The use of payment cards is growing faster worldwide than any other payment system. To be able to collect payments by card, companies need a merchant acquirer, either a merchant acquiring bank or a payment scheme member bank plus a third party processor, to connect them and deliver their payment card transactions to the payment card schemes, American Express, Diners Club, JCB, MasterCard and Visa. For MasterCard and Visa, the merchant acquirer is usually a bank. Some merchant acquirer banks use a third party processor to deliver their acquiring services but it is the bank that is the member of the card scheme.
“Payment cards are becoming an increasingly credible alternative. They help consumers to make purchases and manage their money, and businesses to cut costs, secure sales and manage their cash flow. But how does it all work?” asks Kevin Smith at Visa Europe in Could Corporate Apathy Undermine the Benefits of SEPA?. Read his article to find out how the use of card products and services can lower the overheads of collecting payments, how the payment card process works, and the role of the banks and card schemes.
Only a small proportion of banks provide merchant acquiring services and an increasing number of these are doing so in partnership with third-party processors to achieve the economies of scale and levels of service required to be competitive. Merchant acquiring is also moving from single to multi-country services to meet the needs of international merchants and achieve further economies of scale.”Cross-border acquiring is coming of age in the single euro payments area (SEPA) environment offering a number of opportunities for corporates looking to streamline their card acceptance and drive out scale efficiencies,” says Steve Robson at Barclaycard Business. Read how banks acquire payment card transactions in multiple countries and how the SEPA cards framework will hasten the move to multi-country acquiring in his article, Cross-Border Acquiring: Issues and Opportunities for Corporates.
In his article, Weathering the Storm: Benefits of a Third Party Processing Alliance, Jaime Domingo from Elavon, explains further how third-party processors can help improve efficiencies in collecting card payments. “By providing banks with a previously overlooked revenue generating investment, third-party processors can share revenue with financial institutions through an alliance relationship that delivers indirect, organic financial growth for banks,” he argues.
The merchant acquiring business is not only becoming more competitive, it is also becoming more demanding as merchant acquirers now have to support the collection of card payments made on the Internet, mobile phones and TV set-top boxes as well as over shop counters and land line phones. These new business channels are not only costly to support they are also opening up new opportunities for payment card fraud, which continues to grow worldwide. The payment card schemes are introducing new fraud control standards and procedures to try and stem the rise and banks and retailers are having to introduce costly new fraud control systems and technologies.
“The losses that industry faces due to card fraud are estimated at millions of euros annually,” says Tietoenator’s Maris Ozolins. “Mostly these losses are covered by acquirers and issuers; however the cardholders are also forced to handle significant troubles – the waste of time and energy while fraud case is being investigated.” Read more about the current levels and types of fraud, and the main measures and strategies needed to minimise it in his article, Prevention of Card Fraud: Trends and Industry Action.
The payment card schemes are introducing new fraud control standards and procedures to try and stem the rise of fraud. Banks and retailers also have to introduce costly new fraud control systems and technologies. For example, in her article, Building a Case for Payment Card Security Compliance, Connie Penn from Kilrush Consulting, explains how to implement and take advantage of the new Payment Card Industry Data Security standards (PCI DSS). “The PCI DSS is about making the credit, debit and charge cards that we carry more secure for all,” she explains. “We cannot sustain the level of fraud and compromise at its current rate of growth, so we must all do what we can to protect card data.”
The level of the merchant service charge is also under attack. More and more debit cards have a per transaction charge but most cards including debit and credit cards use the ad valorum percentage based charge, typically ranging from 1-3%, falls. A large proportion of this charge is the interchange fee paid to the card issuer, as shown in Figure 1 below, with only a small proportion going to the merchant acquirer.
Rob Walker from Retail Bank Research (RBR) outlines the size and complexity of the controversy about the interchange fee and how this is being tackled around the world in his article, Interchange Fees – the US$64bn Controversy. The list of countries where there have been recent legal, competition or regulatory actions is getting longer rapidly and includes: Austria, Australia, Brazil, Colombia, the European Union, Germany, Hungary, Israel, Italy, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Singapore, South Africa, Spain, Sweden, Switzerland, the UK and the US.
“The industry estimates that it pays up to €10bn per annum in interchange fees. Moreover it argues that these are costs for services from which the retailer in no way benefits,” explains Xavier Durieu at EuroCommerce. “Why should the retailer pay for free gifts used solely to market cards? Why should the retailer pay for fraud when the security or otherwise of a card is controlled by the issuer? And particularly, why should the MIF be charged as a percentage of the transaction value? Costs attributable to the retailer should be ‘per transaction’ and not ‘according to value’.” Read about how retailers should encourage the authorities to use the development of SEPA to rationalise the level and structure of interchange in his article, SEPA Must Face Facts on the Interchange Fee.
Figure 1 – Components of Payment Card Merchant Service Charge
The level of the interchange fee is under investigation by regulatory authorities worldwide and retailer groups are campaigning to have it reduced. However, the interchange fee is fundamental to the global success of payment cards and is being defended by the card schemes, but it is falling although less than retailers hope, e.g. interchange in Europe in 2004-7 period fell by 10%.
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