When to Consider Using a Secondary Card Processor

As card programs scale, it’s common for businesses to add a secondary card processor to help optimize the program’s performance and add redundancy.

You may want to do this if you’re considering entering a new market, branching out into a new product category, or looking to minimize the risk of any outages as processing loads increase.

In this guide, we’ll explain how companies use secondary card processors and when to consider adding one to your program.

Key Takeaways

• Companies use a secondary card processor for a number of reasons, such as mitigating risk of an outage, launching a new product, or entering a new region.
• A secondary card processor can also be used to optimize a card program’s performance (e.g., increase payment acceptance rate, improve chargeback rates, access better rates on different payment methods).
• You should consider adding a secondary processor if you have experienced too many outages, have heavy processing loads, are expanding into a new region, or if you’re happy with your current provider but need to power a use case they can’t support.
• When looking at secondary providers, here are a few takeaways:
  
  It’s typically easier to onboard new customers to the secondary card processor than it is to migrate existing customers.
  
  If you’re getting a discount from your existing provider based on volume tiering, splitting your volume between two processors can impact your economics.
  
  If you decide to migrate all your business to the new processor, a phased migration using smaller batches of customers will likely help you address any issues faster, if they arise, and provide a smoother transition for your customers.

Why companies use a secondary card processor

Companies typically use a secondary card processor to optimize their card program’s performance and add redundancy in case of any issues or outages.

Sometimes card programs use a secondary processor for other reasons, such as:

• Launching a use case or product their current provider can’t support
• Expanding into a new region and need a local issuer processor
• Negotiating better terms with another card partner

If you're thinking about adding a secondary card issuer, you should check to make sure your existing issuer agreement isn't exclusive. Depending on how it's written, it may prohibit you from adding a secondary issuer.

However, sometimes exclusivity terms only apply in certain situations. For example, a primary processor may have exclusivity over a particular product line, meaning a secondary card issuer could only be used for new product lines. We recommend discussing it with a lawyer.

Let’s expand on some of the reasons why companies use a secondary card processor.

Adding basic redundancy

Using one processor creates a single point of failure. If the processor experiences an issue or outage, it may impact transaction processing, onboarding, and card creation.

If a cardholder tries to make a purchase with the card and the transaction doesn’t go through, they may not return to retry the transaction. Similarly, a user may be unable to sign up for your card program and abandon the sign up process altogether.

In this situation, you lose both interchange revenue from transactions and future revenue from potential customers.

Looking for better economics

Some companies decide to add secondary card processors to gauge whether they can find a provider offering better economics. But this is not just about lowering payment costs or maximizing interchange revenue. They may want to:

• Test out a card program on a different type of BIN
• Negotiate lower account minimum and reserves
• Increase their share of interchange revenue
• Reduce fees charged by the bank
• Find a partner with a different pricing model (e.g., revenue share vs. pay per use)

Testing out a new card issuing solution

Some companies add a secondary card processor as a way to test out different card issuing platforms, usually because they’re unhappy with their current provider or curious about what other providers can offer them.

In the past, companies did this by running a request for proposal (RFP) process and inviting their current provider as an incumbent. But now many card processors have sandbox solutions and pilot offerings that allow companies to test out their products without spending all the time and resources required to run a successful RFP process.

One benefit to this approach: you don't have to tell your current provider you’re testing out other solutions.

Powering a new use case

Even a company happy with their current card processor may still need to work with a secondary processor if their existing provider doesn’t support certain products or use cases.

For example, a company happily running a debit card program through their BaaS provider might want to offer a credit card to their existing customers. Unfortunately, their BaaS provider doesn’t offer any credit products.

The company may decide to launch the credit card program with a secondary card processor while keeping the debit card program with their BaaS provider. This is especially common for companies wanting to protect operations of an original product while experimenting with new offerings.

Expanding into a new geographic region

Companies expanding their card program to a new country often work with a secondary card processor. Sometimes a current provider doesn’t operate internationally or the card program wants a new provider to support localized features and functionality.

Using a processor with local issuing capabilities can also make entry into a new market easier because of market expertise and lower processing costs from elimination of cross-border charges. And local processors can often increase your acceptance rates in those regions, too.

When to consider adding a secondary card processor

You don’t necessarily need a secondary card processor to optimize your card program and solve for these challenges. In fact, we already do all of the above outlined for many of our customers, no secondary card processor needed. But every situation is different.

You may want to consider adding a secondary processor in these situations:

Unexpected downtime or outages

Your current provider has had several outages or perhaps released a few breaking changes to their API, and you want a backup plan to ensure you have a greater likelihood of 100% uptime.

Load balancing during peak periods

If you’re experiencing heavy processing loads, you may want to find a secondary provider to offload traffic during peak periods.

Expanding into a new region

You’re interested in expanding into a new geographic region and need to evaluate whether your current card processor can adequately support you.

Launching a new product

You want to expand your card program offerings, but your current provider doesn’t support the products you want to offer.

Unhappy with your current solution

You’re unsatisfied with your current card processor and want to evaluate new solutions without disrupting your current card program.

Different ways to work with a secondary card processor

There are many ways you can work with a secondary card processor. Each approach has its own pros and cons. No matter what approach you decide to take, the most important part is to ensure that it’s low-friction for your customers and easy for your team to manage on the back end.

Here are a few common strategies:

1. Split your volume between your two card processors (e.g., 50-50)
2. Launch your new product on the secondary card processor
3. Give each card processor different customer segments
4. Split up your volume by geographic region (e.g., US, Europe, Latin America, etc.)
5. Test out a new use case on the secondary card processor
6. Add only your new users to your secondary card processor
7. Split up your volume by different card types

Considerations to keep in mind:

• Shifting existing customers to the secondary card processor is harder than onboarding new customers because it adds friction and may require re-issuing new cards, especially if you’re issuing physical cards.
• If you’re getting a discount from your existing provider based on volume tiering, splitting your volume and shifting it to a new processor may impact the economics.
• If you decide to migrate all your business to a new processor, you may want to consider a phased transition to make it easier on your existing customers. This allows your team to address any issues in the migration process with a smaller batch of customers.

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If you want to test out Lithic’s card solutions, contact us or start building for free in our sandbox environment. Using our guides, you can build an MVP in as little as 20 minutes.