Card Processing: Who is who?

Card Processing: Who is who?

When selecting a card processing supplier, we thought it was useful to understand who the players are and what they do.

As you will have worked out by now, card processing is not a linear supply chain and each player can have several roles or provide several services. Who you buy the services from can impact significantly on the cost of those services, even if the service itself is the same!


Card schemes

The vast majority of UK credit and debit transactions are Visa or Mastercard, although other schemes do exist, for example, American Express, Diners, etc.

Historically, the Visa and Mastercard card schemes were owned by its members (who were all banks). This meant they were effectively members’ associations and as a result were managed as such.

Nowadays, card schemes are moving towards a more commercial structure with shareholders like any other business. Mastercard is listed on the New York stock exchange, trading under the ticker symbol MA. Between 2006 and 2008, Visa overhauled its corporate structure and went ahead with an IPO of half its shares. Visa trades under the ticker symbol I.


Card schemes play several key roles in the processing of a transaction. These include:

  • Issuer: The card schemes own and manage their own technology platform (switches), which direct billions of transaction from acquirers’ platforms to issuers’ platforms and vice versa.
  • Marketing: The card schemes “sponsor” credit and debit cards issued by the banks and pay millions to the issuing banks to brand their cards and invest in marketing card acceptance and their brand.
  • Regulation: The card schemes set the rules that make the whole system work, including cardholder chargebacks, interchange fee levels, acceptance processing, etc.

The card schemes’ commercial model is to earn fees from its members (acquirers and issuers). The majority of these fees are calculated on the volume of transactions done, in other words, their fees are calculated per transaction. However, a handful of fees are flat or based on other criteria. Acquirer pricing models will pass scheme fee costs onto merchants as part of the merchant service charge (MSC).


The Issuer

The issuer is typically a bank or other entity authorised to conduct financial services. Common issuers include high street banks (RBS, Lloyds, HSBC, Barclays, etc.), monoline issuers (MBNA, Capital One, etc.) and other large corporates who have entered financial services (the highest profile new entrants are supermarkets like Tesco, Sainsburys, etc.).

The issuer is primarily responsible for the recruitment of cardholders as without cardholder spend, the whole card eco-system does not work.  Issuers also own the issuing technology platform that authorises transactions, although these platforms are often out-sourced.

The issuer derives its income from three main sources. These are:

  • Interchange: Although interchange rates are set by the card schemes, the interchange income is received by the issuer. Generally speaking, the interchange is 0.8% of transaction value for credit card transactions and 8p per transaction for debit card transactions. (For more information on interchange, read our blog post Why does Interchange matter to me?) These fees are payable by the acquirer and recovered from the merchant through the MSC.
  • Cardholder fees: Cardholder fees include interest charges, late payment fees and so on.
  • Card Scheme inducement fees: Card schemes will pay millions of pounds to financial institutions to brand its debit and credit cards.


The Acquirer

Every Visa or Mastercard transaction must be underwritten by a Visa or Mastercard acquirer. To become a Visa or Mastercard acquirer, you have to be a member of that card scheme. Admittance to the scheme requires a members’ vote and certain additional criteria have to be met in respect of financial stability, the ability to render services and so on.

There are only a limited number of UK acquirers and almost all are high street banks that are also issuers. They are: Barclays, HSBC, Lloyds/HBOS, Santander, Worldpay and Allied Irish Bank.

The acquirer traditionally plays three key roles:

  • Technology platform: The acquirer provides a technology platform to connect merchants with the card schemes and process card transactions.
  • Underwrite transactions: The acquirer underwrites card transactions and is financially liable for non-performance of its merchants. If a cardholder pays for goods using a card and does not receive these goods, the card scheme will refund payment to the cardholder and reclaim this from the merchant via the acquirer. If the merchant cannot refund the payment, it is the acquirer who is liable for the refund.
  • Recruitment: The acquirer is in charge of the recruitment of merchants to accept card payments, who are just as important as cardholders to the card eco-system.

