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.
Introduction
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.
Example
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.
Conclusion
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.
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