Credit Card Processing

How Do Credit Card Processors Make Money?

July 7, 2023

Credit card payment processing is a steadily growing industry these days. And with businesses always needing to process fees, the growth doesn’t show signs of stopping any time soon. In particular, credit card processors are in demand in high-risk businesses like CBD, alcohol, and more.

It’s safe to say credit card processing is a profitable business. Aside from the competitive salary, working for a credit card processor gives you flexibility. It allows you to work for the Independent Sales Organization (ISO) in your chosen niche.

Now with interest in a specific industry comes the age-old question: “How do you earn money from this business?” This guide gives insight into how credit card processors make a profit. Read more to find out how credit card companies work and how the money comes in one card swipe at a time.

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What Are Credit Card Companies?

Credit card processors fall under the category of credit card companies. They are part of institutions that process and receive payments through credit cards. These credit card companies earn from their customers in different ways.

Credit Card Issuer

The credit card issuer is the issuing bank providing credit cards to approved credit accounts. The issuing bank allows you to make purchases with your credit card by lending money. The card issuer must pay the said amount to the merchant to make a successful transaction.

Credit card issuers then charge the amount paid to the merchant back to the cardholders. When you pay your issuing bank, you send back the payment made to the merchant you had a transaction with.

Credit cards sometimes bear the name of another business on them. This usually happens when a card issuer collaborates with a retailer under a contract. A good example of this is Target’s RedCard, issued in collaboration with TD Bank.

With co-branded credit cards, users can earn points or rewards from retailers for every purchase. They can either use it to purchase from the retailer itself or in any institution where the card will be accepted.

Despite collaborating with retailers to issue co-branded cards, the issuing bank usually approves transactions and connects with merchants.


Credit Card Networks

When you pay with a credit card, it needs communication between the card issuer and the merchant. This is the job of credit card networks. They bridge the connection between two banks to process the payments.

A credit card network acts like a middleman for credit card transactions. Here are the top credit card networks:

  • Mastercard
  • Visa
  • American Express
  • Discover

These networks are further divided into two categories: open and closed. Mastercard and Visa are open credit card networks. They allow other credit card issuers to issue their credit cards. American Express and Discover are closed credit card issuers, meaning they distribute their credit cards and send funds directly to the merchant.

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Credit Card Processors

Just as the name suggests, processors do one thing with credit card payments – process them. They ensure the security of transactions between the merchant and the issuing bank. Once the transaction has been made, a processor will notify the card network, which will then alert the banks.

Unlike networks, processors are not connected to specific credit cards. Such credit card companies can process your payments no matter what credit card you have. They are also the preferred credit card company of smaller merchants needing to process credit card payments.

If you have a small business, consider dealing with processors for your transactions. Once you subscribe to their service, you’ll gain access to several amenities, such as:

  • Card processing equipment
  • Access to bookkeeping software
  • Fraud prevention
  • Chargeback alerts and dispute assistance

How Does Credit Card Processing Work?

Before we answer “How do credit card processors make money?” we need to understand how the process works. Processing a credit card involving credit card companies can be explained in the following steps:

  1. Buyers make purchases from merchants that accept credit cards.
  2. To make card payments, they swipe the credit cards on the terminal.
  3. The processor recognizes the buyers’ information and sends the information to the network.
  4. The network contacts its issuing banks to verify the transaction.
  5. The issuing bank of the buyer approves or denies the transaction made.
  6. Once the transaction has been approved, the issuing bank sends the payment to the merchant.
  7. The merchant’s bank then takes the majority of the payment to deposit it into the merchant’s account.

You might be wondering where the rest of the payment from the buyer goes. This is where the processors’ profits come from. The rest of the payment goes to the fees charged by credit card processors.

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How Do Credit Card Processors Make Money?

Credit card companies mainly make their profit through the fees associated with credit cards. Below are some credit card fees and how they work.

Interest Fees

One of the ways credit card companies make money is when they charge interest. These are the fees card users pay when they have a balance past their due date. Simply put, interest fees are the percentage the company gets for lending the user their money. The longer the buyer is unable to pay the card issuer, the bigger the interest gets.

The interest rate correlates to a cardholder’s credit score. A better credit score gives a lower annual percentage rate (APR). In turn, a lower APR gives someone a lower interest rate.

Processor Fees

The processor charges the merchant bank a fee for processing transactions. Processors usually charge merchants processing fees for every transaction that uses a credit card.

Under the umbrella of the processing fees are other fees used to maintain the service. Such payments include the equipment fee, service fee, and more.

Interchange Fees

Whenever the buyer uses a credit card, the issuing bank charges a percentage of the purchase to the merchant’s bank. This is the interchange fee. It amounts to anywhere between 1% to 3% of the amount paid by the buyer. The card issuer determines the interchange fees for transactions made using their credit card.

Annual Fees

Credit card issuers profit from annual fees. These are the fees collected annually by credit card companies for users to maintain their accounts. They can sometimes be waived, depending on the company policy. At times, card issuers don’t even charge annual fees for the first few years.

Some companies offer annual fees to cardholders with low credit scores. They use this to outweigh the risks of issuing a card to someone with a bad credit history.

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Assessment Fees

The assessment fees are paid to the credit card network. This is how credit card companies make their profit during card processing. The payment is used to cover the expenses of maintaining their networks. Each network charges a flat fee for every transaction they handle.

Merchant Fees

The merchant bank charges for their expenses every time a buyer uses a debit or credit card at their store. These are called merchant fees. The merchant bank sends this payment to the issuing bank, as well as to the other credit card companies facilitating the transfer.

Parts of the payment are used for fraud prevention, information verification, and the like.

Transaction Fees

Credit card companies also charge other card fees to the merchant. Often called transaction fees, these are used to process credit card transactions other than purchases.

One prime example is late fees charged when a cardholder fails to pay their bill on time. Not every company charges this fee, which can also sometimes be waived. This heavily depends on a company’s policy.

Credit card companies may also charge balance transfer fees to their clients. This happens when the credit balance from one credit card gets transferred to another.

There are also transaction fees that come when you make a credit card transaction in a different currency.

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Become a Credit Card Processor Today

They say it’s better to strike while the iron is hot. Now that we’ve answered the question, “How do credit card processors make money?” you may want to consider a career as a credit card processor today and experience the benefits of being in the business. Start by being an independent sales organization (ISO) through Shark Processing.

With years of experience in the high-risk processing business, Shark Processing is a great avenue for you to get into the card processing business. High-risk businesses pay higher rates to help validate their transactions. This means more profit for you and your processing business.

Make sure you partner with a trusted name in the high-risk payment processing business. Get in touch with Shark Processing today and learn more about becoming a high-risk processing agent.

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