Understanding and Optimizing Payment Residuals: Drive Down to the Basics

To understand the residuals available to you from a payment processing partnership, it’s critical to know how a payment is processed and to comprehend interchange costs.

To better understand the residuals available to an ISV from a payment processing partnership, it’s critical to know how a payment is processed and, even more importantly, to comprehend interchange costs. Interchange encompasses the basic rates set by the credit card brands and represents the cost the processor has to pay on every transaction. But the costs vary among the card brands and as well as whether cards were swiped vs. keyed vs. dipped (EMV chip) vs. a PIN debit transaction. Understanding the various rates related to how their clients most generally receive payments from customers will allow an ISV to better calculate how residuals will be impacted. Comprehending the interchange and knowing some of the more commonly used interchange rates will help ensure that “true” cost is passed on. (Some companies will pad “interchange” before calculating residuals to their partners.)

Once the base is covered, it’s time to discuss buy rates (otherwise known as Schedule A) and revenue share. Unfortunately, the buy rates are not as simple as transaction fees and rates. Buy rates usually encompass the entire processing relationship with a merchant.

Some things to look out for are:

  • Transactions fees – Some companies may charge multiple “transaction fees” for a single transaction.  It’s critical to clarify the “all in” cost of a transaction fee.
  • “Basis Points” or “Bin Fee” – This is a percentage charged on the total volume that is transacted in a portfolio. Understanding how a “basis point” is calculated is important.  For example, 10 basis points is the same as 0.10 percent.
  • Schedule A – A typical Schedule A can be one page or more than five pages. It’s very important to review each line item and make sure there aren’t any hidden charges to you as the partner, but most importantly to the merchant.

From there, the discussion can move on to revenue share or split. This is where most ISVs make a mistake. In this case, “more” is not always better. For example, an ISV could negotiate for a high 70 percent revenue share, but they could end up making much less than a partner with a 30 percent revenue share. This could happen due to the costs discussed earlier inside a Schedule A, padding of interchange rates, or an ISV not understanding how they or their merchant clients generally accept payments from customers.

Processing residuals can be a lucrative source of additional revenue for ISVs. However, it’s very important to understand the Schedule A, the customer base and all costs and fees associated with credit card processing before negotiating the revenue share of any payment processing partnership. 

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Bom Lee is a payment industry veteran and currently serves as the vice president of sales at North American Bancard (NAB). Prior to joining NAB, Lee spent more than 10 years at First Data. NAB's Velocity provides ISVs, software developers and businesses secure, integrated and customizable payment solutions.