Below is an excerpt from "Making Money by Moving Money: Investing in the Payments Industry" - Jolson Merchant Partners, August 2001

We highlight Planet Payment, a privately held, early stage payment technology vendor, as one example of the many processing niches that often fly below the radar screens of larger payments companies. In, there are many discrete links in the paymentschain that can be specialized in, improved upon and ultimately inserted back into the process as a revenue enhancing component. Planet Payment has the potential to become such an entity by focusing on the arcane world of multi-currency credit card transactions.

What is Planet Payment? In the most general sense, Planet Payment provides one of the many processing functions that a merchant acquirer performs for its customers. The company’s processing technology and relationships are provided to merchant acquirers as revenue enhancing opportunities that the acquirer can share with its merchant base. Just as an acquiring processor, like Vital Processing, provides numerous accounting, routing and settling functions for merchant acquirers, Planet Payment provides a specialized processing function as well that it is marketing directly to acquirers. In its case, the services consist of multi-currency payment solutions.

A Multi-Currency Solution. Specifically, Planet Payment has developed a system of technology and foreign exchange relationships that converts credit card transactions from the merchant’s local currency to the cardholder’s currency at the point-of-sale. What’s so exciting about that? Presumably, not much. We typically do not spend much time pondering the arcane world of cross-border credit card transactions and currency conversion processing flows. However, some have bothered to consider these issues, and it gives rise to an opportunity to inject a new payment processing link into the merchant acquirer’s value chain.

The World Today. You are an American traveler on vacation in London, and naturally, you aim to squeeze in some obligatory shopping before the week is over. After five days abroad, you are now conditioned to multiply everything you see by 1.7 in order to roughly convert the price into U.S. dollars. You pay for a £60 item by credit card, expecting that next month’s statement will show a charge of $100. You naturally assume that your card issuing bank will make the same currency conversion as you did, or perhaps even better, given their scale. The merchant, meanwhile, receives his payment in Pounds, and the UK acquirer handles the £60 transaction like any other purchase.

Imagine your surprise when your credit card statement arrives later that month, and you see a $103 purchase. Well, “surprise” really is not an apt description. The reality is that you are not likely to remember exactly how much the item cost, and you certainly are not about to recalculate your bank’s conversion rate based on historical foreign exchange data. No, you go ahead and pay your bill, reminisce about the vacation and start planning next year’s trip.

So what happene d to the missing $3.00? We know that the merchant did not get it. The UK acquirer was paid its fee based on a £60 purchase. Yet the cardholder paid its card issuer $103. Well, it turns out the card issuer imposed a foreign exchange markup on the transaction, kept $2.00 for itself and passed along $1.00 to the card association.

The Opportunity. As demonstrated in the example above, the imposition of foreign exchange markup fees on credit card transactions represents a stealth charge. With the cardholder, merchant and merchant acquirer all blind to these fees, issuers are able to extract between $2 billion and $4 billion in annual fees, according to Planet Payment.

Since the card issuer is not necessarily “adding value” in exchange for what is typically a 3% to 5% markup, it can be argued that these fees should be “up for grabs.” Planet Payment has created a system that addresses the needs of merchants and cardholders, alike, while also usurping the currency exchange role from the issuing bank. The potential result is a slice of the currency fee for Planet Payment and its partners, additional margin for the merchant, and the ability to pay for goods and view prices in the customer’s own currency.

The Planet Payment Solution. There are two main elements to Planet Payment’s solution. One is the processing technology that is integrated into the credit card processing flow at the point-of-sale. The other is a relationship with a multi-currency foreign exchange provider that enables the company to allow merchants to accept payment in over 100 currencies.

The Planet Payment solution alters the existing credit card processing flow. In today’s world, the UK acquirer would forward a Pound denominated transaction to the issuing bank, at which point the currency conversion would take place. However, as discussed earlier, the issuer and the card association would keep the $3.00 fee, and the merchant and the acquirer are kept in the dark.

For more information on this article, please contact jcleary@planetpayment.com