Many payment processors consider price, rather than the quality of service, as a significant factor in their consideration of cost recovery and pricing of payment services. This article briefly examines three primary factors that determine the final cost of payment processing.
In the first place, operational costs, i.e., those associated with maintaining a server, maintenance personnel, staff wages, utility costs, etc., must be factored into the calculation of the price of payment services. This means the operating expenses of the processor must be factored into the actual operating expenses of the merchant’s account. In short, those whose merchant accounts are paid on the basis of the gross invoice value will usually be paying for their processors and even their support services, such as sales support, over and above the actual invoice amount.
The second cost that must be considered is the consideration of sufficient revenues to pay all expenses that may result from the transaction. This consideration is not simply the cost of the processor or the salaries and wages of all the employees in the processing department.
On the other hand, it must also include any income tax payable by the merchant on any of the funds advanced by the processor. This tax could be computed at a rate much higher than the normal business tax rate.
Thirdly, consideration should be given to any additional revenues that may be generated by the processing activity. This could be the extra proceeds from increased sales, additional earnings from matching merchant credit card payments to credit card sales, additional money from successful marketing of the merchant’s product or service, or even from the redemption of payment cards.
These three basic considerations will help to ensure that the charge and pricing of payment services are based on the current and projected revenues that can be generated by the transaction. It is also important to note that a charge and pricing of payment services are not a fixed cost; rather a definite portion of the total revenue earned by the merchant.
By way of illustration, let us consider a situation where the merchant charge and pricing are based on an estimate of the revenue that will be generated by a particular transaction. Assuming that the merchant has chosen a suitable processing service provider, and is in the process of entering into a contractual agreement with that provider, this estimate assumes that the actual revenues that will be generated by the transaction will be substantially more than the estimated revenue.
In addition, there would also be a negotiation process between the parties, whereby the merchants would decide on the fee for processing, and with which provider they would come to an agreement. This fee would then be considered the actual charge and pricing of payment services. In a very similar way, the revenues assumed above may well turn out to be incorrect, as it could take time for the parties to come to an agreement, and for the processing company to take on the required resources.
By contrast, a merchant charge and pricing of payment services would be based on actual revenues actually generated by the transaction. As a result, this price would be less than the total revenue that would have been generated by the transaction if the processor had not agreed to perform the transaction, because the pricing for this type of processing would be based on an agreed-upon number of merchant sales, rather than on actual sales.
Now, what happens if the revenues generated by the transaction are substantially lower than the estimated revenue? In this case, the processing company would not be able to charge the full amount it would have had to charge to have performed the transaction, but only the percentage of the difference between the estimated and actual revenues, and so would not be charging the full fee.
Now, some people may ask whether it is possible to calculate the impact of cost recovery and pricing of payment services on the merchant charge and pricing of payment services. To do this, it is necessary to assume that the processing company, after deducting its fees, does not use any of the funds advanced by the merchant.
This in turn implies that the fees advanced by the processing company will be returned to the merchant (i.e., the merchant receives the original amount advanced). We have seen that it is possible to calculate the impact of cost recovery and pricing of payment services on the merchant charge and pricing of payment services, but it is possible to quantify the impact on the cost of the processing charges that is essentially the same.