12 Feb The Difference Between Buy Rate and Revenue Share in Merchant Services
Providing a merchant services program to your banking customers can be a lucrative business move that leads to additional clients and profits. However, low profit, stagnant portfolio growth, and high rates of attrition can all be signs that your merchant services partner is not providing you with competitive rates. But in an industry notorious for vague contract language and hidden fees, how do you know what’s “competitive” and what’s not?
To answer that question, we’ll first need to delve into the hard costs associated with maintaining a merchant account.
What is interchange?
It’s important for both merchants and banks to know that any business that accepts credit/debit cards will have to pay interchange fees. Interchange is a fee charged by a cardholder’s issuing bank to the merchant’s acquiring bank each time a transaction is processed. These fees are passed on to the merchant and compensate the issuing bank for the risk involved in approving the payment, revenue lost during 0% interest periods for cardholders, and handling costs.
Since interchange rates are published directly by the card brands, they do not differ between processors. This doesn’t mean that interchange is easy to estimate, though, as rates are calculated based on a variety of factors, including card type, business industry, and transaction type. These rates may change twice annually but will always be available on the brands’ sites. Find Visa’s interchange rates here and Mastercard’s here.
What other costs are associated with merchant accounts?
Unfortunately, other hard costs for accounts are not as standardized as interchange and will rely on various factors, including processing method, products or services provided, pricing plan, etc. For example, some B2B merchants will be able to qualify for Level II/III processing, meaning they’ll receive lower interchange rates and can possibly generate more profit if priced accordingly. On the other hand, an online gateway for an e-commerce account might have a monthly fee of $10 that will add to the bottom line.
Regardless of the costs associated with merchant accounts, the factor that will have the biggest financial impact on your merchant services program will be your agreement with a processing provider. Two factors are used to calculate your bank’s share on an account: buy rate and revenue share. Be very wary of a potential partner that offers you a revenue share that seems too good to be true. Here’s why—a higher percentage might not necessarily equate to more money.
That doesn’t make any sense, right? Before we can break it down for you, let’s go over the essentials of buy rate and revenue share.
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What is revenue share?
A revenue share is the portion of the profit generated by a merchant account within your portfolio that is received by your bank. In order to generate profit, each account will need to exceed the hard costs incurred by the processor. These costs are generally associated with the processor, the credit card associations, and interchange paid to issuing banks.
If a potential partner offers your bank 100% revenue share, it will sound like the perfect deal. But be sure to ask yourself what sustainable business would give up 100% of their profit? This is where it’s important to determine exactly what you’re receiving 100% of.
What is buy rate?
All processors have a cost—called “buy rate”—associated with opening and maintaining merchant accounts. If a processor has offered your bank a large percentage of profit, perhaps even all “profit,” for your revenue share, you can be sure that they’ve padded their buy rates to compensate.
Let’s do the math. In the below example, imagine that both processors have the same actual buy rate. Your agreement with Processor A reflects their lower buy rates, and your revenue share is 70%. Processor B has padded their buy rates, but they’re offering you a 100% revenue share.
| ISO A | ISO B | |
|---|---|---|
| Merchant Processed Volume | $25,000,000 | $25,000,000 |
| Number of Transactions | 500,000 | 500,000 |
| Number of Merchants | 500 | 500 |
| Monthly Fees Margin Per Merchant | $5 | $10 |
| Fee on Processed Volume | 0.03% | 0.15% |
| Per Transaction Fee | $0.06 | $0.15 |
| Margin on Processed Volume | 0.60% | 0.60% |
| Margin Per Transaction | $0.05 | $0.05 |
| Monthly Fees Charged Per Merchant | $5 | $5 |
| Total Profit | $137,500 | $60,000 |
| Revenue Share % | 70% | 100% |
| Total Bank Revenue Share | $96,250 | $60,000 |
With Processor B, you have to charge a higher price to your merchants because of your higher costs, and your profit is lower. Often, this results in higher attrition rates and less new business because your rates simply won’t be competitive enough.
Inflated buy rates have no place in a healthy, mutually profitable partnership. The processor will not have any incentive to help grow your merchant services program—since they’ve padded their costs, they’ll be making money whether you do or not. Make sure your bank doesn’t get tangled in the web of this predatory business practice.
What does this mean for you?
Before you choose a provider for your merchant services program, make sure you determine the base hard cost that you’ll need to exceed on each account before you receive your agreed upon revenue share. A great processor should also have procedures in place to assist you with profit retention. Don’t be afraid to ask for an apples-to-apples comparison with your existing processor to determine your current revenue share and see how competitive your program really is.
Final Thoughts
Credit card processing is often tough to understand and other processors like to hide how they upcharge. In order for your merchant services program to be successful and worthwhile for both parties, your processing partner should have a high level of knowledge and transparency.
Ideally, the processing provider you choose will have an in-house team of experts that can clearly and concisely explain various costs to you while making sure your bids are competitive. The world of credit card processing can be confusing at best and misleading at worst, but you don’t have to go it alone.
If your merchant services program is experiencing stilted growth and low retention, it might be time to switch processors. If you’re still not sure how to choose the right partner for your merchant services program, check out our article, 8 Things Banks Should Look for In a Merchant Services Partner, or reach out to us. Your bank deserves to feel confident that all your hard work to grow your portfolio will be more than worth it.
BASYS Processing as a business partner
If your processor isn’t delivering strategies to help grow your program and personal service to your customers, please call BASYS Processing at (800) 386-0711. Let’s talk about creating a business partnership that will help you meet and exceed your goals.
BASYS Processing features:
• A friendly, live voice will answer the phone when you or your customers call; no automated phone systems.
• In-house PCI Compliance team to walk your customers through the process step-by-step, improving security and reducing costs.
• Thorough Market Analysis followed by mutual plans and goals to grow your portfolio.
• In-depth initial training and ongoing bootcamp training for bank staff.
• A full suite of turnkey marketing assets that can be customized with your bank branding.
About BASYS Processing
BASYS Processing provides credit card and debit card processing services, plus solutions that include terminals, virtual terminals, e-commerce, mobile, and point-of-sale, customized to fit any need. Banks, associations, and software partners depend on us to strengthen their reputations and relationships with their customers by providing remarkable service paired with ultimate flexibility and pricing. Merchants depend on us to make accepting credit cards and debit cards convenient, safe and affordable. BASYS was founded in 2002 on one philosophy: to take care of our merchants, partners, and employees so they never want to leave. We are dedicated to working one-on-one with our customers to design the perfect solution. BASYS is Personal Payment Processing.
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