Credit Card Processing

Industry Overview

The US credit card processing industry includes fewer than 500 companies with combined annual revenue under $10 billion. Major companies include First Data Corporation, Total System Services, Global Payments, and Bank of America's BA Merchant Services. The industry is highly concentrated: the top four companies account for 40 percent of industry revenues.

Competitive Landscape

Demand is driven by consumer spending. The profitability of individual companies depends on efficient operations, as services are sold largely based on cost. Large companies have big economies of scale in processing and can provide more services; small companies can compete by specializing in industries and providing custom services. The business is highly automated and capital-intensive: average annual revenue per employee is about $225,000.

Products, Operations & Technology

Processors provide transaction services to banks that issue credit cards and to merchants that accept credit card payments. Merchant products include authorizing, capturing, and settling merchants’ credit and debit card transactions, and handling chargebacks. Chargebacks occur when a consumer disputes a charge and charges it back to the merchant. Processors also sell or lease point-of-sale (POS) terminals. Card issuer products include transaction authorization and posting, statement generation and printing, and card embossing.

Large processors such as First Data Corporation and Total System Services provide services to both sides of the transaction. Small processors typically offer either merchant or card issuing services, and may specialize in particular vertical markets such as credit unions or retail cards. For every merchant transaction there is a card issuing transaction.

A credit card transaction occurs when a cardholder makes a purchase using a credit card. The merchant swipes the card through a POS terminal, which transmits the card number, amount, and merchant identification number over the processor’s electronic network. The information is transmitted to the credit or debit card network, which relays the data to the bank that issued the card. For example, the data goes to Visa or MasterCard for credit transactions; and to STAR, NYCE, or PULSE EFT for debit transactions. The bank then verifies that the cardholder has sufficient funds/credit for the purchase, and sends the merchant an authorization via these same networks. At the end of the day the merchant sends the day’s charges in batch to its processor, which sends the information to individual banks for settlement through the Federal Reserve Bank’s Automated Clearinghouse (ACH).

The industry handles a high volume of transactions. First Data processes around 20 billion merchant transactions yearly; Total System Services, about 10 billion. First Data had 400 million card accounts from 1,400 credit card issuers in a recent year, and accounts with 4 million merchants. Processors have multiple processing and telecommunications centers across the country. First Data has 95 merchant servicing centers and 10 card issuing centers in the US. Major processing costs include telecommunications expense, personnel, and computer network maintenance.

The industry is technology-based. Transactions occur electronically over the processors’ data and communications networks. Constant investment is required in computer and telecommunications equipment to stay abreast of customer demands.

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