Visa Inc.’s complicated new Fixed Acquirer Network Fee, or FANF, has caused considerable head scratching if not outright consternation for merchant acquirers, independent sales organizations, and merchants since it took effect in April. But, in addition to figuring out FANF’s mysteries, the acquiring industry needs to account for a new element of credit risk that has arrived with the monthly fee, according to a study by First Annapolis Consulting Inc.
The risk is not inherent in the fee itself, but in the way acquirers bill their merchants for it. Visa charges acquirers the FANF during the same month that a merchant generates Visa charge volume. As is the case with most other expenses, acquirers are passing their FANF charges through to their merchant clients, but usually not until the month after they’re generated. That means if a merchant suddenly goes out of business, switches to another acquirer, or is involuntarily terminated as a card acceptor, the acquirer is exposed to a cash loss because Visa collects the FANF from that acquirer regardless of whether the acquirer has collected the fee from the merchant, according to First Annapolis.
“This is significant because the loss that results is a hard-dollar loss for the acquirer, unlike the acquirer’s other fees,” says the report. “Traditional acquirer fees, such as monthly fees or statement fees, are typically reversed when a loss occurs, meaning the accrued but uncollected revenue is written off with no impact on the acquirer’s cash position.”
First Annapolis recently surveyed about 20 acquirers about their FANF practices, and at least 15 are billing the fee in arrears, typically by a month, report co-author Raymond Carter, a principal at the Linthicum, Md.-based firm, tells Digital Transactions News. One acquirer hadn’t even started collecting it, which means its merchants are in for some big bills unless the acquirer absorbs the expense.
But few underwriting managers have yet given serious thought to the risk implications of their FANF billing practices, according to Carter. “I don’t think it’s hit the radar of the credit people yet, and it probably won’t until the dollar amount starts creeping up a little bit,” he says.
For card-present merchants, Visa assesses the FANF through an 18-tier schedule based on the number of locations and whether Visa considers the merchant a “high-volume” business. Visa calculates FANF for card-not-present merchants, aggregators, and fast-food restaurants using a 16-tier schedule based on monthly dollar volume.
The extra credit risk may not seem like a lot when viewed on a per-location basis, but the exposure, or increase in exposure, can be large if spread across a portfolio of hundreds or thousands of merchants. For example, First Annapolis estimates a small restaurant chain with five locations that generates $200,000 in annual charge volume faces credit exposure of only $7.50 at any given time. Risk is low because restaurants usually have card-present transactions and, according to Carter, typically get few chargebacks or returns. But, assuming the acquirer bills the FANF a month in arrears, the new fee adds $14.50 in credit exposure based on a charge, according to Visa’s schedule, of $2.90 per location. That means the credit exposure of the restaurant’s acquirer has just increased by more than 200%.
In another card-present example, a delayed-delivery furniture retailer with five locations that also generates $200,000 in annual volume faces an estimated credit exposure of $9,000 because of the high average ticket and higher chargeback rates than the restaurant chain, says Carter. Assuming billing occurs a month later, the FANF would add the same amount of monthly risk, $14.50.
But FANF’s credit risk rises for acquirers serving small and mid-size businesses because of the relatively high failure and attrition rates of those merchants compared with those of large merchants, according to First Annapolis. “It’s progressive,” says Carter. “If you’re an ISO that has a 25% attrition rate and you’re running into this problem on 25% of your portfolio every year, it can add up.”
The only way to eliminate FANF credit risk is for the acquirer to bill in advance, according to First Annapolis. While advance billing could be done with a fair degree of precision for card-present merchants, such a method would present some problems for online retailers, aggregators, and fast-food restaurants, since no acquirer knows with certainty how much charge volume a merchant will generate.
Though it applies to both credit and debit card transactions, the FANF is one part of Visa’s effort to protect its revenue stream in the wake of Durbin Amendment regulations that have caused a big drop in its PIN-debit transaction volume and is the subject of the cover story in the September edition of Digital Transactions magazine.