How To Start A Merchant Processing Company

How To Start A Merchant Processing Company – How many of you still have cash, or how many of us still pay anything with cash? If you’re like me, few of us are. The use of credit cards, debit cards and online payment processing has exploded over the past decade. But do any of us understand how payment processing works?

The pandemic accelerated the shift to cashless transactions, where stores like Walmart ran out of cash to return to customers because none of their customers were paying cash.

How To Start A Merchant Processing Company

Payment processing has many layers and it gets a bit confusing until you understand how payments flow from point to point. Most of us know Visa and Mastercard as some of the most recognized brands in the world. But newcomers like PayPal, Square, Venmo and others are entering the space and stopping processing payments.

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When we swipe our cards, it seems like a fairly simple process; we swipe our Visa card and that’s it, payment is made in a few minutes. However, the behind-the-scenes process is still much more complicated, even if it only takes a few seconds – swiping the card and signing the receipt only completes the first and last steps. Although the process remains fast, several steps and several actors behind the scenes allow it to go smoothly.

Surprisingly, one of the biggest expenses most small business owners face is credit card processing fees, but most are unaware of the process or how the fees arise. As investors, we need to understand the whole process to fully understand how a company like Visa or Square makes money.

Before diving into the actual steps of the deal, let’s look at the six actors involved in this highly coordinated dance.

The whole process only takes a few seconds, which is amazing when you think about it. In many cases, some confusion may arise throughout the process as the commercial bank may also be the acquiring bank. And then it can handle multiple process steps and make it easier for the issuing bank to process payments.

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In some cases, the commercial banks/acquirers and the issuers are part of the same company. For example, JP Morgan Chase offers its customers all aspects of card processing, so they act as intermediaries between the merchant and card networks such as Visa.

In other words, Chase provides the merchant with a machine that allows them to process customer cards online or in-store; they then process the payments by sending them over the network via Visa and deposit the money into the merchant’s account, which is at Chase. All of this allows the merchant to host all processing and deposits in one place, which saves time and money.

A simple way to think about flow is to visualize a highway. We first took the highway to our destination, in this case the issuing bank. We entered our freeway through a ramp (commercial processor); once on the highway, we choose the direction to take (credit card association, Visa/Mastercard); once we decided on the direction, we arrived at our destination, the issuing bank.

Simple enough, right? While all of this is happening overnight when it used to take days. Enables the merchant to receive their money faster, helping with cash flow.

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When a merchant accepts payment by card, whether it is a debit card, credit card, or online payment, they are processing the payment for the convenience of the customer. But this convenience comes at a cost to the merchant in terms of fees.

Because of these fees, many merchants seek out the cheapest processors or brand their products to cover the fees. In some cases, some small businesses choose not to offer card payment because the fees eat up too much of their profits.

For example, a merchant charges $100 for a product and we pay with a credit card. The trader can receive $100 on their deposits minus the processing fee amounting to $3. So the trader will either receive a deposit of $97 in their account or they will be billed later for the $3.

To figure out how the payment processor gets paid, let’s look at the fee breakdown and how that $3 is split among the various industry players.

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Much of this structure depends on the trader’s trading volume and the types of fees they can negotiate. Depending on the type of transaction, there is also some variability in the fees charged by the processor. Many fees are fixed, per transaction or based on volume.

The discount rate is the fee merchants pay to be able to accept card transactions. Fees are the basis for services provided from any of the following:

Fees range from 2% to 3%, with online merchants paying the higher end, but fees can be as high as 5%. The discount rate charge comes from adding sales tax to the account. There are several components of the discount rate:

The fees above are the main payment processing fees, there are additional fees that businesses may charge, but those that most directly affect the merchant and payment processors are above.

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The customer walks into their favorite store and purchases an item for $100. Let’s follow the cash flow for the 3% or $3 discount rate applied by payment processors:

The example above is a simplified example of how the merchant’s cash flow moves from the payment processing system to the merchant. If you want to see a great video breaking it all down, check out this link.

Once it’s broken down it’s not that complicated, there are a lot of levels to grasp, but once you decode the system it makes a lot more sense.

There are many opportunities to find investment ideas in the payment processing industry, as in many areas of the technology world.

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Let’s start with merchant acquirers, typically customer-facing merchants who purchase payment processing from the merchant, say, a small baseball card store.

These merchant acquirers may own the entire payment processing ecosystem except for credit card processing networks such as Visa and Mastercard. But for our purposes here, let’s break it down into different segments of the payment processing system. One thing to note, you may see the same company at different stages of payment processing.

The items above are just a few examples of potential investments at different stages of the payment processing experience. As with any investment, we need to do our due diligence to find the opportunity that best suits our portfolio and risk tolerance.

All companies remain big companies; some are in the growth phase, like Square and PayPayl, while others, like Visa and Mastercard, are more mature. But just because it’s a bit old doesn’t mean it isn’t important to the economy or critically impacting the processing network.

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The payment processing industry remains a vital and growing part of the economy and its use has exploded with the pandemic’s stay-at-home orders. The move towards a cashless system had already begun, but the pandemic only accelerated this move.

With the majority of consumers using their phones to pay online or with their mobile wallet, the trend will only accelerate. And with the rise of cryptocurrencies, who knows where the payment space will lead.

I recently read that Walmart is pursuing the idea of ​​creating a bank to capture some of the profits available on payment processing. It makes sense when you think about it because they are a low cost provider and those processing fees affect your bottom line. And if they manage to capture that extra 0.50% to 0.75% of their profits, it’s worth it.

As with any investment, we need to understand how the business makes money. And deciphering the payment processing ecosystem has interested me for quite some time. As with my interest in banking, it makes sense to learn more about payment processing.

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There are many great companies in this space, but make sure you understand the economics of the business before you put your hard-earned cash to work.

Thank you for taking the time to read today’s post and I hope you find something valuable in your investing journey. If I can help you with anything else, please don’t hesitate to contact me. The payments industry is a rapidly evolving landscape that is constantly changing due to the introduction of new payment methods, mergers and acquisitions, and technologies. Especially with advances in technology, we’re seeing payment technology companies play a bigger role in the payments industry – and many of them are even merging with traditional financial institutions to meet the latest customer and consumer preferences. tradespeople. Unlike in the past, when payment processing was simply about facilitating the transfer of funds, new players in the world of payment processing are completely redefining the customer experience and enabling business owners to run their business with incredible ease.

In this whitepaper, we’ll provide a high-level overview of the current payments landscape: how the payment processing system works, who the key players are, and what the latest technologies look like. Additionally, we will cover some trends in consumer behavior that may affect the future of the industry.


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