Let’s face it, the payment processing business is one of scale.  In order to function profitably, a processor must charge a very little amount on a lot of transactions – a loaf of many crumbs.  For that negligible amount the consumer, issuer and acquirer all get peace of mind that the transaction will be safe and secure.

Now let’s look at some of the new payment processors entering the game.  We see items in the press detailing how much these startups are processing, and I wonder how they are ever going to make money without an exponential rise in scale.

For example, I read the other day about a firm that boasts it is now processing $1 million a month.  Seems like a lot of money until you start doing the math.  Let’s just say for argument’s sake this firm can charge 250 basis points for each transaction – a much higher rate than many of these firms promise.  At $1 million a month, that equates to revenue of $25,000 a month or $300,000 a year.  Not much of a business plan.

As the above example demonstrates, these firms have a long way to go to produce a viable business model and that will require stealing share from the current players in an ecosystem that doesn’t appear to be all that broken.

Topics: Credit, Debit, Payments Strategy