Payments Flashcards
Learn payments
1
Q
What are the different payment forms ?
A
Cash, check, ACH, credit, debit, prepaid
2
Q
C2B payment market size?
A
$40T in annual volume, 300-400B fees per year. Growing ~5% a year
3
Q
Why is the payments space attractive?
A
- Shift from cash to digital, esp. in emerging digital economies
- Capital light business models
- High returns on capital
4
Q
Why is the payments space unattractive?
A
- High (and always shifting) regulatory focus
- Lots of intermediaries in value chain jockeying for economics
- Complex payment schemes in individual countries
5
Q
What are the drivers of growth in the payments industry? What are the key KPIs?
A
- Personal consumption / GDP growth
- Penetraion of online / digital payments (40% currently)
- # of Payments and TPV are the KPIs
6
Q
What are the different fees in the payment ecosystem?
A
- Merchant Discount Rate (MDR), biggest fee that pays the rest of the ecosystem (2.5-3%)
- Interchange Fee, paid to issuer (~1.5%)
- Network fee, “assessment” paid to network (very small, fixed, $.10-ish)
- Processing fee, paid to processor (small)
- Acquiring fee, paid to merchant acquirer (small)
7
Q
Which is higher debit or credit interchange?
A
- Credit interchange is higher because it isn’t regulated
- Debit interchange regulated by Durbin Act
- Debit like 1.5%, Credit like 2.5%
8
Q
Payments Players: Issuers (What are they and examples)
A
- The FI/party that issues a card to customers
- Acquires end-customer, assumes credit risk, issues cards, etc.
- Issuers earn revenue from interchange fees, which are the largest portion of economics per transaction
- Examples: Chase, Chime, Brex
9
Q
Payment Players: Merchant Acquirers (What are they and examples)
A
- The merchant-acquirer sits between the Merchant and the Network
- The acquirer routes a card authorization request through the appropriate network, if the account is in good standing with the issuer it is authorized
- Chargeback management: responsible for managing disputes between cardholders and merchants
- Merchant acquirers make money from the MDR, then pay out all the other players (networks, issuer, etc.), keeps the acquiring fee
- Examples: Chase Paymentech, Wells Fargo Merchant Services, FirstData, Heartland
- We will not consider Stripe as an acquirer, they get their own classification
10
Q
Payments Players:
Networks (What are they and examples)
A
- Serves as the rails that enable data transmission, connecting other parties involved in the transaction (i.e. merchant to acquirer to issuer)
- They set the operating rules for the parties involved to facilitate acceptance
- Provides real-time availability for authorization, as well as fraud detection, etc.
- Networks make money on a per transaction basis (about .13%) in the form of a “assessment” fee, as well as a processing fee for the communication between issuers and acquirers
- Examples: Visa, MC, Amex
11
Q
Payments Players: Payment Gateways / ISOs (What are they and Examples)
A
- A service that securely sends credit card info from a website to the network for processing, then returns transaction details and responses from the network back to the website
- These act as “passthrough” entities for merchants to create a merchant account relationship. i.e. You do not have a direct merchant account relationship with Stripe because it isn’t a bank, but it handles all of the merchant account relationship for you (kind of like a challenger bank using a partner bank to get banking features)
- Specialty is being a best-in-class customer-facing UX, to make the process much more simple
- ISOs take what is basically an MDR from the Merchant (they price their agreements themselves), then payout the other players
- Facilitates merchant’s relationships with merchant accounts, but isn’t actually a bank so isn’t regulated like one
- Examples: Stripe, Adyen, Square
12
Q
What is a Card Scheme?
A
- Set of functions, procedures, arrangements, and devices that enable a cardholder to make a transaction with a third party such as a retailer
- The protocols of transferring card transaction info from acquirer to issuer
13
Q
Why is Amex special?
A
- Amex is special because it is an issuer and a merchant acquirer, and even the network
- It has a banking and acquiring subsidiary so that it cuts out others out of the process
14
Q
Illustrative example of the economics of a transaction.
A
- Total MDR = $2.50
- Interchange = $1.75 out of MDR (paid to issuer)
- Assessment / Network Processing = $.25 (to network)
- Acquirer Fee = $.50 (to merchant acquirer)
15
Q
Illustrative walkthrough of a card payment.
A
- Issuing bank gives a consumer a credit card
- Consumer pays at a merchant via a POS
- The acquirer / processor passes payment information to the card network
- The card network identifies and connects the issuing and acquiring banks, enabling the transaction
- The merchant acquirer bank (merchant account) fronts the money to the merchant until funds are transferred from the issuing bank
- the merchant pays the acquirer the MDR, then the acquirer pays out the other parts of the ecosystem
