Merchant Services Commissions Sharing

The purpose of this article is to familiarize the key players of merchant services industry with the important approaches to merchant services commissions distribution (a.k.a. merchant services revenue sharing) and respective vital features which need to be implemented in the payment systems to accommodate these concepts.


Merchant services industry is organized in such a way that credit card transaction processing often involves multiple resellers (ISOs, payment service providers, sales agents), basically, entities, assisting other actors and making commissions on transaction processing.

Traditionally resellers were represented by independent sales organizations, which assisted businesses in getting and using their merchant accounts. In recent years more and more software companies, which develop products that include credit card processing features, found themselves playing the role of merchant services resellers (as users of these software products required merchant accounts for credit card transaction processing). Particularly, among such products are POS software, restaurant software, fitness center software, daycare center software and other software packages which rely on recurring revenue.

Merchant Services Commissions

Any transaction processing cost consists of base costs (interchange fees and assessments) and markups, and only markups are negotiable. In an article on transaction pricing and processing costs more information on this subject can be found. Most commonly, merchant services commission constitutes a portion of the markup that is paid to reseller to facilitate the relationship. In other words, if a reseller brought a merchant who is charged 3% markup over the processing cost, the reseller might get 1% of the processing cost as commission.

One of the problems always faced by a reseller of any type is the issue of collecting the commission in the most efficient way; ideally, this task needs to be implemented within a payment system.

Approaches to merchant services commission distribution

There are two common approaches to arrange efficient merchant services commission distributiion between multiple intermediate parties: buy-rate and revenue sharing.

  • In case of buy-rate, a PSP can set its transaction processing rate (buy-rate) at 3.5%. Consequently, the reseller can mark it up and offer the service at 5% and collect 1.5% residual revenue on every transaction processed. Say, for a $100 transaction processed the merchant would keep $95, $3.5 would go to the PSP, and $1.5 would go to the reseller.
  • In case of revenue sharing a PSP prices each deal as it sees fit, and certain percentage of the total markup collected is shared with respective reseller. For example, a PSP might collect a $5 fee on a $100 transaction processed, subtract the processing cost of $1.5, and give 50% of the rest ($1.75) to the reseller.

In the recent years, software companies functioning as resellers found that collecting their SAS-offering fees and merchant services fees as a combined merchant services charge was the more efficient way that made reconciliation easier for the merchants. Consequently, more and more people and businesses are searching for payment systems capable of providing respective functionality.

In order to improve the understanding of the features needed to accommodate various types of revenue sharing strategies, let us look at the example below.


There is a billing company SuperBill which processes credit cards. It has an agreement with a software company ezDesign Software developing CRM systems for web-designers. Each web-designer (ezDesign Software client) is set up a merchant, because it needs to charge its customers for web-sites and design services.

When transactions are processed, every web-designer needs to get all the funds he or she is entitled to, but at the same time a certain amount (representing the cost of transaction processing services and the price of software usage) must be retained by the billing company (the basic mechanism can be found in our article on merchant fees). SuperBill needs to pay a certain percentage of this amount to the ezDesign Software it is partnering with.

For example, let’s assume, processing costs is 4%. Let us further assume that the software company wants to charge 1% for its services, i.e. the total is 5%. When a designer charges $100 from a certain web-site, he gets $95 deposited to his account, $5 is withheld by SuperBill and $1 out of the $5 is sent to the ezDesign Software.


When you are selecting a payment system to partner with, you need to analyze the mechanisms of residual revenue distribution included in this system and ensure that the sharing model that you need is supported and the reconciliation process is not going to be too complicated.

Collections Process

If you haven’t read the introductory article to recurring billing mini-series, as well as the article on basic and advanced recurring payment features, you are welcome to do so, as it will improve your understanding of the current post.

Collections process is an attempt to recover a declined payment or an outstanding debt.

When a business deals with committed recurring billing model (described in the previous article), there is a follow-up process performed for recovery of unpaid balance. It is quite important to think through how the follow-up process is going to happen on declined payments, and, therefore, make sure that this feature is taken into account when a specific system is chosen.

