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
Processors is $450 Billion
*excluding Chinese Players which also have significant
valuation and revenue.
Global Ecommerce Transaction Value (India) by
Payment Tool [5]
Attractive features of the industry:
• 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.
Threats:
Cash!
Nationalist government regulations (eg:
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:
• Government Regulations affect
payment processing:
• China’s monopoly of nationalized
Union Pay.
• Pakistan Govt.s new rules for
Payment system operators and
providers.
• India’s Rupay cards and UPI
payments thrash existing market,
demonetization helped card
business grow.
Broad
Social: Factors
• Reluctance to use digital Analysis • Minimizes cash flow and
payment methods due to
payment safety and data
privacy concerns is key
deterent.
• Establishing a good brand
image is key to success.
Ex: Mastercard recently
appointed MS Dhoni as
Brand ambassador in
India.
Technological:
• Technological innovations
in blockchains and AI giving
rise to new entrants like
Square, Stripe etc.
• Digital wallets like Apple
Pay, Paytm (domestic) on
the rise.
• Chase Pay starts a new
closed loop 3 party
payment system using
digital wallet technology.
Economic:
helps in anti-corruption and
anti-money laundering.
• Developing markets are
showing recent surge in
card payment penetration.
 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:
• Tremendous scale and opportunity for financial
inclusion.
• Digital India Campaign of the Indian Govt.
increases opportunities for card payment
industry.
• Chance to study consumer behavior leveraging
transaction data using data analytics (eg.
Mastercard Advisors)
Percentage Volume by Payment
Instruments [6]
• Threats:
• UPI (Unified Payment Interface) technology
disrupting the Card payment industry by directly
accepting payments from customer’s bank account.
• NPCI’s Rupay (backed up by the Indian Govt. ) giving
tough competition to international players Visa and
Mastercard.
Percentage Transactions Volume at ATM vs
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