Payment Processor/Gateway Business Model

A Payment gateway is a standalone service (API) that can process the payment instructions via a single service (i.e. X bank's credit card, X bank's debit card etc.).

A Payment Processor / Aggregator is a service which aggregates all these services (and thus payment modes) which then can be used in any online shopping website/app or otherwise to make payment for a certain product or a service.

The Business model is a combination of:

  • Fix Fee (Set up fee) : Typically one time
  • Recurring Fee (Txn fee) : Happens on every time a customer makes a transaction on the website/app.  X% of the txn amount (subject to minimum, maximum, flat fee etc.) - This is called as MDR (Merchant Discount or Debit Rate)

E.g. Please consider the below for better clarity:

  • Txn of $100 via Credit Card (or any other mode): MDR of 2-3% i.e. Merchant will be settled $97-$98
  • This 2-3% is split between the customer's payment mode bank (i.e. Bank of America Credit Card), the payment processors bank (i.e. the bank with whom the payment processor is having a settlement account), the card issuing network (i.e. Visa, Mastercard, Discover, Amex etc.) and the payment processor themselves (5-6 entities will split this payment amongst themselves)

This is the most basic business model of a payment gateway, deep diving there are lot of other avenues that payment processors are currently making money from.  They will be subsequently discussed in upcoming articles.