The true cost of 'Translation' - credit card authorisation and settlement

Guest blogger Nick Caunter, Managing Director of APH

From 1998 to 2003, just before I came to the airport parking industry, I worked in card payments.  My recall of the industry has faded over the years but it is true to say that banks and their payments systems were caught out by the boom in e-commerce during this time.  In short, and in a highly simplified way, the new IP based systems of web retailers couldn’t converse with the old legacy systems of the banks.  The result was a new breed of company emerged – Payment Services Providers or PSPs, in essence they provided a sort of “translation” service.  You could have been forgiven for thinking that their role would be short-lived as the banks would surely catch up and the banks merchant acquirer systems would soon be able to converse with the retailer’s systems direct.  Generally speaking, this hasn’t happened. 

Instead, many PSPs were acquired by banks, others carved out a niche by providing fraud screening and other value–added services and to my knowledge bank acquirer systems seem no more developed (for e-commerce) than they were back at the turn of the millennium.

So the PSP is still with us and now provides a vital role in PCI compliance (in fully hosting the card transaction).  An efficiency expert might say this extra link in the payment chain could be eliminated if the banks wanted to streamline the process and update their systems.  Right now (and given the time elapsed, it doesn’t look like changing any time soon) the retailer carries the cost of the “translation” into the bank systems, usually a matter of pennies per transaction – but beware, make sure you get a per transaction fee that includes both authorisation (card approval) and settlement (funds transfer); rumour has it that some PSPs charge separately.

On the plus side, handling your card payments through a PSP gives you the flexibility to switch bank acquirers quickly – the only downside is that when you go out to tender on your acquiring business, all the tenders come in at remarkably similar levels.  You’d think they were acting like a Cartel;-)