Card payment services

Section 1: Size of the market

To be completed

 

Section 2: Roles and sample actors in the card payment services field

 

2.1: Payment (card) scheme operators

Generally, there are three and four-party schemes. In a three-party scheme, a single company serves both card or token holders and merchants. The scheme operator itself is responsible for issuing cards or tokens, and for acquiring transactions. A four-party scheme brings together multiple actors (normally banks), each of which may tend to specialise on either one or both sides of the market: as issuer serving the cardholders, or as acquirers serving the merchants.

Many four-party schemes are owned by issuers and acquirers.

Three-party schemes are American Express, Diner’s Club, etc.

Four-party schemes are Visa, Mastercard, and debit card schemes (Maestro, Carte Bleu, Carta Si, EC card, etc.)



Scheme operators charge an interchange fee to acquirers or to merchants directly.

Not all schemes have interchange fees. Some schemes work without any kind of interchange fee, with each leg of the payment covering its own costs.

Interchange fees for the most popular payment cards range from as low as 0.21% for face to face transactions in France (France has low interchange fees) to as high as 1.73% and 1.78% in the United States and Canada respectively – or even above 2% for online transactions.

Example documents:

Mastercard rulebook – such rulebook is binding for issuers that issue cards carrying the mastercard logo, for acquirers that have an agreement with Mastercard, but it may also have effects on merchants or users of the logo that have at some point in time signed an agreement to be bound by sections of these rules.

Visa Europe membership application form

2.2: Card or token issuers (banks in particular as current account or credit providers)

Especially in credit card and debit card schemes is it very common that card- or tokenholders do not directly have a membership with the scheme operators – and that such membership is either very costly or at least in some other way reserved to banks – so that a bank sits in between the card- and tokenholder and the scheme operator. For instance, membership of Visa Europe scheme is reserved to parties that are:

  • Organised under commercial banking laws and authorised to accept demand deposits; or
  • A Payment Service Provider from an EU/EEA Member State or from a country where the Payment Services Directive has been implemented by relevant national legislation.

The scheme operator therefore always works with big and credit worthy parties – that virtually never fail to perform their duty to transfer funds for acquirers. The matter if card- or tokenholders then perform their payment duties towards the card issuing bank is then a matter that is purely between the card- or tokenholder and the bank – in fact that relationship is indeed often based on providing credit – a function that banks do, but that payment scheme operators do not.

 

2.2.1: Whitelabel card issuers (solution providers / facilitators)

Card issuers may also cooperate with partners that wish to provide payment cards to users, but who do not have the organizational, regulatory or financial capacity to be a card issuer that participates in a card scheme. Think about the many sellers of virtual visa and mastercard cards. For such companies, there are card issuers in the market that issue cards that are branded by other companies, and for which the client intake and client relationship is even handled by that other company (under strict conditions of the card issuer). Examples of such card issuers that provide such whitelabel services are for instance Wirecard, Raphaels Bank (for Avuba, Compte Anytime), PPRO, Bank of Valletta (for Entropay), Prepaid Financial Services Limited, etc





Example documents:

Example of an agreement with cardholder and whitelabel issuerThe relationship with the cardholder might then not develop via the whitelabel issuer – and is probably also not managed in such direct way and rather through the interposition of a party that appears to be the issuer. However, the card is really issued by the whitelable issuer and not that party that appears to be the issuer. Thus, the client will have an agreement with that interposed party, but also with the whitelabel issuer – in the example this is combined into one.

2.2.2: Card- or tokenholders

Cardholders instruct the issuer or the scheme operator (in four or three party schemes respectively) to transfer funds to the acquirer that accepts on behalf of the merchant or to the merchant’s account (in four or three party schemes respectively).

Cardholders may be charged a fee by the issuer (in a four-party scheme) or by the payment scheme operator (in a three party scheme). This can be monthly/yearly fee, and/or a fee per transaction that is debited from the card- or tokenholder’s account, or a combination of both.

 

2.2.3: Acquirers

Acquirers may be charged a fee by the scheme operator (in a four-party scheme). This can be membership fee (i.e. monthly, yearly), and/or a fee per transaction that is credited to the merchant’s account, or a combination of both.

