Financial Transaction Processing
Description
Companies in this industry provide services such as credit card processing, electronic funds transfer, and check clearing. Major companies include Bread Financial, Fiserv, Heartland Payment Systems, Mastercard, Visa, and Western Union (all based in the US), as well as Cielo (Brazil), Moneris (Canada), and UnionPay International (China).
Worldwide, many large credit card processors operate and maintain processing centers globally. According to the Nilson Report, Asia/Pacific region has the most purchase transactions in 2023, followed by Middle East and Africa, and Latin America.
The US financial transaction processing industry includes more than 4,300 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $80 billion.
COMPETITIVE LANDSCAPE
Technology is transforming the financial transaction processing industry and consumers' interactions with money. The use of cash as a payment method is plummeting, although it remains the predominant form of payment for small purchases.
In recent years, the financial transaction processing industry has come under increasing pressure from fast-growing financial technology (aka fintech) companies that are developing new platforms and business models for delivering financial services, including the making, receiving, and processing of payments. Paper checks, credit card fees, money transfers, lending, and more are all being disrupted by new technologies. Innovations posing a threat to established industry players include the cryptocurrency Bitcoin; smartphone-enabled payments, such as Google Wallet and Apple Pay; mobile banking; and "smile to pay," a technology that allows consumers to authenticate mobile payments by scanning their faces with a smartphone. In Sweden -- fast becoming a cashless society -- more than 4,000 people have had microchips implanted in their hands to pay for things. By the end of 2023, about $1 trillion will transact via mobile P2P apps, driven by Venmo, Zelle, and Cash App, according to Insider Intelligence.
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 US industry is highly concentrated: the top 50 companies account for about 85% of industry revenue.
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 card is read by 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.
Worldwide, many large credit card processors operate and maintain processing centers globally. According to the Nilson Report, Asia/Pacific region has the most purchase transactions in 2023, followed by Middle East and Africa, and Latin America.
The US financial transaction processing industry includes more than 4,300 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $80 billion.
COMPETITIVE LANDSCAPE
Technology is transforming the financial transaction processing industry and consumers' interactions with money. The use of cash as a payment method is plummeting, although it remains the predominant form of payment for small purchases.
In recent years, the financial transaction processing industry has come under increasing pressure from fast-growing financial technology (aka fintech) companies that are developing new platforms and business models for delivering financial services, including the making, receiving, and processing of payments. Paper checks, credit card fees, money transfers, lending, and more are all being disrupted by new technologies. Innovations posing a threat to established industry players include the cryptocurrency Bitcoin; smartphone-enabled payments, such as Google Wallet and Apple Pay; mobile banking; and "smile to pay," a technology that allows consumers to authenticate mobile payments by scanning their faces with a smartphone. In Sweden -- fast becoming a cashless society -- more than 4,000 people have had microchips implanted in their hands to pay for things. By the end of 2023, about $1 trillion will transact via mobile P2P apps, driven by Venmo, Zelle, and Cash App, according to Insider Intelligence.
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 US industry is highly concentrated: the top 50 companies account for about 85% of industry revenue.
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 card is read by 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.
Table of Contents
- Industry Overview
- Quarterly Industry Update
- Business Challenges
- Business Trends
- Industry Opportunities
- Call Preparation Questions
- Financial Information
- Industry Forecast
- Web Links and Acronyms
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