As you will see below, most of the UK acquirers have now outsourced large elements of two of these key roles — technology platforms are now commonly provided by a processor and merchant recruitment is commonly handled by ISOs.

The Acquirer’s income is generated from merchant fees, which are mainly “per transaction” fees and terminal hire fees. (For more information on fees and charges, please see our blog post Breakdown of Card Processing Charges.)


The Processor

The aquirers used to own their acquiring technology platforms but most have now outsourced this activity to US-based technology companies called processors.

Below is a short summary of high-profile outsourcing exercises.

  • HSBC to Global Payments Inc
  • Santander to Elavon Inc
  • HBOS to First Data Inc
  • RBS to Worldpay*

Acquirers operating their own platform are known as acquirer processors. All the other UK banks and building societies that provide merchant services will do so through an outsourced or partnership arrangement with a processor and sometimes also a card scheme member.

* WorldPay has now become a card scheme member and RBS no longer acts as an acquirer.


Independent Sales Organisation (ISO)

An emerging party in the UK payment landscape is the Independent Sales Organisation (ISO), sometimes known as a Merchant Service Provider (MSP).

The ISOs primary role is to recruit merchants for the acquirer. They do not own any processing technology infrastructure and they do not play any role in the underwriting, authorisation, processing or settlement of transactions. They will, however, typically also rent the terminal to the merchant and provide after sales service.

ISOs have only really emerged in the UK in the last five to ten years but each year has seen more merchants turn to an ISO to acquire merchant services.

In the US, the ISO channel has been established and accepted for some time and is the preferred channel for SME merchants seeking payments services.

ISOs aggregate the transaction volumes from SME merchants and perform credit and regulatory checks on new merchants to provide acquirers with a high transaction volume. In return, the acquirer will provide the ISO with a low transaction rate, similar to that available to larger corporate merchants. The ISO can pass this low rate onto its SME merchants because it has a low cost base.

A merchant buying from an ISO will receive exactly the same product they would have got from the acquirer but at a price typically 30-40% lower.There are c.40 ISO’s in the UK,

There are around 40 ISOs operating in the UK. They include:

  • Card Cutters
  • Annecto
  • Payfficiency
  • Consolis
  • Glorydale Merchant Services
  • First Payments
  • Handepay
  • FIS


The Payment Gateway Supplier

The other area where new players have emerged is the provision of payment gateway services for online transactions. A payment gateway serves as an online terminal and collects payment details from the card presented to the merchant for payment and passes these onto the acquirer or the payment scheme who in turn pass these to the card issuer.

A few banks built their own payment gateway, some have acquired competitor gateways but most will simply outsource the service to their partners. This is because gateways are relatively cheap to build and therefore the gateway market is very competitive and commoditised.

Additionally, to be truly successful as a global player, a gateway must provide multiple payment types and must continually add to these payment types as new ones emerge. This doesn’t suit the business model of banks who are typically interested in servicing the needs of Visa or Mastercard as this is the type of credit and debit cards they. Each new payment type is further income leakage from their core brands.

For merchants, the payment gateway represents only a small element of the total cost of card acceptance. (For more information on taking payments online, please see our blog post What do you need to accept cards online?).

Common payment gateways available to UK merchants include:

  • Sagepay
  • Paypal
  • Worldpay
  • Nochex


Don’t forget to compare!

So, now you know who is who. But do you know how much you’re paying to each of those parties? Payment processing fees can quickly add up and become a serious drain on your finances.

The best advice we can give you is to shop around when looking for merchant services!

To start off with, contact your current supplier and ask for details of what you’re paying at the moment. Next, jump over to our card processing comparison engine and discover what the market is actually prepared to offer you. Over 66% of businesses who take the Cardswitcher Challenge make significant savings on their payment processing fees! So, what are you waiting for?

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