With the rise of digital innovations, the boundaries between the physical and virtual worlds are blurring. Today, money can travel faster than a bullet train and conveniently, at just the touch of a button.
According to a recent study, the total transaction value of digital payments is expected to soar to a whopping $14.78 trillion by 2027, with an annual growth rate of 11.80% between 2023-2027.
Electronic payments are here to stay, and it’s important to understand the different financial entities that facilitate these transactions.
The backbone of this financial revolution? Money transmitters and payment processors.
But what exactly are they, and how do they differ?
In this article, we’ll explore the key differences between money transmitters and payment processors and uncover the critical role they play in our increasingly cashless society.
Table of Contents
- Here’s a Quick Summary
- What is a Money Transmitter?
- How Do Money Transmitters Work?
- What is a Payment Processor?
- How Do Payment Processors Work?
- Money Transmitter Vs. Payment Processor: Similarities
- Money Transmitters Vs. Payment Processors: Key Differences
- Frequently Asked Questions
- The Bottom Line: Money Transmitter Vs. Payment Processor
Here’s a Quick Summary
- Money transmitters and payment processors are financial entities that facilitate money transfers, but they have different business models, regulations, transaction limits, payment methods, transfer times, and fees.
- Money transmitters typically focus on international money transfers, while payment processors are used by businesses to accept payments for goods and services.
- Money transmitters are subject to more stringent regulations than payment processors due to the potential for illegal activities such as money laundering and financing of terrorism.
- Money transmitters often have lower transaction limits than payment processors and typically accept cash or bank transfers as payment methods.
- On the other hand, payment processors accept a wide range of payment methods, including credit and debit cards, bank transfers, and digital wallets, and can process payments almost instantly.
- Payment processors are subject to regulations but not to the same extent as money transmitters, and they can offer lower fees due to their straightforward payment processing operations.
- Both money transmitters and payment processors provide customer support to ensure a positive customer experience.
What is a Money Transmitter?
A money transmitter is a licensed financial institution that sends, receives, and processes money transfers. This can include services such as wiring money, issuing money orders, and transferring funds between bank accounts.
To become a licensed money transmitter, businesses must meet various regulatory requirements, including maintaining minimum net worth levels, passing background checks, and filing reports with regulatory agencies.
Money transmitters must also implement anti-money laundering and fraud prevention measures and maintain records of transactions to comply with regulatory requirements.
These can be banks, credit unions, or non-bank financial institutions. They typically charge fees for their services, which can vary depending on the amount of money transferred and the destination country.
While money transmitters offer a convenient way for consumers to transfer funds, they can be subject to limitations and restrictions depending on the laws and regulations in their operating jurisdiction.
Overall, money transmitters play an important role in facilitating global commerce and helping individuals, and businesses transfer funds across borders or to recipients without access to traditional banking services.
How Do Money Transmitters Work?
Working through a money transmitter calls for the following steps:
Step 1: Initiation of the transaction
You start the process of sending money through a money transmitter by either visiting a physical location or using their online platform. You’ll provide the necessary information, such as the recipient’s name and contact information and the amount of money to be transferred.
Step 2: Verification and Compliance
After you provide the necessary information, the money transmitter will verify your identity and perform compliance checks, such as anti-money laundering (AML) and know-your-customer (KYC) checks. This step ensures the legality of the transaction and prevents fraudulent activities.
The verification and compliance process may involve the money transmitter requesting additional information or documentation from you, such as a government-issued ID or proof of address.
The money transmitter will also check your name against various watchlists to ensure you are not a known criminal or terrorist.
Step 3: Conversion of Funds
Once your identity has been verified and the transaction deemed legitimate, the money transmitter will convert your currency into the recipient’s currency using the prevailing exchange rate. This can take place either electronically or through a physical location.
Step 4: Transfer of Funds
The money transmitter will then transfer the funds to the recipient, either electronically or by providing them with a cash pickup option at one of their physical locations. In some cases, the funds may be transferred directly to the recipient’s bank account.
Step 5: Notification of Completion
The money transmitter will notify you and the recipient when the transfer is complete. This notification can come in the form of an email or text message. It will usually include details such as the amount transferred, the exchange rate, and any fees associated with the transaction.
Step 6: Follow-up and Support
In case of any issues or questions, you or the recipient can contact the money transmitter’s customer support team for assistance. The customer support team is usually available through various channels, including phone, email, and online chat.
What is a Payment Processor?
A payment processor is a financial service provider that facilitates the transfer of funds between a buyer and a seller during a transaction.
It acts as an intermediary between the two parties, handling the payment details and ensuring the payment is securely processed.
Payment processors typically offer various services, including authorizing transactions, verifying the availability of funds, transferring funds between accounts, and providing reports on transactions.
They can process payments through various channels, such as credit cards, debit cards, bank transfers, and digital wallets.
Payment processors charge fees for their services, which may be a percentage of the transaction amount or a flat fee per transaction.
Merchants who use payment processors benefit from increased efficiency and security in payment processing and access to a broader range of payment options.
How Do Payment Processors Work?
While payment processing may appear to be a quick and easy task for customers—involving just a credit or debit card tap, swipe, or insertion–for businesses, it is a much more complex process.
It requires several steps and involves multiple entities, such as:
Step 1: Customer initiates a transaction
The payment processor process usually begins when a customer initiates a transaction, such as purchasing goods or services from a merchant’s website. The customer will typically enter their payment information, such as their credit or debit card number, into the merchant’s website or payment portal.
