How to become a credit card processor
The credit card processing industry is challenging, especially for those who want to break into it. When you think of credit card processing, you probably picture large companies like American Express, Visa, or MasterCard.
But the truth is small businesses can also easily become a part of the credit card payment processing industry and reap huge benefits from it. This article will give you an overview of how to become a credit card processor agent and tips on what to do once you’ve obtained your new position.
Here are the steps you must take to become a credit card processor or even to establish yourself as a successful credit card processing company:
- Understanding the Payment Process and business
- Estimate your earnings From credit card processing Business
- Know your cost for becoming a credit card processing Agent
- Understanding MPS / ISO and becoming a partner
- Meeting PCI DSS compliance
- Select Your Niche
- Register your business to start your payment processing business
- Get the Insurance Policy
- Procure The business asset
- Start Marketing
- Bottom Line
Understanding the Payment Process and business
To start your own credit card payment service, first, you need to understand the payment gateway and how the system works.
The credit card processing begins from the customer end at the point of sales. First, the customer initiates a payment with their credit card, and the payment information is shared with the merchant. The payment information is then transmitted to the credit card processor, which transmits it to the card network.
The card network then passes the payment information to the companies like Mastercard, Citi, or Visa, depending on what type of transaction was initiated by the customer.
There are a few different steps that credit card processing companies take to complete a transaction. The first step is called authorization only, which means that the bank will authorize the transaction but not complete it. This is generally used for online transactions to make sure that the customer has enough funds in their account to cover the purchase.
The second step is a settlement, which means that the bank will complete the transaction and deposit the funds into the merchant’s account.
The third step is pre-authorization, which is used to hold funds from a customer’s account so that they can’t spend any more money. This is generally used for car rentals or hotels.
In this process, The merchant pays a fee to the bank for each transaction, and the customer may also be charged a fee by their credit card company. The credit card processing fee generally ranges from 2-3% of the total purchase amount.
The bank will share a portion of this fee with the card processor. This fee is generally split 50/50 between the two parties but can vary depending on the contract that they have in place. This is the point where your company’s operations will begin.
Estimate your earnings From credit card processing Business
Credit card processing agents have several different sources of revenue. The most significant source comes from two fees: transaction fee and monthly fee. A transaction fee is charged for every time the merchant uses the credit card processing equipment, while the monthly fee is charged by paying a certain amount each month to use the equipment.
Agents earn money by purchasing “wholesale” merchant processing rates (also known as “buy rates”) from banks and then selling them to their customers at a slightly higher price.
If the agent negotiates a buy rate of 1.80% plus 19 cents per transaction but sells their services at 2.25 percent plus 24 cents, they will make 0.45 percent and also an additional $0.05 on each sale (assuming that the seller and buyer agree to a fee reseller agreement). This difference between the wholesale cost and your retail earning is known as residual.
Now, for example, If you have a client who has 500 transactions per month with an average order value of $100, then you will be processing about $50,000/month. That means your residual income from this client will be $250/month after considering the above purchase price.
In addition, you can charge your customer a monthly payment processing fee. But it will make you less competitive over your competitors if they are not charging it.
Now let’s focus on your cost.
Know your cost for becoming a credit card processing Agent
Credit card processing can be a very lucrative business, but there are some costs that need to be factored in. The first is the cost to become an Agent. This will vary depending on the company you go through.
Then there are the costs associated with setting up your processing system. You will need a merchant account, which can cost several hundred dollars depending on your processing volume. You will also need to set up a credit card processing terminal.
A minimum viable product (MVP) for a payment gateway may cost you from $200,000 to $250,000. This, of course, may vary depending on the services you wish to include in your gateway.
Getting this MVP off the ground will at least enable you to begin accepting credit cards and also debit card payments.
Understanding MPS / ISO and becoming a partner
To establish a payment gateway, you must first become an MSP or ISO of a bank. MPS or ISO stands for Merchant Services Provider and/or Independent Sales Organization. The role of the MSP / ISO is to provide the technical and sales resources to help a business start and maintain a payment gateway.
The term “Merchant Service Provider” refers to the financial institution (i.e., bank) through which you will be validating the cardholder’s registration and transactions.
An Independent Sales Organization is a person (you) who has been registered with the card association and is sponsored by an MSP (a financial institution) that can secure point-of-sale purchases online or offline, major credit card brand such as Mastercard, Visa, Amex, Discover, and other credit cards.
Criterias To get MPS/ISO
To become an MSP / ISO, you’ll need to meet the following criteria:
– Have a strong credit history
– Have a business plan and financial projections
– Be in good standing with your government, if applicable. If you have filed for bankruptcy, it may be difficult to get approved. Any criminal history will also count against you.
– Meet specific country requirements, if applicable. Each country has its own regulations for this status.
Documents You Need To Have
- Personal or business tax returns for the last two years for all of the principals
- Each principal will be required to submit a personal financial statement.
- Articles of Incorporation/Article of formation / Partnership documents
- Sales materials/solicitations Copy
- A complete list of current ISO employees and agents
Once approved for ISO / MSP status, you will need to complete a training program. The length of the program varies and covers topics such as card acceptance, risk management, and chargebacks.
