How Acquirers Make Money
Acquiring banks (Acquirers) play a key role in enabling modern payments processing. Acquirers offer the services required for Merchants to process debit and credit cards, and accept the liability of payment, refunds, reversals, and chargebacks. They’re the middlemen that keep Merchants compliant with Card Association requirements and smooth the flow of data with payment networks.
How Do Merchant Acquirers Make Money?
Acquirers make money by charging Merchants a service fee. Service fees are usually blended into the Merchant pricing, which includes all the other fees associated with processing a payment. Therefore, the more transactions that get processed, the more revenue they generate.
Onboarding higher risk Merchants offers the opportunity to increase revenue by charging higher fees—the difference can be more than 3% on each transaction. The types of Merchant risk acquirers look at are litigation, compliance, reputation, and regulatory. That’s why when underwriting a Merchant, Acquirers will often increase prices depending on:
- Business type – some industries are prone to more fraud and chargebacks; they require more oversight and carry more risk. And others, such as Gambling and Firearms, can be greatly affected by the regulatory environment. Business type is categorized by the Merchant Category Code (MCC)
- Years of business – new Merchants can’t easily prove that their services will stay compliant. Newer Merchants can see larger fees, or be denied altogether
- Chargeback history – large amounts of chargebacks mean large amounts of risk for Acquirers
- Billing method – recurring billing for Merchants carries higher levels of risk. Continuity (subscription) billing is inherently riskier than single payment billing
- Owner’s credit score – Acquirers need to know if a Merchant has the funds or credit to pay back a chargeback. Lower credit carries a higher risk of a business going under and Acquirers pay out-of-pocket for those chargebacks
- Sales volume – with more sales come more chargebacks, fraud, and risk. Fast scaling Merchants also run the risk of not being able to deliver on products and services
The True Cost of Underwriting Merchants
The cost of underwriting new Merchants isn’t cut-and-dried. Once underwritten, the Acquirer assumes liability of chargebacks, disputes, fraud and compliance. So, knowing each Merchant inside-and-out is not just recommended. It’s necessary.
The riskier the business, the higher the margins. But the riskier the business the more time and the more oversight that’s required. Merchant Acquirers need to look closely at chargeback ratios, products/services of concern, turbulent finances, and shared Merchant accounts. Once onboarded, keeping those risky Merchants compliant and healthy is where the biggest margins can be found.
Know Your Customer (KYC) is a standard used in the financial industry to verify risk. It’s used to prove that business is legitimate, and to prove that products and services rendered are legal.
- Identification—tax info, business registration, ownership structure, personal documents for owners and stakeholders
- Verification—cross reference documents with public records, credit bureau, and commercial databases
- Risk Assessment—transaction volume, location, compliance, type of business
- Ongoing Monitoring—changes to risk profiles, red flags, or suspicious behavior/activity
Ways Acquirers can Increase ROI
The Acquirer and Merchant relationship is symbiotic. The easiest way for an Acquirer to increase revenue is to bring on more Merchants and ensure the growing portfolio remains healthy. But bringing on more Merchants is easier said than done, especially when underwriting more risk.
Acquirers might start offering new products that increase risk profiles. Maybe a risker category leads to an influx of chargebacks. Or current chargeback mitigation tools aren’t working correctly.
There are many underlying causes that can decrease Merchant health.
That’s where a tool like Slyce360 comes in. It increases Merchant lifespan up to 2x and more.
Slyce360 gives your Risk Department the tools to continuously monitor Merchant health, see red flags as they happen, and generate plans of action.
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