McGovern Smith has tracked processor operating costs over the past 15 years and recently updated its Processor Cost Index1 for 2024. The index measures the per transaction decline in operating costs across an index of card processors and provides a relevant fact-base to card issuers as they approach contract renewal or competitive selection processes. Since many contracts for credit and debit card processing have variable or per-transaction based pricing structures, card issuers should attempt to mirror the decline in processor operating costs over time during contract renewal/selection processes.
In 2024, processor operating costs per transaction fell by 4.1%. This is the third straight year that processor operating costs per transaction fell by a healthy amount and were not otherwise influenced by the pandemic. Most processors continue to benefit from platform leverage and scale and many card issuers continue to pay fees that outpace the underlying delivery costs of their processors.
To keep pace with these declines, issuers that executed credit and/or debit processing contracts in or around 2018 should target unit cost savings of 19.6% today to mirror the decline in processor operating costs per transaction 2018 to 2024. Likewise, McGovern Smith forecasts processor operating cost per transactions will decline by 4.2% in 2025, assuming a conservative uptick in operating costs and higher transaction growth (see Select Data chart below). Using this forecast, issuers that executed related contracts in 2021 should, at a minimum, target unit cost savings of 17.3% to mirror the decline.
The data continues to suggests that issuers should strongly push back on most fee escalators (particularly those related to scalable transaction processing) pursued by processors tied to CPI or other factor – even if they are included in current agreements. There appears to be no reasonable rationale for processor fee escalators, outside possibly FTE-based delivery services such as customer service or dispute processing.
Select Data2
While the index results and forecast should be targeted by many for their respective businesses, individual savings will continue to be influenced by a variety of factors, including incumbent providers, current or baseline pricing, contract duration, mix of services, program size and growth, the process employed (competitive RFP processes tend to drive better results than renewal or renegotiation processes), the amount of value-added services (which typically are priced at a premium), and others.
- Index measures third party card issuer processing and related services (e.g., ATM driving, EFT network, back-office, etc.) operating expenses per transaction. The Index is derived from SEC filings, industry statistics and other public information. 2020 % Change is measured from 2018 data. ↩︎
- 2020 % Change is measured from 2018 data. ↩︎
Scott Reaser (Partner), with over 25 years of industry experience, manages the Strategic Sourcing practice at McGovern Smith Advisors. He can be reached at [email protected]
McGovern Smith Advisors – Payments Strategic Sourcing Offerings
