The Credit Card Industry Is Enormously Powerful And Complex - But Payments Startups Are Beginning To Shake It Up

The credit card industry processes a massive volume of transactions - about $4 trillion last year in the U.S., according to BI Intelligence estimates.

With so much money in play, it's no wonder that a host of startups are trying to carve out a niche for themselves and offer services to merchants and consumers that will rewrite the value they get from every credit card payment.

But it won't be easy to truly disrupt the credit card processing industry. These startups are entering an extremely complex and entrenched space.

In a recent report from BI Intelligence, we look at the complicated series of interactions among different legacy players that powers each credit card payment, outlining the six essential links in the credit credit payment chain. We explain what each of these players do, and how much value they add, and explain why two parts of this chain - the hardware providers and merchant service providers (MSPs) - are particularly vulnerable to disruption.

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Here are some of our key findings:

• The credit card companies themselves aren't going anywhere for now. Visa and MasterCard in particular will remain an indispensable part of the chain because they don't actually process payments. They simply provide the rails that the credit card system runs on. Credit card processors like First Data that actually do the work of processing merchants' credit card transactions on the back-end are also in a strong position.
• Two pieces in the chain are particularly vulnerable to disruption: the makers of the actual hardware - basically card readers and registers - that are used to physically accept card payments at stores, and the hundreds of vendors known as merchant service providers, or MSPs, which set businesses up to accept credit cards.
• Point-of-sale hardware faces an immediate threat from mobile devices. These devices are cheap and easy to implement, they do not require consumers to adopt new behaviors, and they free up retailer space previously devoted to bulky hardware.
• In addition, the new payments companies - including PayPal, Leaf, Revel Systems, Square, and others - could shove traditional MSPs aside as they bridge the offline and online worlds. They pair their mobile registers with consumer-side smartphone apps, and often also provide additional merchant services, like software for loyalty programs or for parsing online consumer data. These new companies want to replace the old players that focused mainly on logistics, i.e., helping merchants take credit card payments.
• But it's not all doom and gloom yet for legacy MSPs: they have existing relationships with the majority of merchants who accept credit cards and with banks. They also have established marketing channels and large sales forces. Large MSPs will move to acquire new payments technologies to squelch the disruption threat.

In full, the report:

• Sizes the U.S. credit and debit card industry, taking stock of offline vs. online volume and growth
• Gives a detailed breakdown of the entire credit card transaction process
• Defines what role each of the players occupies within that chain
• Underscores which players in the credit card transaction process are most ripe for disruption from new payments companies, and which ones remain in the strongest positions
• Explains what services these new payments companies will most likely offer to merchants and consumers
• Examines how legacy players are responding to the threats from these new payments entrants