Thus far (Part 1, Part 2, Part 3) in this series, I talked about the MNO led and bank led mobile payments paradigm. Now, it’s time to talk about yet another viable mobile payments schema, but this time led by the payment networks. By now, you know these guys by heart – right? Just in case you are still wondering who they are – they are Visa, MasterCard, Discover and American Express.
Just to put things in perspective, the global payments industry consists of all forms of payment and value transfer, including:
- Paper-based payments—cash, personal checks, money orders, government checks, travelers checks and other paper-based means of transferring value;
- Card-based payments—credit cards, charge cards, debit cards, deferred debit cards, ATM cards, prepaid cards, private label cards and other types of general-purpose and limited-use cards;
- Mobile payments—electronic payments through mobile phones and other handheld devices using a variety of applications such as text messages, mobile billing, web browsers or applications, contactless readers, or other means; and
- Other electronic payments—wire transfers, electronic benefits transfers, automated clearing house payments and other forms of electronic payment not typically tied to a payment card or similar access device.
The bulk of the revenues for the payment networks come from discount fees that these networks charge. The discount fee ranges from 1 to 3% of the transaction. I am guessing that like everything else, bigger retailers such as Safeway, Walmart, Macy’s etc, would see smaller fee(s) as opposed to the neighborhood mom & pop store. That’s one of the reasons why in small stores, they prefer cash payments and/or prefer that a card based payment be used for transactions above a certain dollar value.
The payment networks essentially connect the ‘issuers’ and ‘acquirers’ together. Issuers are those financial institutions that the customer has a relationship with – meaning that these institutions ‘issued’ the credit/debit card to the customer. Acquirers are those financial institutions who have a relationship with the merchant. Often, they are the same financial institution.
In terms of the fee, every player in the ecosystem takes a cut. Here are the various fee(s) paid to by the merchant.
- Issuer fee – Issuer has the relationship with the customer and is essentially issuing credit with each purchase within the account holders credit limit. Issuer collects this fee from the merchant via the acquirer.
- Discount Fee – Paid to by the Issuer(or acquirer) to Payment Networks. Also known as Interchange fee.
- Acquirer Fee – Fee paid by the merchant to their bank. There are several layers of this fee – Set up fee, equipment maintenance fee, statement fee, transaction fee etc. It’s basically a 2-part tariff system. Merchant pays the bank anywhere from 20-70¢ per transaction AND a fee per transaction.
In sum, the merchant is essentially paying between 2 – 4% of the transaction costs in fee(s). And just for your information, here’s some payments lingo to chew on.
Authorization is the process of approving or declining a transaction before a purchase is finalized or cash is disbursed. Clearing is the process of delivering final transaction data from an acquirer to an issuer for posting to the cardholder’s account, the calculation of certain fees and charges that apply to the issuer and acquirer involved in the transaction, and the conversion of transaction amounts to the appropriate settlement currencies. Settlement is the process of calculating, determining, reporting and transferring the net financial position of our issuers and acquirers for all transactions that are cleared. And finally, Batching is the process where transactions are batched or grouped at close of business (or periodically) and then processed. Settlement essentially takes place after batching. Fun stuff eh!
These payment networks have a global reach built through partnerships with local providers, government run-networks, joint-ventures, subsidiaries, holding companies and the like. For example, Visa and MasterCard are accepted in 170 countries in over 25 million locations. That’s huge! In comparison, Discover is accepted in just over 4 million locations.
Furthermore, all these companies cross-sell other services by means of which they generate incremental revenue. Services such as indemnification, risk-management services, dispute management, loyalty management etc.
Of these networks, it must be noted that American Express is perhaps the most successful in terms of revenue generation. The company does not have a wide card holder base as compared to Visa or MasterCard, but they have been successful in segmenting the market and in obtaining high-quality customers. And add to that, they have been successful in penetrating the corporate market and appeal strongly to the business traveler among other things. In the past, I have said that Amex cards are Uni-branded (meaning they are issued by Amex alone). I would like to modify that statement by saying that Amex does have strategic partnerships with several companies that allows them to reach out to new channels via dual-branded cards. For example, Costco, American Airlines etc. Discover follows an identical methodology like American Express (save for the dual-brand) , in that it issues the card on its network. Both American Express and Discover charge higher fee(s).
Here’s a quick compare of some financial metrics of the payment networks..
In terms of payments processed, the numbers are quite staggering. Visa notes that in 2010, total global payments volume was $5 Trillion of which $1.9 Trillion was cash transactions. Visa processed about $46 Billion globally through its network.
Ok..this piece is getting rather long. So, I am going to split this into two parts. I’ll conclude the Part 4 in the next installment where I’ll talk about the rationale for payment networks to participate in mobile payments. And in the last part (Part 5), I’ll talk about the other services that are challenging the status-quo.
So, more fun stuff coming down the pipe. Stay tuned!