Only federally insured depository institutions can be members of Visa USA and MasterCard Worldwide, yet some of the most dynamic and creative issuers are nonbanks. Some of these nonbank players effectively rent the bank identification number charters of commercial banks.
But pricing on these deals is insensitive to the underlying risk a bank takes.
In a rent-a-BIN deal, a nonbank gains access to the payment system by paying a bank a sponsorship fee. This sort of arrangement has been an aspect of the U.S. acquiring business from time immemorial, and there is substantial precedent for rent-a-BIN pricing, which has come to have a "transaction-processing" orientation.
In other words, pricing has tended to fall the greater the size of the nonbank, and the largest players command the lowest pricing due to scale. Consequently, rent-a-BIN pricing for sizable nonbanks has fallen to one cent per transaction and much lower for the largest players.
At our consulting firm, First Annapolis, we believe that instead of a 'transaction processing' orientation, rent-a-BIN pricing should have an "exposure" orientation, from the bank point of view.
A bank in a rent-a-BIN deal is a guarantor of the nonbank. It is an ambiguous Visa/MasterCard operating rule that if a nonbank cannot meet its obligations, then the bank must do so. So if an ISO has such a significant loss that it cannot honor chargebacks for a failed or fraudulent merchant, its BIN bank would be left with the bill.
Therefore, from the bank point of view, it should be compensated for this contingent liability, which is really a function of the exposure that the nonbank has in its portfolio combined with the risk that the nonbank will not be able to meet its commitments.
For example, assume a $20 billion nonbank acquirer has a total exposure of $70 million, considering its chargeback rates, return rates, delayed delivery profile, etc. Assume also that this nonbank has very high-quality credit and could absorb this level of exposure. Assume, finally, that the nonbank is highly capable and has more than adequate risk-management sophistication, making the probability of generating significant losses remote.
In essence, this would be like a bank extending credit to a AAA company. The bank would be accepting an exposure, analogous to the extension of credit, with a very low level of default risk.
Even using a risk-free rate against this exposure, a bank should generate more than banks typically do on these types of arrangements. We selected the 91-day T-bill rate and multiplied it by the exposure amount to generate a notional rent-a-BIN fee of $3.4 million annually, or 1.2 cents per transaction. If the nonbank does not have pristine credit, some risk premium on top of the risk-free rate would be appropriate. This is 20% at minimum higher than prevailing fees in the market and likely a lot more than that.
From the nonbank point of view, rent-a-BIN fees are a tax on their businesses imposed by what they view as arcane and inefficient membership rules at Visa and MasterCard. There are many ways to think about pricing rent-a-BIN deals from the bank point of view, but, to us, this "exposure"-oriented approach most closely approximates the real economics for the bank under the current rules.
Raymond Carter is a senior manager responsible for First Annapolis commercial risk-management practice. He can be reached at Ray.Carter
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Pricing of Rent-a-BIN Deals In Acquiring Needs Reviewing
June 01, 2007, 7:55 p.m. EDT 3 Min Read
