July 15 th, 2011 Table of Contents About The Strawhecker Group... 2 Benchmark Objective... 3 Executive Summary... 6 SECTION 1: Front-End Comparative Pricing Analysis... 8 SECTION 2: Authorization Cost Comparison by Volume Band... 14 SECTION 3: Back-End Settlement Comparative Pricing Analysis... 15 SECTION 4: Transaction Settlement Cost Comparison Analysis... 19 SECTION 5: Trend of Average Prices Dial Authorization and Transaction Processing... 21 SECTION 6: BIN Sponsorship Fee Analysis... 22 THIS REPORT, AND ALL INFORMATION, ANALYSIS AND CONCLUSIONS HEREUNDER, IS IN ALL RESPECTS SUBJECT TO AND GOVERNED BY THE TERMS AND PROVISIONS OF THE ENGAGEMENT AGREEMENT BETWEEN THE STRAWHECKER GROUP AND THE CLIENT.
About TSG The Strawhecker Group (TSG) is a management consulting company focused on the payments industry. The company specializes in providing financial institutions, merchant acquirers, card associations, ISOs, processing companies, large merchants, and the investment community with advisory services to maximize their growth and profitability. TSG is also a resource of merchant acquiring industry research, benchmark studies and developing trends. TSG is composed of seasoned veterans of the payments industry. Both Partners and Associates of the firm have held key senior management positions at leading industry companies including First Data, VISA USA, Humboldt Merchant Services, RBS WorldPay, Cardservice International, ipayment, Alliance Data, RapidAdvance, Accenture Consulting, Redwood Merchant Services, Chase Paymentech, as well as other top financial institutions and ISOs. Over the last three years, TSG has provided services to 30 of the top 50 U.S. Acquirers and has completed over 300 projects for more than 175 different clients. TSG has recently performed Transaction Due Diligence Services for financial institutions including Goldman Sachs, Comerica Bank, Prudential, Brantley Partners, Claritas Capital, Arsenal Capital, Merrick Bank, and First National Bank. TSG was named 2010 Business Partner of the Year by the Electronic Transactions Association (ETA). ETA is an international trade association which represents companies who offer electronic transaction processing products and services. Other nominees for this award included Discover, TSYS, National Processing Company (NPC) and Security Metrics. Please visit www.thestrawgroup.com or www.paymentspulse.com for more information. Mike Goding, Senior Associate MGoding@TheStrawGroup.com/402-676-7617 (C) Goding, the primary author TSG s Merchant Processing Pricing Benchmark Study, is a finance and management professional, advising clients of TSG on business and negotiation strategies, with a focus on processing agreement terms and pricing issues. Goding served in several senior management roles during his more than 20 years at First Data Corporation. Most recently he was the Vice President and General Manager of the Full Service Processing business unit within First Data Merchant Services. In his previous role at FDMS Goding provided financial support including business case analytics, strategic planning, contract analysis and negotiation, and portfolio analysis to a $400 million business unit. The Strawhecker Group 1236 South 113th Plaza Omaha, NE 68144 www.thestrawgroup.com Page 2 of 23
Benchmark Objective During late spring 2011, The Strawhecker Group surveyed the merchant acquiring industry to determine the prevailing line item pricing rates for merchant processing. The objective of this unique Benchmark Study was to explore the cost of key pricing elements throughout the US merchant acquiring industry. The study included merchant acquirers who use third-party providers for front-end authorization and back-end settlement services. The intent of this study was to provide clients a credible reference source that would allow them to compare their costs for processing products and services with those of other merchant acquirers. Transaction volume data for each participant was collected to allow segregation of results into four broad volume bands. In total, information was gathered from 58 front-end authorization portfolios and 50 back-end settlement relationships, providing each volume band with ample data points. Participants included financial institutions and independent sales organizations. Each data contributor is being issued a mini-report that compares their own key line item costs for front-end authorization and back-end settlement processing to those of their respective volume peers. With this personalized information, study contributors will have an excellent benchmark tool to compare the competitiveness of their current processing expenses versus those of their peers. Study Objective The objective of the study is to provide acquirers with a credible benchmark tool for comparing the costs of merchant acquiring processing services and products at various volume bands. Study Methodology Acquirers were invited to participate in the study in May/June 2011; these responses were combined with other recent processing cost data collected by TSG. The data questionnaires and processing data were then compiled and analyzed by The Strawhecker Group. Every attempt was made to ensure a comparative study. Given that multiple processors are used by some participants, the data was reviewed qualitatively and for consistency. Responses were distributed into representative Volume Bands. This was done in order to provide the most useful data for all participants given that most processors price key elements of their services differently depending on volume. The volume bands for both the front-end and back-end analyses are as follows: Volume Band # of Monthly Transactions Small 0 250,000 Medium 250,001 1,000,000 Large 1,000,001 3,000,000 Jumbo 3,000,001 + Page 3 of 23
