Credit card and payment processing industry overview

Payment processing market size

The credit card industry is big business. Massive. The amount that people spend using credit cards is over $3 trillion per year and that is growing by about 8% per year in the USA alone. The fees add up to around $85 billion per year. It’s easy to understand why payments is so competitive and dominated by a few very large banks. The amount people user cash and checks as a payment method is falling off a cliff in favour of digital payments, in particular credit cards. The US Federal Reserve has some pretty good studies on payment card trends.

Payment processing value chain

The credit card value chain includes all the types of companies that make money off of a credit card transaction. These are:
  • Issuing bank: The issuing banks are the guys (banks or credit unions) that people get their credit cards from. Chase and Citi are a couple of the largest in USA while TD and RBC are the largest in Canada. The issuing bank decides things like the interest rate that cardholders pay, the limit, foreign fees, etc.
  • Credit card network: A credit card network (or card brand or card association) are the ones that set interchange. That’s Visa, MasterCard, etc. They are the credit card brand and set the rules.
  • Payment processor: This is where definitions get complicated. People sometimes use the term process to cover several of the companies in the value chain. Technically, the payment processors do the communication with issuing banks during a transaction.
  • Acquirer: An acquirer (or acquiring bank) actually process credit card transactions and hold the merchant account for merchants. Sometimes people use the term “processor” as a general term for “payment processor” or “merchant services provider” but they are technically different.
  • Merchant service provider: Merchant service providers provide the sales, support, and software to merchants. Sometimes they build their own software, sometimes they white label. These are the folks that merchants primarily work with. These can also be called an ISO (Independent Sales Organization).

Where the payment processing revenue goes

Now, the above value chain all work together to enable merchants to accept credit cards and to ensure consumers have a safe, efficient, and secure way to pay. For this service, they obtain a fee (their revenue) of about 2.5% of purchases. Let’s look at an example where a consumer pays $100 for a pair of shoes. To start off, the merchant gets $97.50 and the credit card value chain gets $2.50. Of the $2.50 here is an approximate split across the value chain.
  • Issuing bank: $1.64 (65%)
  • Credit card network: $0.12 (5%)
  • Payment processor: $0.03 (1%)
  • Acquirer: $0.11 (5%)
  • Merchant service provider: $0.60 (24%)
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