Card processing, who is who ?

When selecting a card processing supplier, we thought it was useful to understand who the players are and what they do.  As you will have worked out by now, card processing is not a linear supply chain and each player can have several roles or provide several services.  Who you buy the services from can impact significantly on the cost of those services, even if the service itself is the same!

Card schemes (or card network)

The vast majority of UK credit and debit transactions are Visa or Mastercard though other schemes do exist (AMEX, Diners, etc).  Historically, the Visa and Mastercard card schemes were owned by its members (who were all banks) and were effectively Members Associations and were managed as such.  Nowadays, the card schemes are moving towards a more commercial structure with shareholders like any other business – Mastercard is listed on the New York stock exchange and Visa may soon follow.

The card schemes play several key roles  :

  • Issuer : acquirer interface-  the card schemes own and manage their own technology platform “(switches”) which direct billions of transaction from acquirers’ platforms to issuers’ platforms (and vice versa).
  • Marketing – the card schemes “sponsor” credit and debit cards issued by the banks and pay millions to the issuing banks to brand their cards and invest in marketing card acceptance and their brand.
  • Regulation – they set the rules which make the whole system work including cardholder chargebacks, interchange fee levels, acceptance processing, etc

The card schemes’ commercial model is to earn fees from its members (acquirers and issuers).  The majority of these fees are calculated on the volume of transactions done, ie “per transaction”, but some are flat or based on other criteria.  Acquirer pricing models will pass scheme fee costs onto merchants as part of the MSC.

The Issuer

The issuer is typically a bank or other entity authorised to conduct financial services.  This will include high street banks (RBS, Lloyds, HSBC, Barclays, etc), monoline issuers (MBNA, Capital One, etc) and other large corporates who have entered financial services, notably super-markets (Tesco, Sainsbury, Marks & Spencers, etc).

The issuer is primarily responsible for the recruitment of cardholders.  Without cardholder spend the whole card eco-system does not work.  They also owns the issuing technology platform which will authorise transactions, although these platforms are often out-sourced.

The issuer derives its income from 3 main sources :

  • Interchange – although interchange rates are set by the card schemes, the interchange income is received by the issuer.  It is broadly 0.8% of transaction value for credit card transactions and 8p per transaction for debit card transactions (see Why does Interchange matter to me?).  These fees are payable by the acquirer and recovered from the merchant through the MSC.
  • Cardholder fees – interest, late payment fees, etc
  • Card Scheme inducement fees – card schemes will pay millions / tens of millions to a bank/financial institution to brand its debit / credit cards.

The Acquirer

Every Visa or Mastercard transaction must be underwritten by a Visa or Mastercard acquirer.  To be a Visa or Mastercard acquirer, you have to be a member of that card scheme.  Admittance to membership requires a members vote and certain criteria have to be met in respect of financial stability, ability to render services, etc.  The UK acquirers are almost all high street banks who are also issuers.  There are only a limited number of UK acquirers and these are :

  • Barclays
  • HSBC
  • Lloyds/HBOS
  • Santander
  • WorldPay (formerly RBS Streamline)
  • Allied Irish Bank

The acquirer traditionally plays 3 key roles :

  • Provides a technology platform to connect merchants to the card schemes and process card transactions (see The Processor below)
  • Underwrites card transactions and is financially liable for non-performance of its merchants (ie chargebacks).  If a cardholder pays for goods using a card and does not receive these goods, the card scheme will refund payment to the cardholder and reclaim this from the merchant (via the acquirer).  If the merchant cannot refund the payment, say it has become insolvent, it is the acquirer who is liable for the refund.
  • Recruitment of merchants to accept card payments, who are just as important as cardholders to the card eco-system.

You will see below that most of the UK acquirers have now outsourced large elements of 2 of these key roles (technology platform to Processors and merchant recruitment to ISO’s).  The Acquirer’s income is generated from merchant fees, mainly “per transaction” fees (merchant service charge or “MSC”) and terminal hire fees (see Breakdown of Card Processing Charges).

The Processor

The aquirers used to own their acquiring technology platforms but most have now out-sourced this activity to US Processors (technology companies) :

  • HSBC – Global Payments Inc
  • Santander – Elavon Inc
  • HBOS – First Data Inc
  • RBS – WorldPay (WorldPay has now become a card scheme member and RBS no longer acts as an acquirer)

Acquirers operating their own platform are known as Acquirer Processors.  All the other UK banks/building societies who provide merchant services, will do so through an outsourcing or partnership arrangement with a processor and sometimes also a card scheme member.

The ISO

An emerging party on the UK payment landscape is the Independent Sales Organisation (“ISO”), sometimes known as a Merchant Service Provider (“MSP”).  The ISO’s recruit merchants for the acquirer – they do not own any processing technology infrastructure and they do not play any role in the under-writing, authorisation, processing or settlement of transactions.  They will typically also rent the terminal to the merchant and provide after sales service.

ISO’s have only really emerged in the UK in the last 5-10 years but each year, more and more merchants are using ISO’s to procure merchant services.  In the US, the ISO channel has been established and accepted for some time and is a preferred channel for SME merchants seeking payments services.

ISO’s aggregate the transaction volumes from SME merchants and perform credit and regulatory checks on new merchants to provide acquirers with a high transaction volume.  In return, the acquirer will provide the ISO with a low transaction rate, similar to that available to larger corporate merchants.  The ISO can pass this low rate onto its SME merchants because it has a low cost base.

A merchant buying from an ISO will receive exactly the same product they would have got from the acquirer, but at a price typically 30% – 40% lower.  There are c.40 ISO’s in the UK, including :

  • Card Cutters
  • Annecto
  • Payfficiency
  • Consolis
  • Glorydale Merchant Services
  • First Payments
  • Handepay
  • FIS

The Payment Gateway Supplier

The other area where new players have emerged is provision of payment gateway services for online transactions.  The payment gateway serves as an online terminal and collects payment details from the card presented to the merchant for payment and passes these onto the acquirer or the payment scheme (who in turn pass these to the card issuer).

A few banks built their own payment gateway, some have acquired competitor gateways but most will outsource to partners.  This is because gateways are relatively cheap to build (<£5m) and therefore the gateway market is very competitive and commoditised.  Secondly, to be truly successful as a global player, a gateway must provide multiple payment types and must continually add to these payment types as new ones emerge.  This doesn’t suit the business model of banks who are typically interested in servicing the needs of Visa or Mastercard as this is the type of credit and debit cards they issue  – each new payment type is further income leakage from the Visa/Mastercard brand.

For merchants, the payment gateway represents only a small element of the total cost of card acceptance (see What do you need to accept cards online ?) – typically dwarfed by the internet merchant account costs.

Payment gateways available to UK merchants include :

  • Sagepay
  • Paypal
  • Ogone
  • WorldPay
  • Nochex
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