Merchant Services Residuals: How Reseller Commissions Work

Every card payment has a cost that nobody in the middle keeps. To see what can be shared, split the merchant's processing bill into two parts.

Part 1: pass-through costs. These go straight through to the card system:

• Interchange: the fee set by Visa, Mastercard and the other networks and paid to the bank that issued the customer's card. It's the largest part of most processing bills.
• Assessments (network fees): smaller fees the card networks charge on each transaction.

Neither of these is shared with anyone. They're the same no matter who sells the merchant account.

Part 2: the provider's revenue. This is what the merchant account provider charges on top:

• the markup: a percentage of sales, a fixed amount per transaction, or both
• account fees, such as a monthly fee or a gateway fee

Part 2 is the pool your merchant services commission comes out of. Under interchange-plus pricing, the two parts appear as separate lines on the merchant's statement, so everyone can see the markup. Under a flat or bundled rate, they're mixed together, and it's harder for you or your client to tell what the markup is.

This is also why residuals are a fair deal for clients when the pricing is honest. You're paid from the provider's margin, not from a separate charge added to your client's bill.

Merchant services commissions come in three main shapes. Which ones you're offered usually depends on your partner type. Our guide to ISO vs agent vs referral partner explains the partner types in detail.

The example merchant (example, not START's terms): an online store processing $20,000 a month in 250 transactions. It pays interchange and network fees at cost, plus 0.30% and 10¢ per transaction, plus a $15 monthly fee.

1. Referral fee

You introduce the merchant, and the provider pays you once when the account is approved (or, in some agreements, once it starts processing). Example: $150, paid once.

• Simple, and paid soon after the merchant signs up.
• No ongoing income, however long the merchant stays.
• Little ongoing work. The provider handles approval, setup and support.

2. Revenue share (a split)

You earn a percentage of the provider's revenue from each merchant, every month. This is merchant services revenue sharing in its most common form, and it's what most people mean by a residual. Example: a 50% split of $75 net revenue = $37.50 a month (the next section explains why it's $75, not $100).

• Income keeps coming as long as the merchant processes.
• It grows when the merchant's sales grow.
• The percentage means little until you know what it's a percentage of.

3. Buy rate (Schedule A)

The provider gives you a buy rate: a wholesale cost for each pricing item, usually listed in a pricing appendix often called Schedule A. You earn the difference between that cost and what the merchant pays. Example buy rate: 0.10% + 5¢ per transaction + $5 a month.

Buy rate deals usually go to agents and ISOs (independent sales organizations: companies registered with the card networks through a sponsor bank to sell merchant accounts), and they often come with more responsibility. The margin also depends on the merchant's price. Price too high and you lose the client to a cheaper offer. Authorize.Net's own Reseller Program is one published example of this model for a gateway: it describes monthly residuals on the difference between buy and sell rates. Our Authorize.Net reseller program guide covers what it includes and what it leaves out.

Buy rate vs revenue share: which pays more?

Neither, automatically. In the example, the buy rate pays more ($62.50 vs $37.50), but the buy rate figures were invented to be low. A generous split can beat a stingy buy rate, and the opposite is also true. To compare two offers, run the same merchant through both, using each contract's real definitions, and compare the dollars.

"50%" can mean very different amounts. The difference is what the provider deducts before it applies your percentage.

• Gross: your split applies to all the revenue above interchange and network fees. In the example, that's $100.
• Net: the provider first subtracts its own costs, such as processor fees, per-transaction platform costs or risk costs. In the example, $25 of costs leaves $75.

A 70% net split can pay about the same as a 50% gross split. There's no industry-standard definition of "net", so every agreement defines it its own way. Ask the provider:

• Which costs are subtracted before the split, item by item?
• Are chargeback losses or merchant debts taken from your residuals?
• Is the gateway fee included in the revenue you share?
• Can the provider change the definition later, and how much notice do you get?

The split tells you what you earn this month. The contract terms tell you whether you'll still be earning it in five years. These are the clauses that decide what happens when something changes.

1. Vesting. "Vested" means your residuals are yours to keep, even if you stop working with the provider. Some agreements vest right away. Others require a period of active selling first, and until then you can lose your residuals if you leave.
2. If you stop referring. Some agreements pay only while you keep sending new merchants, or stop payments after a set time with no new accounts. If you plan to refer a few clients a year, this clause matters most.
3. Termination for cause. Find out what counts as "cause" and whether it ends all your residuals. Look for a clear list, not "any reason at the provider's discretion".
4. Non-solicitation. Most agreements bar you from moving your merchants to another provider. Breaking this clause, even for one merchant, can cost you all your residuals in some contracts. Read how long it lasts after the agreement ends.
5. Portability. This is whether you can move your book of business to another provider. It depends on the contract's assignment terms and on how the merchants' accounts are set up. Most referral agreements don't include it.
6. Clawbacks. If you received an upfront bonus, you may have to repay it when the merchant closes within a set period. Some agreements also claw back or cut residuals when your merchants' volume falls below a threshold.
7. Payment date, minimum and reporting. Ask when residuals are paid, whether there's a minimum before a payment goes out, and what report you get each month. You should be able to see each merchant's volume and your share, so you can check the math.
8. Changes to the split. Check whether the provider can change your percentage or buy rate during the agreement, and with how much notice.

If a merchant you referred later decides to switch merchant services to another provider, the residual on that account usually stops. That's why clients who are treated well by the provider are worth more to you over time than the size of any one split.

Your book of business (or portfolio) is all the merchants you earn residuals on. What it pays comes down to one sum:

average monthly residual per merchant × number of active merchants × months they stay

Here's that sum with the example merchant (example, not START's terms). You refer 2 merchants a month for 24 months, each paying you $37.50 a month:

• If none leave: 48 merchants × $37.50 = $1,800 a month by month 24.
• If 1 in 5 has closed or switched by then: 38 merchants × $37.50 = $1,425 a month.
• Referral fees instead: 48 merchants × $150 = $7,200, paid once, with nothing after.

Three things move that number more than the split does:

• Merchant size. A client processing $200,000 a month earns ten times what a $20,000 client does at the same pricing. A few larger clients can outweigh dozens of small ones.
• How long merchants stay. Merchants close, get sold or switch providers. Good service and fair pricing keep them longer.
• How many you refer. This is the part you control. Our guide on how to sell merchant services to your existing clients covers how to earn more by referring more.

Be wary of any partner pitch that shows only the "none leave" line, or projects income without showing the math behind it.

A recurring revenue reseller program suits you if your clients already need to take card payments and trust you to recommend the tools they use. Web developers, agencies, hosting companies and software providers are in that position every time they build a checkout.

A one-time referral fee may suit you better if you'll refer only now and then, or you'd rather not think about the account after the introduction. Ongoing residuals suit partners who expect to refer steadily and want merchant account reseller revenue that builds over time.

Either way, the fundamentals are the same: fair pricing for your clients, a provider that approves and supports them well, and a contract you've read line by line.