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Card Payment Processing Industry

4- party Model (Open system) [1] 3- party Model (Closed


4. Acquirer submits transaction
system)
to issuer. [2]

Card Network, Card Issuer,


Merchant, Acquirer &
Processor
5. Issuer approves
the transaction and
remits retail price to
acquirer less in

6. Acquirer
Card Network pays the
merchant, 3. Retailer
7. less MDR submits
Customer’s (Merchant transaction
account is discount to acquirer
debited with rate) (merchant’s
retail bank) American American
amount Express Express
1. Issuer (consumer’s bank) Cardholde Merchants
issues credit/debit/prepaid rs
card to consumer
Handles every step of the payment and
receives MDR as revenue.
2. Customer selects
good to buy at Take on credit risk but also earn from credit
retailer (merchant) card membership fees, late fees, interest etc.
CUSTOME MERCHAN Spend Centric
R T
Merchant Discount rate is MDR includes fees paid to the Transaction
the fees charged from issuer (interchange), acquirer and Centric
merchants (usually 2.5%- network processor (revenue
3.5%) source for card processing
Market Capitalization of only 4 network Attractive features of the industry:
Processors is $450 Billion • Shift from cash to digital – lower
operating costs for financial institutions.
• Safe- dedicated to fraud mitigation
ensuring low fraud rates.
• Global acceptance- enjoys public trust.
• Continuous research in newer
technologies (block-chains, AI,
tokenization etc.).
• Reduced friction leads to increased
spending.
• Financial Inclusion
Competition among top players: HIGH
Constant conversion of cards from one
network to another. Ex: Costco switched
from American Express to Visa/Citi in 2016.
*excluding Chinese Players which also have significant Threats:
valuation and revenue.
Cash!
Global Ecommerce Transaction Value (India) by Nationalist government regulations (eg:
Payment Tool [5] China, India).
Increase in CyberCrime/Fraud attacks.
Data privacy concerns.

Opportunities:
New technologies to make payments safer
and faster.
Data analytics and consulting solutions
leveraging Global transactional data.
Political: Technological:
• Government Regulations affect • Technological innovations
payment processing: in blockchains and AI giving
• China’s monopoly of nationalized rise to new entrants like
Union Pay. Square, Stripe etc.
• Pakistan Govt.s new rules for • Digital wallets like Apple
Payment system operators and Pay, Paytm (domestic) on
providers. the rise.
• India’s Rupay cards and UPI • Chase Pay starts a new
payments thrash existing market, closed loop 3 party
demonetization helped card payment system using
business grow. digital wallet technology.
Broad
Social: Factors Economic:
• Reluctance to use digital Analysis • Minimizes cash flow and
payment methods due to helps in anti-corruption and
payment safety and data anti-money laundering.
privacy concerns is key • Developing markets are
deterent. showing recent surge in
• Establishing a good brand card payment penetration.
image is key to success.
Ex: Mastercard recently
appointed MS Dhoni as
Brand ambassador in
India.
Domestic Perspective : The Indian Story
Strength: Weakness:
• Strong Govt. Backing to encourage cashless • Low financial literacy.
transactions. • Merchant acceptance in rural areas.
• Regulatory Support. • Unreliable internet penetration in many areas
• Increasing internet penetration leading to • Inertia to adoption due to tax evasion or security
increase in digital wallets that further use cards concerns.
for payments. • Low margin.

Opportunity: • Threats:
• Tremendous scale and opportunity for financial • UPI (Unified Payment Interface) technology
inclusion. disrupting the Card payment industry by directly
• Digital India Campaign of the Indian Govt. accepting payments from customer’s bank account.
increases opportunities for card payment • NPCI’s Rupay (backed up by the Indian Govt. ) giving
industry. tough competition to international players Visa and
• Chance to study consumer behavior leveraging Mastercard.
transaction data using data analytics (eg.
Mastercard Advisors)
Percentage Volume by Payment Percentage Transactions Volume at ATM vs
Instruments [6] POS [6]
References

1. Four Party Model – How a Typical Transaction Flows.Visa Europe


2019. web. https://www.visaeurope.com/about-us/four-party-model/
2. Taylor, Hiro. Three Party Model, 2015. web.
3. https://www.heropay.com/glossary/three-party-model/
4. Raza, Sheeraz. Payments Industry Overview – Analysis Of Visa,
MasterCard, American Express, pp13. Valuewalk, 2017.
5. https://www.owler.com/company/americanexpress
6. https://www.infotechlead.com/digital/digital-payment-india-overtake-
cash-non-digital-payments-52558

1. https://www.globaldata.com/mobile-wallet-gradually-displacing-cash-
india-says-globaldata/
2. https://www.livemint.com/Industry/MMgDqn8vcgXPjLFiVoLavM/Digital-
payments-4-emerging-trends.html
3. http://www.fisfilab.com/2018/06/digital-payments-in-india-a-look-at-the-
major-trends-in-indias-digital-economy/
4. https://economictimes.indiatimes.com/news/economy/finance/rupay-
how-a-six-year-old-card-gave-the-scare-to-global-biggies-such-as-visa-
and-mastercard/articleshow/66591913.cms
January 12, 2019