Market Analysis – 84121611 – Transaction fees

Market Analysis Brief: Transaction Fees (Acquiring)

UNSPSC: 84121611

Executive Summary

The global market for transaction fees, driven by the ongoing shift to digital payments, is projected to reach $165 billion by 2025. The market is expanding at a 3-year compound annual growth rate (CAGR) of 8.9%, fueled by e-commerce and the adoption of contactless payments. The primary opportunity for procurement lies in optimizing pricing structures to isolate and negotiate the acquirer markup, which is the only truly negotiable component of the fee. The most significant threat is regulatory intervention, such as the proposed Credit Card Competition Act in the U.S., which could fundamentally alter routing and fee economics.

Market Size & Growth

The global transaction fee market, representing the revenue captured by payment acquirers and processors, is substantial and continues to expand. Growth is directly correlated with the rise of global digital payment volumes. The three largest geographic markets are North America, Asia-Pacific (APAC), and Europe, with APAC demonstrating the highest growth potential due to rising internet penetration and a growing middle class.

[Source - McKinsey & Company, Oct 2023]

Key Drivers & Constraints

1. Demand Driver (E-commerce & Digital Wallets): The persistent growth of online retail and the consumer shift towards digital wallets (e.g., Apple Pay, Google Pay) are the primary drivers of transaction volume, directly increasing the fee pool.
2. Demand Driver (Cashless Initiatives): Government and societal pushes toward cashless economies, accelerated post-pandemic, increase card-present and card-not-present transaction volumes.
3. Cost Constraint (Interchange Fee Hikes): Card networks (Visa, Mastercard) periodically update interchange rates, which constitute the largest portion of the total fee. Recent updates have resulted in net increases, particularly for online and commercial card transactions, pressuring merchant margins.
4. Regulatory Constraint (Fee Caps & Routing Mandates): Regulations like the Durbin Amendment (U.S.) and Interchange Fee Regulation (Europe) cap certain fees and mandate routing choice for debit. Proposed legislation like the Credit Card Competition Act (U.S.) threatens to extend similar mandates to credit, creating significant pricing uncertainty.
5. Technological Shift (Alternative Payment Methods): The rise of Account-to-Account (A2A) payment rails (e.g., FedNow, RTP) and Buy Now, Pay Later (BNPL) services present a long-term threat by offering payment methods that bypass traditional card networks and their associated fee structures.

Competitive Landscape

Barriers to entry are High, driven by immense capital requirements for infrastructure, stringent regulatory licensing (e.g., PCI DSS compliance, money transmitter licenses), and the need for scale to establish relationships with card networks.

⮕ Tier 1 Leaders * Fiserv (First Data): Unmatched scale and distribution, particularly strong in serving small businesses and large financial institutions. * FIS (Worldpay): Global leader with deep expertise in enterprise-level, multinational e-commerce processing. * JPMorgan Payments (Chase Paymentech): Dominant market share in the U.S., leveraging its vast banking relationships to bundle services. * Stripe: Tech-first, API-driven platform that has become the standard for online startups and software-integrated payments.

⮕ Emerging/Niche Players * Adyen: Focuses on a single, modern platform for unified global commerce (online, mobile, in-store) for large enterprise clients. * dLocal: Specializes in providing payment solutions for emerging markets, navigating complex local payment methods and regulations. * Finix: Operates as a "payments-as-a-service" provider, enabling software platforms to become their own payment facilitators (PayFacs).

Pricing Mechanics

The total transaction fee, often called the Merchant Discount Rate (MDR), is a blend of three core components. The most common pricing model for large enterprises is Interchange-Plus, which provides the most transparency. This model separates the non-negotiable costs from the acquirer's negotiable markup.

The price build-up is: Total Fee = Interchange Fee + Assessment Fee + Acquirer Markup. Interchange fees, the largest component (~70-80% of the total cost), are paid to the card-issuing bank and are set by card networks. Assessment fees (~0.13-0.15%) are paid directly to the card networks. The Acquirer Markup is the processor's fee for service, risk, and support, and is the primary point of negotiation for procurement.

The three most volatile cost elements are: 1. Interchange Rates: Set by Visa/Mastercard and updated semi-annually. Recent changes in April 2023 led to a net increase of est. 5-7 basis points for certain card-not-present categories. 2. Cross-Border Fees: Additional fees applied by card networks for international transactions. These can add 1.0% - 1.5% to the transaction cost and are subject to FX volatility. 3. Network Assessment Fees: While smaller, these fees are also subject to periodic increases by the card networks, with a recent average increase of est. 0.5 - 1.0 basis points over the last 18 months.

Recent Trends & Innovation

• Launch of FedNow (July 2023): The U.S. Federal Reserve launched its instant payment service, FedNow. This infrastructure enables Account-to-Account (A2A) transfers, creating a viable, low-cost alternative to card rails for certain use cases, which could pressure card transaction fees in the long term.
• Credit Card Competition Act (Re-introduced June 2023): This bipartisan U.S. bill, if passed, would mandate that large card-issuing banks offer at least two unaffiliated network choices for credit card routing (e.g., Visa and a competitor). This could significantly disrupt the current duopoly and create downward pressure on credit interchange fees.
• Payment Facilitator (PayFac) Model Proliferation (2022-2024): Software-as-a-Service (SaaS) companies are increasingly embedding payment processing directly into their platforms using the PayFac model, monetizing transactions and creating stickier customer relationships. This trend is powered by providers like Stripe Connect and Finix.

Supplier Landscape

Regional Focus: North Carolina (USA)

North Carolina, particularly the Charlotte metro area, is a major financial services hub, home to Bank of America's headquarters and significant operations for Truist, Wells Fargo, FIS, and Fiserv. This creates a highly competitive local market for payment acquiring services with robust local support capacity. Demand is strong and diverse, driven by the state's large banking, retail, healthcare, and growing technology sectors. From a regulatory standpoint, North Carolina is subject to all U.S. federal regulations, including the Durbin Amendment and the potential impacts of the Credit Card Competition Act. There are no state-level taxes or unique regulations that materially impact acquiring fee structures.

Risk Outlook

Actionable Sourcing Recommendations

1. Mandate Interchange-Plus Pricing. For all new RFPs and contract renewals, require suppliers to bid on an Interchange-Plus (IC+) basis. This unbundles costs, providing full transparency into the non-negotiable interchange/assessment fees versus the negotiable acquirer markup. This enables data-driven negotiation focused solely on the markup, targeting a 15-30% reduction on that specific cost component.
2. Optimize Debit Routing & Prepare for Credit. Immediately audit current debit transaction processing to ensure least-cost routing is enabled to comply with and benefit from the Durbin Amendment, saving an estimated $0.05-$0.10 per debit transaction. Concurrently, engage IT and payment gateway partners to assess the technical feasibility of dynamic credit card routing to prepare for potential opportunities arising from the Credit Card Competition Act.