Saving on Merchant Services Fees (Part 2)

In this article we are going to explain how large-size merchants, PSPs, and MSPs can reduce and save on merchant services fees.

Merchant services fees: merchant perspective

Transaction processing industry is organized in such a way, that there are several parties in between the cardholder, holding the card at the point of sale, and the issuing bank, that approves or declines the transaction. These parties include software companies, providing POS software, payment gateways, acquirers that issued merchant accounts to respective merchants, and others.
Each of these parties represents an intermediary link in the process, and makes something of every transaction processed, and you as a merchant pay for it.

The closer to the network you are, and the fewer middlemen and intermediary links there are in the “food chain”, the greater your savings are. Consequently, to save on merchant services fees you need to get as close to the processing network as possible.

It should be noted, that often, in addition to merchant services fees, merchants are surcharged gateway fees by the gateway service providers that they use.

One of the ways to reduce the total fees amount is to use your own payment gateway, or negotiate the possibility of subscription-based pricing (as opposed to transaction-based pricing) with your current (or new) payment gateway provider. In such an arrangement a certain monthly fee is paid for the use of gateway software and hardware, as well as network bandwidth for an unlimited or capped transaction volume (as opposed to transaction-based fees, depending on the number of transactions being processed).

The tendency of moving from per-transaction fees to subscription-based fees is already manifesting itself on the gateway services market. A similar trend was once witnessed in telecommunication industry, where subscription model replaced the one, in which every call was separately paid for.

Merchant services fees: PSP perspective

The concepts of a “food chain”, including many intermediaries, and subscription fees, as opposed to per-transaction fees apply to PSPs as well as to large-size merchants. However, in case of a PSP there is an additional dimension to the problem.

At the high level there are three things that a PSP needs to facilitate for its sub-merchants:

  • Underwriting and on-boarding
  • Processing
  • Remittance (merchant funding)

Traditionally, all three functions could be delegated to an underlying processor. In this case, the processor does most of the work, and, usually, charges additional premium for that.

Processing function, one way or the other, always remains with the processor, unless you go directly into the network (but that is a complicated scenario, which will only save you money if you process really huge transaction volumes).

As for remittance and underwriting, these two processes can be handled by a PSP on its own. If you, as a PSP, handle underwriting (and, therefore, assume more risk) and merchant funding as well, then you not only get more control over the entire process, but you can also negotiate better pricing with the processor, since less work is now done on the processor’s end. Another advantage of handling of merchant funding is that your processor will not be able to see your profit margins, and you will be able to negotiate still better pricing with the processor.

You can also optimize the process and save more if you optimize transaction routing, i.e., if you send specific transactions to specific entities for processing. For example, debit card transactions can be routed to a PIN-less debit network, while American Express cards can be processed directly through Amex (and not through your current processor).


As your business grows, the fees, that seemed reasonable and acceptable yesterday, might feel overbearing in your today’s business scenario. It never hurts to review your current merchant arrangement and the fees you are paying on a periodic basis to see if it can be optimized to save some money for your business.