In the era where digital payments have seamlessly integrated into our daily lives, operating a credit card processing business can be extremely profitable. Nonetheless, embarking on this journey is challenging and requires a solid knowledge foundation.
In this article, you’ll find all the necessary information on credit card processing for businesses, from how to start a credit card company to the cost of it.
Key points to know before starting a credit card processing company
Before you start credit card processing for businesses, you need to know the basics of this industry, the key players, and the roles they perform.
What is a credit card processing business?
A credit card processing business facilitates transactions between merchants and their customers by processing digital credit or debit cards. Simply put, credit card processors provide merchants with a technical layer to accept card payments on their websites.
Their essential functions include:
- Verifying whether a card is valid and has enough credit for the transaction.
- Facilitating the transfer of funds from the customer’s bank to the merchant’s account after processing the transaction successfully.
- Implementing fraud prevention measures to protect sensitive cardholder data.
- Providing software and infrastructure for merchants to process card transactions through their websites or applications securely.
- Offering hardware and software solutions for card processing.
What is a payment processing company?
A payment processing company can provide credit card processing within its operations. However, it is not limited to card transactions. Payment processing companies handle all forms of digital transactions to enable businesses to accept payments from their customers, including credit and debit cards, electronic funds transfers (EFTs), e-wallets, Buy Now Pay Later (BNPL), cryptocurrencies, etc.
What is a payment service provider?
With such a variety of key players in the digital payments field, here’s where it gets tricky.
Payment Service Provider (PSP) offers payment services for facilitating digital payments between businesses and customers. PSPs provide their clients with various services, including payment processing itself and advanced technologies for improving transaction approval rates and minimizing declines.
What is a payment facilitator?
Another major player in the digital payments arena is a Payment Facilitator, also called PayFac. PayFac is a type of financial service provider that simplifies the process of accepting electronic payments for smaller businesses. Previously, the main task of PayFacs was to enable companies to quickly set up and start accepting payments without the need for a traditional merchant account that involves more complex underwriting and approval processes. However, PayFacs have evolved over time to meet the diverse needs of merchants, now providing a comprehensive range of services to enhance the overall payment experience.
To learn more about payment facilitators, read the article below:
What is a merchant processing company?
A merchant processing company specializes in providing payment processing services to merchants. It is often called MSP. MSPs and PSsP are related terms in the payment processing industry, but they refer to different types of entities with distinct roles and focuses. MSPs work directly with merchants to set up and manage merchant accounts, acting as middlemen between businesses and acquiring banks.
To learn more about starting a merchant services business, read the article below:
How does a payment processor work?
Being responsible for managing transaction processing, the payment processor holds a pivotal role within the electronic payment ecosystem. Here’s how a payment processor works.
When a customer makes a purchase, they enter their payment information. Then, the merchant’s payment system receives it and sends an authorization request to the payment processor. In turn, the payment processor processes the authorization request, verifying the customer’s sensitive information. Once verified, transaction details are sent by the processor to the issuing bank to check the customer’s account for sufficient funds and fraud alerts. If the issuing bank approves the transaction, it sends approval back to the payment processor. Lastly, the payment processor sends it to the merchant’s system. After that, the transaction is finally authorized.
Why start a credit card processing company?
Now that you know the fundamentals of the key players in the digital payments arena, let’s delve into reasons to start a credit card processing business.
As per the 2022 McKinsey Global Payments Report, electronic transactions saw a remarkable 19 percent growth rate in 2021, which indicates that the need for reliable payment processing solutions also continues to rise, making the time just about right to learn how to start a credit card company.
The second major factor is revenue consistency. Merchants rely on payment processors to accept payments from clients. Consequently, credit card processing business benefits from the recurring nature of their revenue streams, driven by transaction fees, monthly charges, and value-added services.
Profit potential is another good reason to start a credit card processing company. Payment processing companies can charge their clients not only for transaction processing but also for value-added offerings, such as white-label payment solutions, new integrations with new banks and payment providers, assistance with Payment Card Industry Data Security Standards (PCI DSS) certification, etc.
Lastly, credit card processors can quickly expand globally. Credit card processing for businesses allows a company to participate in cross-border transactions and attract business overseas.
If you are wondering how to become a credit card processor by now, let’s take a look at the options you have.
What are the options for starting a payment processing business?
When it comes to how to start a payment processing company, there are two main options. You can either develop a payment system on your own or leverage ready-to-use white-label software. Let’s examine each in detail.
Building payment software
Creating your payment system offers an unmatched level of flexibility, enabling you to customize it precisely to align with your business’s unique requirements. This approach allows you to gain complete control of your system, craft software that perfectly caters to your merchants’ needs, and ensure scalability for future growth. Yet, constructing your own software relies on three essential pillars: time, money, and expertise.
Developing your own payment system will require lots of resources. Furthermore, the work continues when the system is ready, as ongoing maintenance and improvement demand a significant dedication of resources.
For a thorough insight into the costs associated with developing your own software, read the article below:
White label solution
There is a viable alternative to developing your own payment system for starting a credit card processing business – a white-label solution. It is a pre-configured customizable payment software that can be branded in your company’s name. It offers significant cost efficiency and a quick setup process, allowing entrepreneurs to start their business operations within a couple of weeks and begin capitalizing on it in no time.
White-label payment solutions can incorporate multiple technologies and integrations, which vary based on the provider. For instance, we at Akurateco offer white-label payment software equipped with cutting-edge technologies and over 300 integrated banks and payment providers via one integration to the platform. Among the supported technologies much needed to operate a payment processing business are:
- Intelligent routing
- Payment cascading
- Payment fraud prevention
- Built-in payment analytics
- Optimized checkout
.. and more.
