How to Start a Credit Card Processing Company
With over 100 billion transactions happening via credit card every year, starting a credit card processing company can be a great way to make a steady amount of money every month from residuals. The credit card industry is complicated, with many moving parts and many opportunities. However, there's a lot to do before you are able to join the industry.
When you enter the credit card processing industry, you'll establish relationships with merchants, banks and developers of credit card machines and payment gateway devices. Then, you can charge fees to process your clients' credit card transactions, with both a percentage of the transaction and a flat fee for each transaction. These will be your residuals — from where the money comes.
Before getting into this business, it's important to understand how it works. The players in credit card processing include:
- Consumer: The consumer is the cardholder making the purchase.
- Merchant: The business selling the product or service the consumer is purchasing. These will be your clients.
- Payment gateway: The technology, such as a credit card terminal, that connects merchants to payment processors. These capture payment details and route them to a payment processor or merchant bank and return an "approved" or "declined" message.
- Credit card processor: This is you. You will be facilitating communication between the merchant, the credit card network and the cardholder's bank and making sure all transactions comply with the Payment Card Industry Data Security Standards. You might provide merchants with payment gateways via lease or sale or have a reseller agreement with a payment gateway manufacturer or developer.
- Card network: This is the brand of the consumer's credit card, such as Visa, Mastercard, American Express or Discover. They set interchange and assessment fees and PCI DSS standards.
- Issuing bank: This is the consumer's bank that provided the credit card. It checks to make sure the cardholder's account has sufficient funds and then releases those funds for settlement.
- Merchant bank: This is the bank used by the merchant, where the merchant will have a merchant account through which funds will move thanks to the transactions you process. Some merchant banks provide credit card processing services and equipment as well.
Your job will be to facilitate communication and transactions among these entities. The process is broken down into authorization, settlement and funding:
- The consumer presents his card to a merchant through a payment gateway.
- The merchant sends a request for payment authorization to the payment processor (this is you).
- You submit transactions to the appropriate card network, eventually reaching the issuing bank. The authorization request includes the credit card CVV, expiration date and other parameters.
- The issuing bank approves or declines the transaction and sends this status back to the merchant via the card network and the payment processor.
- At the end of a period, usually a day, the merchant sends batches of all the authorized transactions to the payment processor (you again).
- You pass the transaction details to the issuing bank via the card networks.
- The issuing bank charges the consumer's account the appropriate amount and transfers the funds to the merchant bank minus interchange fees.
To be a competitive participant in this process, you need to understand PCI compliance. This is a set of practices you will need to follow to comply with the Payment Card Industry Data Security Standards, or PCI DSS. These standards are developed and enforced by the Payment Card Industry Security Standards Council, which is an association sponsored by the major credit card brands.
While maintaining PCI compliance is not legally mandated in any way, it is still your best defense against costly and devastating data breaches and also demonstrates to your customers that you are a trustworthy, safe and secure business. As a payment processing provider, you should be offering:
- PCI-compliant processing equipment and software. This includes terminals, point-of-sale systems and other payment gateways.
- Quarterly network vulnerability scans and logs of those scans.
- Assistance with completing and filing a self-assessment questionnaire.
Make sure you research PCI DSS and are prepared to offer these services to your clients.
You will make your money by offering these services and equipment and by charging a fee for each transaction you process. To make your money, you will buy "wholesale" merchant processing rates (also known as "buy rates") and sell them to your client at a slightly higher rate. For example, if you negotiated a buy rate of 1.77% plus 21 cents per transaction but sell your services at 2.24% plus 25 cents per transaction, you will receive 0.47% plus 4 cents per transaction. This is your residual.
If you have a client that processes $20,000/month across 300 transactions, you will make $106/month in residuals. With five such clients, you would be making over $6,000 per year in residuals. As your clients' businesses grow, so will your residuals.
Make sure you can provide your clients with swift transaction speeds, strong uptime records, a fair and transparent rate structure and access to customer support. This will help you stand out from the competition.
To get started with your credit card processing business, first find a niche that plays to your strengths. There are a lot of credit card processing companies out there, and when you start out, you won't be able to compete with the major companies that bid on big government contracts, for example. You will need to cultivate a customer base in your area, and you'll have the best chance of establishing long and fruitful relationships with local merchants if you understand their businesses and their needs.