Step 2: The merchant sends the transaction data to the payment processor
Once the customer has entered their payment information, the merchant will send the transaction data to the payment processor. This data includes the customer’s payment information, the transaction amount, and other relevant details.
The payment processor will then begin to authenticate the transaction and the customer’s information to ensure the payment is valid and authorized.
Step 3: The payment processor sends the transaction data to the card network
After the payment processor has verified the customer’s payment information, they will send the transaction data to the relevant card network, such as Visa or Mastercard. The card network will then verify the customer’s payment information and the availability of funds.
This is done through a series of complex checks, including verifying the card’s expiration date, checking the credit limit, and ensuring that the card has been reported as safe and safe.
Step 4: The card network sends the transaction data to the issuing bank
Once the card network has verified the customer’s payment information, they will send the transaction data to the issuing bank, which is the bank that issued the customer’s credit or debit card.
The issuing bank will then review the transaction to ensure the customer has enough funds or credit to make the purchase. The issuing bank will also perform fraud checks to ensure the transaction is legitimate and authorized.
Step 5: Issuing bank approves or declines the transaction
After reviewing the transaction and performing fraud checks, the issuing bank will approve or decline the transaction. The issuing bank will send an authorization code to the card network if the transaction is approved.
If the transaction is declined, the issuing bank will send a decline code to the card network, and the payment processor will notify the merchant that the transaction has been declined.
Step 6: Issuing bank sends an authorization code to the card network
The issuing bank will send an authorization code to the card network if the transaction is approved. This authorization code indicates that the customer has enough funds or credit available to make the purchase and that the transaction is authorized.
Step 7: The payment processor sends the authorization code to the merchant
Once the payment processor receives the authorization code from the card network, they will send it to the merchant. This authorization code indicates that the transaction has been approved, and the funds will be transferred to the merchant’s bank account.
Overall, payment processors use a complex network of card networks, banks, and financial institutions to verify and authorize transactions, transfer funds, and ensure the security and legality of electronic payments.
Money Transmitter Vs. Payment Processor: Similarities
Money transmitters and payment processors are often discussed in the same context, as both facilitate the transfer of money, albeit in different ways, and share several similarities:
1. Facilitate Electronic Payments
Both money transmitters and payment processors facilitate electronic payments, making it easier for individuals and businesses to send and receive money electronically. They leverage technology to make transactions faster and more convenient than traditional payment methods.
2. Comply with Regulatory Requirements
Both money transmitters and payment processors are subject to strict regulatory requirements, including compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations, to prevent fraudulent activities and ensure the security of electronic payments. This ensures that transactions are legitimate and not being used for illicit purposes.
3. Charge Fees for their Services
Both money transmitters and payment processors charge fees for their services, including transaction fees, monthly fees, and chargeback fees. These fees can vary depending on the service provider and the services offered.
4. Offer Competitive Rates
Both money transmitters and payment processors offer competitive exchange rates and fees to make their services more attractive to customers. This allows businesses and individuals to save money on transaction fees and get the best value for their money.
5. Provide Customer Support
Both money transmitters and payment processors provide customer support to help customers with any issues or questions. This support is usually available through a variety of channels, including phone, email, and online chat.
Money Transmitters Vs. Payment Processors: Key Differences
Money transmitters and payment processors share some similarities but are also quite different in several ways. Here are some key differences between the two:
|Focus on international money transfers
|Used by businesses to accept payments from customers
|Subject to more stringent regulations, including BSA, AML, and KYC laws
|Subject to regulations, but not to the same extent as money transmitters
|Lower transaction limits
|Higher transaction limits
|Accept cash or bank transfers
|Accept various payment methods, including credit and debit cards, bank transfers, and digital wallets.
|Take longer to transfer funds due to compliance and regulatory requirements
|Can process payments almost instantly
|Typically charge higher fees due to compliance and regulatory requirements
|Can offer lower fees due to more straightforward payment processing operations
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Frequently Asked Questions
What is a money transmitter license?
A money transmitter license is a legal permit that allows a company or individual to transmit money electronically. The license is issued by the state in which the money transmitter operates.
Who needs a money transmitter license?
Anyone who engages in the business of transmitting money electronically needs a money transmitter license. This includes money transfer services, currency exchange services, and virtual currency exchanges.
How much is a money transmitter license?
The cost of a money transmitter license varies by state and depends on several factors, including the type of license, the number of locations, and the amount of money transmitted. Fees can range from a few hundred to several thousand dollars.
Are payroll companies money transmitters?
Payroll companies are typically considered money transmitters if they engage in the business of transmitting money electronically outside of traditional payroll services. If a payroll company offers electronic payment options, such as direct deposit or pay cards, they may need to obtain a money transmitter license.
The Bottom Line: Money Transmitter Vs. Payment Processor
In 2020 alone, a mind-boggling 121.5 billion non-cash transactions took place worldwide.
To put that into perspective, that’s equivalent to almost 15 transactions for every person on the planet! This is set to skyrocket to over 200 billion non-cash transactions in 2025, according to Capgemini.
The demand for fast, efficient, and reliable payment solutions has never been higher as the world becomes increasingly interconnected.
From the struggles of keeping up with this ever-changing digital age to the concerns of payment security to understanding legal requirements, payments can be perplexing. They may be cause for some dreaded decision-making.
However, understanding the comparison between money transmitters and payment processors will help you reduce confusion and make more informed decisions.
FinTechs such as Gettrx provide invaluable services in helping businesses comply and make smart decisions
Contact us today to see how we can help you or your company save time, money and prevent the risks of becoming your payment facilitator.