To learn more about white-label software, read the article below:
How to start a payment processing company: Step-by-step
Starting a payment processing company is a complex procedure. Here is a step-by-step guide to help you get started:
Step 1: Marketing research and a business plan
Firstly, prepare detailed marketing research for your future company that defines your target market and outlines the services you want to offer. Based on that research, develop a comprehensive business plan that outlines your payment processing business goals, revenue model, pricing strategy, marketing approach, and financial projections.
Step 2: Financing and capital
Calculate the initial capital required to become a payment processor. Costs should include technology infrastructure, marketing, staffing, and operations. You can also explore funding options to secure the necessary capital.
Step 3: Legal and regulatory compliance
The next crucial step is to choose a legal structure for your business and research payment processing regulatory requirements in your jurisdiction. To adhere to laws and regulations, ensure compliance with industry standards like PCI DSS, and obtain all the necessary licenses and permits.
Step 4: Technology and infrastructure
To start a payment processing company, you require a well-established system equipped with essential technology and infrastructure. You can either build your own software or partner with a white-label payment gateway provider.
Step 5: Partnerships and relationships
Foster partnerships with banks, acquire merchant accounts, and collaborate with technology partners to develop a robust payment processing ecosystem for your merchants. Establishing these relationships can be challenging, especially for a newly launched brand. However, when utilizing a white-label payment gateway, you gain access to a variety of technology partners through open APIs.
Step 6: Marketing and launch
When your system is tested and ready to use, the last step is to promote it to your potential clients. You should develop a marketing strategy, build a strong sales team, and launch your payment processing business.
How much does it cost to start a payment processing company?
Costs can vary greatly when it comes to starting a payment processing company. It depends on several factors, including the scale of your operation, the services you plan to offer, regulatory requirements in your region, technology infrastructure, and others. However, the main cost factor is whether you develop your own software or leverage a white-label system.
If you decide to develop a payment system on your own, the costs associated with it will include developers’ salaries, technology and infrastructure you’ll build independently, regulatory and compliance costs, security measures, and ongoing system maintenance. On average, moderately complex software with additional features and security measures could cost between $100,000 and $500,000. Yet, a highly advanced and fully customized payment system may cost way over $500,000.
Alternatively, if you opt for a white-label solution, you’ll get ready-to-use software with licensing fees and customization costs. Generally, the price of a white-label solution customized to meet your specific branding, feature, and integration requirements may vary widely, ranging from $10,000 to $100,000 or more. It’s worth emphasizing that you will generate revenue much faster with a white-label solution since it’s pre-built and ready for use.
How to Start a Credit Card Processing Company FAQs
Let’s take a look at the most frequent questions on how to start a credit card processing company.
How to start a payment processor business?
There are two ways to start a payment processing business: develop your own software or opt for a pre-built white-label solution. If, on your journey towards becoming a payment processor, you choose to develop your own software, you’ll be responsible for software development, compliance, and infrastructure costs. Alternatively, selecting a white-label solution offers a quicker path to entry, with the main expenses being licensing fees and customization expenses.
Is it hard to start a credit card processing company?
Starting a credit card processing company can be challenging due to industry regulations, competition, and the need for substantial financial backing. It requires compliance with strict security standards and building trust with clients and financial institutions.
What is the average credit card processing fee for a business?
Credit card processing fees vary widely. Typically, they include interchange fees (around 1.5-3% of each transaction), assessments (0.11-0.15%), and processor fees (0.2-0.5% plus transaction fees). On average, business pays between 2% and 3.5% of the transaction amount in fees.
How much do credit card processing agents make?
Credit card processing agents, also known as ISOs (Independent Sales Organizations), earn commissions of 50% to 100% of merchant fees. This can translate into an annual income of $50,000 to $100,000 or more, depending on the agent’s sales volume. That is why a person who decides to become a credit card processing agent can make it a highly profitable venture.
How do card processors make money?
Card processors make money by charging businesses a fee for processing credit card transactions. They earn revenue from interchange fees, assessments, and their own processing fees. Additionally, they may offer value-added services, earning additional income. That also answers the question: “How do payment processors make money”
Are payment processing companies profitable?
Yes, payment processing companies can be highly profitable. They generate revenue from processing fees and often offer services like fraud prevention and data analytics, which can further increase profitability. However, profitability depends on factors like transaction volume, competition, and cost management.
What are the legal requirements and licenses needed to operate the business?
The legal requirements and licenses needed to operate a payment processing business vary depending on the region of your operation, business model, and jurisdiction. Generally, you’ll need to ensure compliance with financial regulations, obtain appropriate licenses, and adhere to Payment Card Industry Data Security Standards to handle transactions securely.
What are the potential challenges in the credit card processing industry, and how can I overcome them?
Potential challenges you may face include fierce competition, evolving regulations, and security threats. To overcome them, focus on delivering innovative services, stay informed about changing regulations, and invest in robust security measures and compliance to protect merchants and consumers from fraud.
How long does it take to start a credit card processing company?
The timeline for starting a credit card processing company can vary significantly. It may take you 6 months to a year to develop your own software. In contrast, launching with a white-label solution can speed up the process, allowing you to start within weeks.
What are the growth prospects for the credit card processing industry?
The growth prospects for the credit card processing industry are promising. E-commerce expansion, digital wallet adoption, and cashless payments are driving this change. Additionally, emerging technologies like instant payments and blockchain are expected to continue reshaping the industry, offering further growth opportunities.