For example, if you've worked for a long time in food service, you might be able to develop good relationships with bars and restaurants as clients. You could also specialize in multi-currency transaction processing, processing for retail stores or processing for nonprofits. Play to your strengths and experience.
Research the market in your area to see what sectors are flourishing or are up and coming, see if you can match your background to a promising sector and then find out what services they're using, if any, and how satisfied they are.
A good way to do this is to conduct a free survey asking merchants whom they use and how satisfied they are with that service on a five-point scale. Then, ask for their email addresses so you can send them the survey results. This way, you will get insight on the market as well as their contact information.
The next decision you will need to make is whether you will be starting your business from scratch or buying into a franchise. Starting from scratch means you have to lay all the groundwork, including all the paperwork; building relationships with customers, banks and manufacturers and developers; and paying startup costs, including fees, insurance, licenses and purchasing equipment. However, in the long run, you will also get to keep all the money you make and have all the room to run your business your way.
If you buy into a franchise, a lot of the heavy lifting will have been done for you, and your workload will be more about servicing and retaining existing customers and taking care of day-to-day paperwork and decisions. However, on top of paying franchise fees that cut into profits, most major decisions will be out of your hands, which works for some entrepreneurs and doesn't work for others. Choose the direction that is right for you.
You will also need to pick a legal structure. Options include a sole proprietorship, a partnership, a limited liability company and more, and each has its advantages and disadvantages.
This will be one of the most important decisions you make in starting any business. This is best done with the advice of a legal professional, preferably one who has worked with credit card processing startups before. A lawyer can guide you toward a legal structure suitable to your budget and business strategy.
Getting underway as a credit card processing company will require several steps and legal documents. These include:
- Business license
- Business plan
- Certificate of incorporation
- Insurance policy
- Nondisclosure agreement
- Operating agreement
- Contract document
Once you've decided on your niche, franchise vs. independent status and legal structure, register your business with your state's secretary of state and establish a federal tax identification number with the IRS. You'll need both of those along with your credit history to start a merchant services company. You will also need to pass background and credit screenings with bank and credit card networks to get contracts. This is because you will be handling private financial data.
You will need a comprehensive business plan before you can start approaching banks. A business plan lays out how you intend to run your business, how you intend to get funding and equipment and how you intend to make money (including the rates you intend to set) so your stakeholders, investors and partners know that you have solid strategies.
Your business plan should include an executive summary, market analysis, sales and marketing strategies, SWOT (strengths, weaknesses, opportunities, strengths) analysis, pricing strategies, costs and financial projections and what makes you unique and different from your competitors. You may be able to find a sample business plan for a credit card processing company online to help you.
You will also need several types of insurance for your credit card processing business. These include:
- General insurance
- Liability insurance
- Equipment insurance
- Errors and omissions insurance
- Business owner policy group insurance
- Health insurance
You generally will not need intellectual property protection unless you have a unique company logo or brand statement. Otherwise, this is a low priority.
Once your business is properly set up, it's time to start making connections. You will need to partner with a Visa/Mastercard bank to underwrite your transactions and handle the interbank routing. A good way to do this is to demonstrate to banks how your merchant payment services will help the banks develop and nurture relationships with the small-business community in your area.
Contact the banks in your area that serve your chosen market directly and then meet with bank management and show them your business plan. Check with your partner bank or banks to see if they require specific types of equipment and software.
In addition to contracting with Visa/Mastercard, it's worth considering contracting with American Express depending on your chosen market. American Express charges merchants a higher rate per transaction but also has a loyal and affluent customer base, with American Express customers likely to spend more per transaction than Visa/Mastercard customers. You would need to get a separate contract with American Express, and your customers would need to agree on a separate document to take American Express.
Next, when you want to become a credit card processing agent, you should contact equipment leasing companies. Small businesses will need credit card processing terminals, POS terminals, ATM machines and other payment processing equipment. You can generate business by offering your clients a choice of leasing equipment or purchasing it from you.
Most businesses will lease the equipment, and the leasing company will credit you for the purchase price of the equipment minus the leasing fee. You should also research wholesale equipment sources. You can get a distributor agreement with a transactions systems manufacturer (or multiple manufacturers) and make a profit on the equipment you provide to your clients.