Meeting PCI DSS compliance
It is an important step for any company that wants to start a credit card processing business.
The Payment Card Industry Data Security Standard (PCI DSS) is a set of security standards created to safeguard cardholder information. Any company that wants to process payments using credit or debit cards must meet PCI DSS compliance.
There are many ways to achieve PCI compliance, and two of the most common solutions are EMV 3-D Secure and peer-to-peer encryption (P2PE). Let’s take a closer look at each of these solutions.
3D Secure is simply a communication standard that allows users to authenticate their credentials when making CNP (card-not-present) transactions while making e-commerce or m-commerce purchases. The protocol adds an extra layer of protection for merchants by preventing unapproved CNP transactions.
Here EMV refers to EMV chip cards meaning EuroPay, Mastercard, and Visa. On the other hand, 3DS means Three-Domain Secure. That includes the three domains of merchant domain, interoperability domain, and the issuer domain. In Other Words, it’s simply the issuing bank, acquiring bank, and merchant account holding bank.
P2PE ensures the secured connections between devices that are involved in the credit card processing work. Lets organizations ensure that security. From small business service providers to big service providers like Apple pay, cash app, and google pay, all are P2PE ensured.
Select Your Niche
You need a niche before starting a credit card processing business. This can be a specific set of customers, products, or services.
Merchants use multiple strategies to segment their markets, including geographical, demographic, and behavioral. The problem arises when a merchant assesses market segments too narrowly.
For example, if you only focus on one geographic area, you may miss out on opportunities in other areas. On the other hand, if you focus on broad demographics, you could lose sight of potential customers with unique needs.
First, think about where you’ve been before and where you’re located now. For example, you probably worked at some point in time in a restaurant. Great! Use your knowledge and network of foodservice operations to frame your merchant services around them.
Get contracts only with businesses that make up roughly 80% of transactions within your target spending range. This could mean signing contracts with small companies, but also it could include niche markets such as local chains in your city.
Participate in any available marketing campaigns If a sense of community is important to your business. It could be worth looking for fairs and other industry-related events you can join.
Initially, people often will not trust a newbie. But your networking will create a base to get their merchant account transferred.
If you have a good reputation and relationships, you can help these clients find better rates and terms. You can even offer to pay the fees yourself.
Once you have established a relationship with a client, ask them to refer you to others. They might know someone else who would like to work with you.
Register your business to start your payment processing business
You will have to register your business with your state. This will give your business a legal identity and allow you to open a merchant bank account and get a federal tax identification number. You should always keep your personal account and business finances separate.
For a small business owner, a sole proprietorship is the simplest form of business as a separate legal entity. However, if you are looking to grow your payment processing business, it would be better to open an LLC. This will provide you with some limited liability protection in case something goes wrong. Another option would be to start a holding company, which would allow you to separate your payment processing business from your other businesses.
Whatever structure you choose, make sure to consult with an attorney to ensure that you are compliant with all state and federal laws.
Get the Insurance Policy
Insurance protects your business from financial loss due to accidents, errors, and other risks. It is important to protect your business against liability if someone gets hurt while using your services. This includes protecting your employees and customers.
If something goes wrong with your business, it can be very expensive to defend yourself against lawsuits. At least try to get some common insurances like Equipment insurance, liability insurance, Errors, and omissions insurance.
Procure The business asset
When starting out as a credit card processing agent you should find a company that offers leasing options. This way you can get started without having to purchase expensive equipment. Your customers will also be more likely to use your services if they lease their equipment instead of buying it.
Most businesses will lease the equipment from a leasing company. This is an easy way to buy equipment without having to pay upfront. Wholesale distributors offer discounts to their customers but charge a commission to each transaction.
At this stage, you should be getting ready to sign up for merchants for your credit card processing company. You’ll want to make sure that all of your merchant agreements are signed before you signup for merchants.
Make sure you know how much money each merchant will pay per month, transaction volumes and if there is any minimum amount required for credit card transactions. Also, make sure you know whether or not the merchant has set their own price, or if you can negotiate one.
Finally, make sure you understand the terms of the agreement so that you don’t end up with an account that doesn’t work for you.
Give your customer a clear idea about your credit card processing services, security features of your credit card networks, mobile payments, and finally any termination fee if you have.
If you’re selling at a lower rate than your competitors, pitch yourself first before talking about your product. Build your unique strategies and sale systems and try to have a long-term vision to make yourself more competitive over other payment processors.
You’ll be able to get more referrals if you can identify your customer’s pain point and provide the best credit card processing solution accordingly.
There are many aspects of credit card processing that can be overwhelming and confusing to someone who is just starting out. That’s why we created this blog post for you! We hope it helps clarify some things about the process, as well as give you a few helpful tips on how to become a credit card processor.
We would love to talk more about flat rate pricing options, contactless payments, online payment gateways, also about the interchange fee, and much more. This blog post may have been long but our team has done their best to provide an exhaustive list of information for anyone who wants to know what becoming a credit card processor entails.