Updates in scheme fees that cause profitability “leaks”
By Kirill Lisitsyn, CEO & Сo-Founder at Torus
Understanding card scheme fees often resembles assembling a jigsaw puzzle. Even one missing piece can significantly impact the outcome. The trick is that you typically notice the effect of that missing part only after your product launches and starts generating revenue.
This material can benefit CFOs, heads of analytics departments and payment product managers by enhancing card payments business profitability, improving company operational efficiency, strengthening reporting reliability and transparency across the organizations, optimizing merchant interactions, and more.
You can conduct this analysis yourself: export all transactions, for example, monthly and set up Excel spreadsheets with the necessary filters. This can be challenging due to the volume of data or the lack of filters beyond just portfolio level, but it’s feasible for smaller companies. For larger organizations, you might consider engaging analysts, audit firms, developing in-house software, or using existing services to perform the analysis for you.
First and foremost: approach analytics like cleaning your home
Consider reviewing expenses in schemes invoices, adjusting parameters in scheme fees, or analyzing merchants down to specific entities as a thorough home cleaning. Start by decluttering and meticulously organizing everything, investing significant time in the process. Then, maintain cleanliness regularly with minimal effort to avoid being overwhelmed by unnecessary expenses again. In the months following your cleanup, your business will experience a “wow” effect, and trust me, that feeling of cleanliness is incredibly rewarding!
Step #1. Analyze Merchants: review MSC rates and x-border payments and save up to 10%
The entire landscape of transaction analysis unfolds from the top down. It starts with broad portfolio-level hypotheses, such as by geographies or payment types. Then, we drill down to merchants, terminals and, ultimately, individual transactions.
If you only have the big picture, it’s easy to overlook that some merchants may be loss-making, as the average figures might seem satisfactory. Therefore, dive deep into merchant-level data, and if you’re dissatisfied with any, investigate the reasons on either side.
Here are some reasons a merchant’s profitability may decline:
- X-Border Payments: Unexpected payments from cards issued in other countries.
This especially can happen during unforeseen mass international events, like sports championships, where many tourists arrive. Changes in the merchant’s environment can also trigger this. For instance, if a large office building housing foreign companies opens near a restaurant, employees may start using their cards for daily lunches at your merchant, who has been assigned a domestic Merchant Service Charge (MSC) rate based on its previous traffic structure.
Such situations can incur losses of up to 5% leaks, with the rate difference between domestic and international potentially reaching 4x times, depending on the country.
2. Failure to set a fixed MSC rate for merchants with large amounts of small transactions.
Sometimes, the cost of processing a transaction for a stream of small payments is unprofitable for the acquirer, prompting fixed parameters to be set on scheme fees. This is common in schemes for vending machines, parking, souvenir shops, etc.
You may have noticed that in tourist souvenir shops, purchases under 10 euros are often requested to be paid in cash. This happens because the acquirer sets a flat transaction fee, like 7 cents. While this is acceptable for a 100-euro purchase, it becomes unprofitable for a 50-cent transaction.
It’s important to understand that the cost of a transaction can range from 0.4% to over 20% of the transaction amount, depending on the size. The smaller the transaction, the higher its cost, especially when dealing with international cards that often dominate in popular tourist areas.
If you don’t account for this when signing contracts, such merchants aren’t profitable for you, and in the worst case, they operate at a loss. The fees from payment schemes remain fixed for you, so this discrepancy impacts your bottom line. Based on our experience, this may cause up to 5% of portfolio profitability leaks.
Step #2. Review Additional Services and Fees in schemes Invoices and save up to 40%
1) Additional Services: 10%
When you receive an invoice from a card scheme, it often appears as a file filled with numerous line items. While the structure may vary by scheme, the overall logic of additional expenses remains consistent.
Typically, 60% to 90% of the invoice consists of transaction fees, while the remaining portion may include additional services, some of which can be either very useful or, vice versa, excessive for your business. You can save a lot of money by promptly opting out of or adjusting these services.
For instance, there may be paid reporting services where the card scheme provides detailed breakdowns of transactions or summarizes them. There are also analytical services, such as access to the card scheme’s platform, which analyzes quantitative statistics related to operations.
These minor services can account for up to 10% of the monthly invoice.
2) Fines: 30%
Fines from card schemes can be technological, such as improper transaction processing or legal, for violating specific scheme rules.
For example, we encountered a situation where a client overlooked a line item with a zero fine on their invoice, which signaled that they were nearing a critical threshold of erroneous transactions month after month. This lack of information risked turning into a 30% loss of the total invoice amount in the coming month.
Step #3. Protect Yourself Against Human Errors
Regular transaction analytics helps identify tech or business mistakes before they become material profit leaks. This may involve incorrectly assigned Merchant Category Codes (MCC) or the absence of a parameter indicating the need for special (reduced) fees from the card scheme.
Errors can vary widely, but timely detection can prevent a couple of percentage points of losses on average. If the merchant is large (and such businesses often have special fees), these amounts can translate into impressive figures, totaling tens of thousands of euros or even more.
Conclusion
As the saying goes, saving is earning. Regularly monitor the overall health of card transactions and the performance of individual merchants to help your company grow fast while maintaining your profitability.
About the Author
Kirill Lisitsyn is CEO & Сo-Founder at Torus. Kirill has over 15 years of consulting experience with companies like Accenture and Mastercard, serving banks and financial services. He co-founded Torus to enhance transparency in card payment profitability control for mid-market players. Torus is an award-winning SaaS intelligence platform that helps banks and fintechs boost profits on card transactions, enabling issuers and acquirers to optimize fees and improve earnings through detailed profitability analysis. Kirill is a frequent speaker at industry events, sharing insights on payments and financial technology.
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