how do you know if your merchant account provider is a direct processor? Unless your provider is a regional bank, national bank, or one of the few massive payment processing companies that have successfully spun off from banks, it probably isn’t a direct processor. However, this doesn’t stop enterprising sales agents from claiming that they have “access to wholesale Visa/MasterCard rates” or “direct processing through our banking partner, (insert actual direct processor here).” This sales tactic is effective because it makes credit card processing seem like the retail industry. Most merchants understand how wholesale pricing works in retail: the higher up in the supply chain, the better the deal. Unfortunately, though, credit card processing doesn’t necessarily work that way.
The Marketplace Is Fiercely Competitive
Huge direct processors like First Data may dominate the market, but they can’t directly serve every last business owner in the country. That’s why nearly every direct processor operates an extensive network of independently branded and operated sales offices known as ISOs. Many ISOs operate smaller sub-ISOs, and very large ISOs are known as super ISOs. The smallest individual unit, found at the bottom of the chain, is a single independent sales agent—think “Don’s Merchant Accounts”—who is a reseller for a sub-ISO, which is a reseller of an ISO, which is a reseller of a super-ISO, which is a reseller of a direct processor.
It’s true that most super ISOs, ISOs, and sub-ISOs pay a base cost for each account they open through their direct processor. This fee covers the direct processor’s costs for maintaining the account and ensures that the ISO program remains viable on a large scale. However, most direct processors offer ISO agreements that protect resellers from being undercut by their parent organization. The reasoning behind this is simple: if Company A’s subsidiaries are competitive in the marketplace, then they will beat Company B’s subsidiaries for new accounts, thereby increasing Company A’s market share and bottom line. This means that every merchant account provider in the country, regardless of whether it is a direct processor or a small sub-ISO, should be able to compete when it comes to rates.
However, this still leaves us with the problem of the base cost that each ISO must pay to open an account. If direct processors don’t have to pay these costs, then isn’t it more likely that direct processors can go lower on rates and fees to win your business?
Big For Big, Small For Small
The overall cost of a merchant account is made up of multiple fees: per-transaction fees, monthly fees, annual fees, minimum fees, termination fees, and any other fees a provider might charge. It’s up to each ISO to tweak these different fees so that it can recover its base cost per account plus enough to pay sales agents and keep the lights on. This means that smaller, leaner organizations will likely have lower maintenance costs and therefore more wiggle room to find pricing that works. In other words, even the organizations at the bottom of the supply chain should still have the flexibility to put together deals that cover their costs and still give you a reasonable rate.
But even if they struggle to offer competitive pricing, smaller providers can still compete on service and expertise. Large direct processors typically suffer from the same customer service woes that plague other multinational organizations: long phone waits, slow turnaround times, canned responses, and rigid adherence to protocol. Local and regional merchant account providers, on the other hand, understand that they can add value to their product by offering dedicated account reps, clear phone lines, and flexible agreements.
This contrast is perhaps the most important thing to consider when deciding between a direct processor and an ISO. As a general rule, large businesses can often negotiate low rates through direct processors, but small businesses will receive more competitive pricing and service from small merchant account providers. It ultimately comes down to leverage. If your business is processing less than $5,000 per month, then it’s unlikely that you’ll be able to persuade a huge, direct processor like Elavon to risk losing money on your account by providing you with zero-markup pricing. However, a business your size could provide a nice boost for a growing sub-ISO or a new agent looking to land an account, which in turn might encourage them to find a price point that works for you. Conversely, large companies processing over $100,000 per month can throw their weight around a bit and secure competitive quotes from most large processors. Not only can these corporations get direct processors’ best rates (for instance, Wal-Mart receives nearly zero markup above interchange through First Data), but they may also benefit from the scalability that these huge processors offer.
In short, it’s possible to get a great deal from a merchant account provider of any size. If your business is the size of Wal-Mart, then you may be able to convince a direct processor to give you rock-bottom rates. For everyone else, it’s best to secure a competitive interchange-plus rate quote with no early termination fees or exorbitant monthly costs. Any good middleman can help you with that.