How Do Payment Processors Make Money?

Shaw Merchant Group
6 min readMar 16, 2024
How to Become a Credit Card Processing Agent?

Payment processing is a crucial part of the modern economy, enabling businesses to accept electronic payments from customers. Payment processors act as intermediaries between merchants and financial institutions, facilitating transactions and ensuring secure payment processing. But how exactly do payment processors make money? In this comprehensive guide, we will explore the various ways payment processors earn revenue, with a focus on credit card processing commission structures and the concept of merchant services residual income.

Understanding Payment Processing

Payment processing involves the handling of transactions between a merchant, a customer, and their respective financial institutions. This process typically includes authorizing transactions, capturing funds, settling transactions, and managing chargebacks and disputes. Payment processors play a crucial role in facilitating these transactions, ensuring that payments are processed securely and efficiently.

How Do Payment Processors Make Money?

Payment processors generate revenue through various channels, including transaction fees, interchange fees, and other ancillary services. Let’s delve into the primary ways payment processors make money:

1. **Transaction Fees**: Payment processors charge merchants a fee for each transaction processed. This fee may be a flat rate or a percentage of the transaction amount. The transaction fee covers the cost of processing the payment and includes a markup for the payment processor’s services.

2. **Interchange Fees**: Interchange fees are fees charged by the card networks (such as Visa and Mastercard) to process credit card transactions. Payment processors may pass these fees onto merchants or include them in their pricing structure. Interchange fees vary based on factors such as the type of card used, the transaction amount, and the merchant’s industry.

3. **Monthly Fees**: Some payment processors charge merchants a monthly fee for access to their payment processing services. These fees may cover account management, customer support, and other operational costs.

4. **Ancillary Services**: Payment processors may offer additional services to merchants, such as fraud prevention tools, chargeback management, and reporting analytics. These services often come at an additional cost, allowing payment processors to generate extra revenue.

Credit Card Processing Commission Structure

Credit card processing commission structures are vital for understanding how payment processors earn revenue from credit card transactions. The commission structure typically includes the following components:

1. **Merchant Discount Rate**: The merchant discount rate is the percentage of each transaction that the payment processor charges the merchant. This rate includes the interchange fee, the payment processor’s markup, and any other fees associated with processing the transaction.

2. **Per-Transaction Fee**: In addition to the merchant discount rate, payment processors may charge a flat fee for each transaction processed. This fee covers the payment processor’s operational costs and may vary depending on the transaction volume.

3. **Monthly Fees**: Monthly fees are recurring charges that merchants pay for access to the payment processor’s services. These fees may cover account management, customer support, and other services provided by the payment processor.

4. **Incidental Fees**: Payment processors may also charge merchants incidental fees for services such as chargeback management, PCI compliance, and account setup. These fees contribute to the overall revenue generated by the payment processor.

Understanding Merchant Services Residual Income

Merchant services residual income is a key concept in the payment processing industry, referring to the ongoing revenue that payment processors earn from each merchant account. Residual income is generated through a combination of transaction fees, interchange fees, and other sources of revenue.

When a merchant signs up for payment processing services, they enter into an agreement with the payment processor that includes a commission structure. The payment processor earns a percentage of each transaction processed by the merchant, providing a steady stream of residual income over time.

Credit card processing residual income is a form of passive income for payment processors, as they continue to earn revenue from existing merchant accounts without actively selling new services. This residual income provides stability and predictability to payment processors’ revenue streams, making it a valuable source of income in the industry.

How Do Payment Service Providers Make Money?

Payment service providers (PSPs) operate in a similar manner to payment processors, offering payment processing services to merchants. PSPs generate revenue through transaction fees, interchange fees, and other ancillary services, just like traditional payment processors.

However, PSPs may have a different business model that allows them to aggregate transactions from multiple merchants and process them in bulk. This aggregation model enables PSPs to negotiate lower interchange fees with card networks and pass the savings onto their merchants. PSPs may earn revenue by charging merchants a flat rate per transaction or a percentage of the transaction amount.

In addition to payment processing services, PSPs may offer value-added services such as e-commerce platforms, fraud prevention tools, and cross-border payment solutions. These services contribute to the overall revenue generated by PSPs and help differentiate them in the competitive payment processing market.

How Do Merchant Acquirers Make Money?

Merchant acquirers are financial institutions that partner with payment processors to facilitate payment processing for merchants. Acquirers are responsible for underwriting merchant accounts, managing risk, and settling transactions with card networks.

Merchant acquirers earn revenue through various channels, including markup on interchange fees, transaction fees, and ancillary services. Acquirers may charge merchants a discount rate for each transaction processed, as well as additional fees for services such as chargeback management and account maintenance.

Acquirers may also earn revenue by providing financing solutions to merchants, such as merchant cash advances and business loans. These financial services can generate additional income for acquirers while providing value to their merchant customers.

Start a Payment Processing Business

How to Start a Credit Card Processing Company

If you’re interested in entering the payment processing industry and starting your own credit card processing company, there are several steps you’ll need to take:

1. **Research the Market**: Conduct market research to understand the competitive landscape, industry trends, and opportunities for growth in the payment processing sector.

2. **Obtain Licenses and Certifications**: Depending on your location, you may need to obtain licenses and certifications to operate a credit card processing company. Check with regulatory authorities to ensure compliance with legal requirements.

3. **Build Partnerships**: Partner with payment processors, acquirers, and other industry stakeholders to establish relationships and access the necessary infrastructure for processing transactions.

4. **Develop Sales Channels**: Create sales channels to attract merchants and sell your payment processing services. Utilize digital marketing, networking, and referral programs to reach potential customers.

5. **Provide Excellent Customer Service**: Offer exceptional customer service to merchants, providing support for account setup, technical issues, and payment processing queries. Building strong relationships with your customers can lead to long-term success in the industry.

Payment processors, merchant acquirers, and payment service providers play a crucial role in enabling businesses to accept electronic payments from customers. By understanding the various revenue streams in the payment processing industry, including credit card processing commission structures and merchant services residual income, you can gain insight into how these companies make money and sustain their operations.

As the payment processing landscape continues to evolve with advances in technology and changes in consumer behavior, payment processors must adapt their business models to remain competitive and profitable. By staying informed about industry trends and providing innovative payment solutions to merchants, payment processors can continue to thrive in the dynamic payment processing market.

By comprehensively exploring the intricacies of payment processing revenue models, this guide aims to provide valuable insights for industry professionals, entrepreneurs, and anyone interested in understanding how payment processors make money and drive financial success in the digital economy.

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Shaw Merchant Group

At Shaw Merchant Group we specialize in merchant services agent and ISO development. We are a group of experienced payment processing industry professionals.