Merchants may be charged a merchant fee by the acquirer. This can be monthly fee, and/or a fee per transaction that is credited to the merchant’s account, or a combination of both.

Example documents:

Example of an acquirer’s terms and condition towards merchant

 

2.2.4: Terminal (software and/or hardware) providers

To authenticate payments under a certain scheme, one needs a terminal, or software that communicates according to certain standards. Manufacturers / providers include First Data, Ingenico, NCR Corporation, Verifone, etc.

 

2.2.5: Solution providers / facilitators (payment gateway providers)

It’s not an easy thing for merchants to understand the different requirements to participate in different schemes, or to sign up with acquirers, or to have the right terminals or communication tools to communicate for the different schemes. The pricing is often non-transparent and it is often a cumbersome work. Also, participating in multiple schemes may require to set up multiple relationships and to have multiple accounts with scheme operators and acquirers. Therefore, many companies have stepped in to make this process easier. Many payment service providers stand in-between the scheme operators and the merchants (in case of three party schemes) or the acquiring banks and  the merchants (in case of four party schemes) – and by doing that they provide participation in many schemes and a relatively easy sign up procedure. As the payment service providers specialize in the complexity that different payment schemes bring, they take the task on them to enroll with different schemes and acquirers and then offer a single account to merchants that offers acceptance of a wide coverage of schemes.

Usually, payment services providers also provide an easier to understand cost strucutre. Sometimes there are montly costs. And then there are variable and/or fixed costs per transaction (or a combination of both). The can be one and the same cost structure irrespective of the scheme type – or still dependent on the scheme type with which a payment is made.

They usually also allow to use a single terminal or simple payment gateway software solution (with little or sometimes no technical integration requirements) for accepting payment for those different schemes.

Examples are Paypal (no monthly fee, one cost structure irrespective of the scheme, but a discount structure for high amount of received transactions), Stripe (no monthly fee, one cost structure irrespective of the scheme), iZettle (no monthly fee, one cost structure irrespective of the scheme, but a discount structure for high amount of received transactions), Braintree (no monthly fee), etc.






 

2.2.6: Merchants

The schemes that a merchant enrolls with (directly, or indirectly via an acquirer in case of a four party scheme) generally depends on the cost and ease to enroll – and also depending on the number of people that will use it to actually pay.

Some payment types are expensive to accept for merchants – with high interchange fees (either charged directly to the merchant in three party schemes or to acquirers in four party schemes). Because merchants cannot always pass that on, they might choose not to accept some payment types.

 

2.3: Regulatory drivers

The size of merchant fees (especially interchange fees) is sometimes regulated. This can be on a domestic scale – for instance for national debit card schemes (Dankort in Denmark is an example), or on a supranational level. There is often little competition among schemes, and the issuers and acquirers that own a scheme might have an interest to maximize the profits that a scheme can generate. Prices may be higher than what competition would normally provide. But in general, prices can be to an extent that it hinders society – or that ther is a market failure.

Competition laws affect the price structure of four-party schemes, due to their multilateral nature. Antitrust policy is normally the competence of competition authorities. Competition laws restrict the ability of four-party schemes (consisting of competing entities) to set a privately optimal price structure. The goal of competition law is an efficient and competitive market, without restrictive agreements between entities. Their ability to succeed in attaining this goal will depend on the application and interpretation of competitionrules. It is sometimes argued that the reduction of interchange fees due to the application of the competition rules is likely to result in higher prices or a reduction of reward programmes for cardholders. (Borestam, Schmiedel, 2011)

In Europe, the European Commission has been cracking down on the interchange fees rates. As of December 9th, 2015, the credit card interchange fees are capped at 0.3% for credit cards and 0.2% for debit cards. The new interchange caps are applied to all transactions involving personal payment cards that are handled by a four party scheme operator like Visa or MasterCard. Business payment cards or three-party providers like American Express and Diners are exempted. From 2018, also domestic payment cards will be expected to adhere to the new transaction caps.

In the United States, there exists very little regulation relating to credit card interchange fees. On debit card transactions, it is however capped in 2011 by the Durbin Amendment.

 

2.4: Commercial drivers

To be completed

 

Section 3: References

Borestam, A. and Schmiedel, H. (2011) ‘Interchange fees in card payments’. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1927925 (Accessed: 5 February 2017).