If there is a necessity to collect a declined payment or an outstanding debt, depending on the particular account and situation, one of the 3 approaches can be utilized. The 3 approaches, often referred to as re-bill process, first-party collections and third-party collections, are as follows.

Re-bill process

In general, the re-bill process is a reattempt of a previously declined transaction. Re-bill process can be combined with decline recycling); in fact it is similar to declined credit card transaction recycling, but in case of rebilling the reattempt can be made a month later with additional late or decline fees included in the transaction.

There are several methodologies that businesses use for rebilling, and, depending on the methodology, you might want to go with a system capable of accommodating it.

Re-bill methodologies

Let us say, a person owed a company $50, during the previous month his $50 payment were declined, decline and late fees, which are due, amount to $25, and current month’s debt constitutes $40.

The re-billing methodologies are listed below.

  • The first and the simplest strategy is to charge the monthly amount which is due, and collect everything else manually, through first-party collection process (see next section).

    Under this strategy only the sum of $40 which is due this month will be collected from a person in the abovementioned example.

    While the approach is most commonly used within the context of committed billing and term agreements, it is also applicable to non-committed billing, even for charitable organizations, such as churches. For example, a card may get stolen, and the cardholder forgets to tell the charity the new card number.

  • Under the second strategy, if previous month declined, the business would reattempt whatever is due this month plus previous month, plus any service fees.
  • If we return to the abovementioned example, under this strategy the business will try to collect $40 for the present month, $50 for the previous month and $25 of accumulated fees.

  • Under the third strategy, on a due date the entire outstanding balance is collected.
  • If we return to the abovementioned example, under this strategy the business will try to collect $50 of the original debt, $40 for the present month, $50 for the previous month and $25 of accumulated fees.

Sometimes people use a hybrid model, where on the due date they are going to collect whatever is due this month, and, if the payment is successful, they are going to try to collect the entire outstanding balance, on some other date, towards the end of the month.

First-party collections

First-party collections is a process when a call is made to person in order to recover a payment and get updated payment information. During the first-party collections phase an e-mail or a printed letter is sent, notifying of a declined payment, and a follow-up call is made by a company representative. When the call is made, a representative introduces him or herself to the person as an employee as an employee of the original debtor\merchant\business (even if the process is outsourced and the caller actually works for a different company).

First-party collections process runs in the name of the original merchant or the billing company. It is done by the representatives and under the name of the business that the customer signed original agreement with.

The primary purpose of first-party collections is to recover the declined payment. Usually, the goal of first-party collections is to recover declined payments within the first 90 days from the decline date. Beyond that term third-party collections process is started (see next section).

Third-party collections

Third-party collections are usually done on outstanding debt which is more than 90 days old. In third-party collections process when the call is made, the caller introduces him or herself as a representative of a collection agency, and not of the original business, the customer signed the agreement with.

Normally, businesses, that do not have third-party collections licenses in a given state, are not allowed to use third-party collections techniques, such as credit bureau reporting. Only certified collection agencies have the authority to report customers to credit bureaus.

Overall, third-party collection process tends to be more aggressive, because in many cases accounts are considered unrecoverable, and the primary goal is simply to collect as much of the outstanding debt as possible, while in the first-party collections the primary intent is not only to recover the funds, but also get the customer to continue using the service.

Third-party collections process is more formal and structured than first-party collections. It usually involves 3 to 4 formal collection letters, sent out every 30 days. Beside that, the collections company can make a certain number of calls. After that it is allowed to report the account to credit bureaus.

During third-party collections certain data about the customer may be obtained by a collections company in order to maximize the chances of collecting. The process is often referred to as data scrubbing.

The process of data scrubbing, often used in the third-party collections, involves several techniques listed below.

  • Skip-tracing – verification of updated contact information, such as alternative phone numbers and mailing addresses to locate the person;
  • Bankruptcy scrubbing – verification whether the customer has formally filed bankruptcy and is under the bankruptcy protection (thus, no collection calls are allowed);
  • Verification if the person is alive

By this article we conclude the series of installments dedicated to recurring billing. The next topic we are going to cover at is merchant services commission sharing.