News
How does a processor make money?
Learn the basics of processing's profitability side.
November 6, 2000
Whena customer uses an ATM at his own bank, there are usually no extra charges. Your bank likes it when that happens, because it's usually cheaper than a transaction conducted by a teller.
Also, banks are hesitant to charge customers for this for fear they will leave and go to another bank. Typically, the ATM's transaction processor (the Acquirer) does charge the card-issuing bank a small fee for "on-us" transactions. However, the fee is small enough that the bank usually doesn't pass it on to its customer.
When a person uses an off-premise ATM, the two fees (the surcharge and the foreign fee) collected from this non-customer are what drive the whole transaction.
Let's see how it works.
The cardholder swipes his card at an ATM. A notice appears on the screen that says this transaction will cost him a certain amount of money (the surcharge), plus whatever his own bank charges him (the foreign fee). His bank charges him this in order to recoup expenses incurred because he is not using one of their machines. This foreign fee will appear on the cardholder's bank statement later.
The ATM owner or the merchant keeps most of the surcharge. Call it a "convenience fee," if you like; because this is charged to the cardholder for the opportunity to use this specific ATM, rather than going to a more out-of-the-way machine owned by his own bank.
Debates rage back and forth about surcharging. Customers don't want to pay it, because they resent paying fees twice for the same transaction. But, without the surcharge, what's in it for the ATM owner?
In the fall of 1999, San Francisco voters and Santa Monica's City Council passed a referendum to make bank-owned ATMs do away with the surcharge. "Okay, well fine," said Bob Campbell, president of 1st Federated ATM Network, an ISO in Tampa, Florida. "What the bank ATM owners did out there is turn off the machines to anyone other than those hooked up on their own financial institutions."
That move effectively made off-premise ATMs unavailable to hundreds of customers.
According to the Associated Press, in November, 1999, U.S. District Judge Vaughn Walker overturned this vote, by ruling that any local ordinances restricting bank-owned ATM surcharges violate federal laws.
The San Francisco vote is up for appeal, but industry experts think it's a dead issue.
What happens to the foreign fee once the cardholder's bank gets it? The card-issuing bank dishes out a piece of the pie to all those who participate in the cardholder's transaction.
First, to the networks, in addition to paying its own membership fees, the card-issuing bank pays a switch fee for each foreign ATM transaction. Next, it pays the processors involved in the transaction what's known as the interchange fee.
Finally the Acquirer deducts his money from the interchange fee and passes the rest on to the ISO and/or the ATM owner, depending on what's been negotiated between them.
"It's kind of like a food chain," said Ron Schuldt, COO of Columbus Data Resources.
Efficient routing-within network rules
The Acquirer sends transaction information in and out of the system to the right processors, networks and financial institutions. To do this he uses a computer that is hooked up to such communication lines as telephone wires, fiber optic cables or by wireless.
All along the way to the card-issuing bank on the far end, the information will be routed by many computers running many kinds of software. To get through this maze, the Acquirer enters precise specifications, or electronic message formats, into the software on his computer to tell it what to do. This is called setting the routing tables.
Every computer in the world has its own special electronic address. When the Acquirer's computer has been configured properly, it checks to see which route will best fulfill the ATM card-holder's needs, so the transaction data will reach its targeted computer address at the card-issuing bank without mishap, and the transaction will be approved.
Skillful routing by the Acquirer is a necessity, because every switch or network through which the transaction passes will want a small piece of the interchange pie. Therefore, it only makes sense that Acquirers set up their routing tables to run each transaction, according to network rules, as efficiently and directly as possible.
If an Acquirer cannot directly access the primary network on a given card, the net income that flows back to the Acquirer and the ATM owner may be less than if he did have a direct connection.
From an ATM owner's perspective, he needs an Acquirer that can directly route most of the card types used at his terminals, because as President and CEO of Core Data Resources Campbell Burgess said, "Proper routing can sometimes mean the difference of two to four cents per transaction. So, if I'm running 200,000 transactions in a month, well, every extra cent adds up to real money."
