Financial Transaction Processing
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Industry Overview
The US financial transaction processing industry includes about 2,000 companies with combined annual revenue of about $40 billion. Major companies include Alliance Data Systems, Banc of America Merchant Services (a joint venture between Bank of America and First Data), Elavon, Global Payments, Heartland Payment Systems, and Total System Services. The industry is highly concentrated: the top 50 companies account for about 85 percent of industry revenue.
The global transaction processing industry generates revenue of about $250 billion annually. Many large credit card processors operate and maintain processing centers globally. International markets with strong growth in payment services include Europe, Asia Pacific, and South America. Non-US financial transaction processing firms include China UnionPay (China), MasterCard's DataCash (UK), and Moneris Solutions (Canada).
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 economies of scale in processing and typically can provide more services; small companies can compete by specializing in industries and providing custom services. The business is capital-intensive: average annual revenue per employee is about $400,000.
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 customer makes a purchase. 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. 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).
Merchants accept debit cards in one of two ways, online or offline. The online method requires a PIN entry device (PED), and the offline method (signature debit) requires a customer signature. Unless the transaction amount is less than $25, PIN debit costs less than signature debit.
The industry handles billions of transactions annually. Processors have multiple processing and telecommunications centers across the country. Major processing costs include telecommunications expense, personnel, and computer network maintenance. Constant investment in computer and telecommunications equipment is required to stay abreast of customer demand.