Benchmark Objective Participant Demographics Data from 39 acquiring organizations was used in the survey. These organizations had 58 different front-end agreements and 50 back-end settlement agreements. (Some organizations provided frontend or back-end information only.) Portfolio sizes ranged from more than 10 million to fewer than 100 thousand authorization or settlement transactions per month. In total more than 80 million monthly authorization transactions were represented in the study. A varied group of processing solutions was represented in the survey including thirteen different front-ends and eight different back-end solutions. The chart that follows shows the distribution of data across the volume bands along with the average monthly transactions for each category. Volume Band Small 0 250,000 Medium 250,001 1,000,000 Large 1,000,001 3,000,000 Jumbo 3,000,001 + Front-end Relationships 17 21 11 9 Back-end Relationships 15 18 11 6 Average Monthly Trans 125,000 400,000 1,300,000 7,000,000 The reason there are fewer back-end relationships than front-end relationships represented in the survey is that some acquirers use multiple front-end providers but utilize only one back-end solution. Notable Changes to the 2011 Edition of the Benchmark Study 1. In an effort to make the authorization line items more easily understood, we have revised the labels for POS dial. First, we are now using the label Dial Traditional Telecom to describe all authorizations that are carried via traditional telecom including POTS, 800 and 950 service. The label Dial SSL describes a dial authorization carried over the internet via SSL where the SSL session lasts only for the duration of the individual authorization. Finally, the label Nondial will now be used to describe all authorizations transmitted over dedicated always on communication links. This includes frame, VPN, and IP modes. 2. We have added a new survey category Annual Per Merchant Fees with two sub-items to begin to capture the evolving trend of processors to charge annual fees for PCI and other services on a per merchant basis. For simplicity, we have annualized any processor fee charged on a monthly basis for PCI or similar new service. Page 4 of 23
Benchmark Objective Line items with Average cost only In those instances where we have only one data point for a line item within a volume band, we have reported that data point as the 2011 Average with no data reported in the 2011 Low or the 2011 High fields. We did this on the premise that one data point while not necessarily representative would still be of value as reference point. Front-end vs. Back-end Report Color Key Front-end Data Reports Back-end Data Reports Page 5 of 23
Executive Summary For this sixth edition of its Merchant Processing Pricing Benchmark Study, The Strawhecker Group collected and analyzed data from dozens of acquirers to create an industry-leading survey of the current prices being paid to processors. This investigation was based on the actual prices for merchant processing incurred by acquirers representing a variety of different-sized portfolios and processing alternatives. In this study, the key metric used for grouping portfolios was the number of transactions processed on a monthly basis rather than more traditional metrics such as dollar volume or number of merchants. In this year s study we found notable developments that are impacting the overall cost of merchant processing costs: Authorization Costs and Transaction Processing Costs dropped by more than 10% - generating real savings for acquirers signing new deals These line items typically constitute approximately two-thirds of acquirers invoices and dropped significantly since our last study. This trend is a continuation of the decreases we noted in the previous study. One macro level factor that may have contributed to this decrease is the great recession which made processors ever more willing to compete via price for new business or to maintain existing business. This bodes well for existing acquirers who are about to re-negotiate their processing agreements or new acquirers seeking processing services as it should translate into lower costs. Existing acquirers with years to run on their agreements will likely find themselves at a disadvantage versus competitors with fresher agreements. Look for the averages (at least for the Medium to Jumbo bands) to continue fall as old agreements are re-priced downward and new agreements with low-end rates are established. Merchant on File Fees are Dramatically Higher for Medium and Large Acquirers This fee increased 76% and 104%, respectively, for the Medium and Large acquirers. TSG s assessment is that two factors drove these increases. First, there is evidence of other service components specifically, customer service and merchant statements more frequently being bundled into the merchant on file fee. This may be being done to simplify billing for both parties. In one other case it appeared that the high merchant on file fee was implemented to compensate the processor for an extremely low transaction fee price. Customer Service and Terminal Help Desk Support Fees are Significantly Higher This year s study found that for the Medium, Large, and Jumbo bands the prices paid for these laborintensive services had risen significantly. This is most likely the result of: a) increased costs being passed on by the processors and b) low price sensitivity for these items on the part of acquirers when negotiating prices. Competition for acquirer business leaves new players with lower costs than established ones The major processors in seeking their own growth frequently offer better pricing to new entities than they have in-place with their established and long-term customers. Then, even at renewal time legacy customers are at a disadvantage because every concession they seek comes dollar-for-dollar Page 6 of 23
Executive Summary out of the processors profits. Therefore, processors defend these old rates vigorously. In contrast, with new business even if it was aggressively priced every dollar of revenue is additive for processors and incremental costs typically are relatively small. Long-term customers may find going through a formal RFP process at renewal time the best avenue to get truly competitive pricing from their processors. This strategy puts the processors on notice that the acquirers revenue streams are up for grabs and they need to treat them as if they are new business. Annual Per Merchant Fees are Still an Exception While there is more and more talk in the industry about these fees being implemented by processors, the study found that fewer than 15% of acquirers are incurring them today. This may be due to processors reluctance or inability to impose this new fee except upon contract renewal. In Conclusion With double digit price reductions for authorizations and transaction processing the overall cost of processing a transaction is getting less expensive. It is clear that processors continue to compete vigorously on price to win and keep business. The savings produced by these reductions easily outweighs the price increases observed in ancillary services. This is encouraging news for acquirers looking for ways to remain competitive in a difficult economy. And, since the multi-year trend in the major cost line items is downward, it is incumbent for acquirers to take advantage of every opportunity presented to seek to re-price fees. This Study can be a great resource during that process. Page 7 of 23