How does Visa / Mastercard make money? - Deep dive into the most successful payments companies.

Welcome to our latest edition of "Connecting the Dots in Payments with Arthur Bedel," where we explore the dynamic world of financial transactions and innovations alongside this esteemed payments professional. Join us as we uncover insights and trends shaping the future of payments.

Let's take a look at the current payment ecosystem today: Core:

🔸Issuers - Chase, Citi, Revolut

🔸Acquirers - Nuvei, Stripe, Adyen

🔸Card Schemes - Visa, Mastercard, American Express

Additional:

🔸Payment Orchestration - Gr4vy, Inc, ACI Worldwide, Cybersource, Spreedly

🔸Payment Methods - Klarna, Alipay, Accrue Savings, Trustly

🔸Payment Aggregators - PPRO, Payoneer

🔸Token Vaults - VGS, Basis Theory, Spreedly

🔸Crypto Solutions - Zero Hash, Mural

This 6-step diagram shows the economics of the credit card payment flow (by Alex Xu):

1️⃣ The cardholder pays a merchant $100 to buy a product.

2️⃣ The merchant benefits from the use of the credit card with higher sales volume and needs to compensate the issuer and the card network for providing the payment service.

The acquiring bank (Nuvei / Stripe) sets a fee with the merchant, called the "𝐦𝐞𝐫𝐜𝐡𝐚𝐧𝐭 𝐝𝐢𝐬𝐜𝐨𝐮𝐧𝐭 𝐟𝐞𝐞."

3️⃣-4️⃣ The acquiring bank keeps $0.25 as the 𝐚𝐜𝐪𝐮𝐢𝐫𝐢𝐧𝐠 𝐦𝐚𝐫𝐤𝐮𝐩, and $1.75 is paid to the issuing bank (Chase / Revolut) as the 𝐢𝐧𝐭𝐞𝐫𝐜𝐡𝐚𝐧𝐠𝐞 𝐟𝐞𝐞.

The merchant discount fee should cover the interchange fee.

The interchange fee is set by the card network (Visa / Mastercard) because it is less efficient for each issuing bank to negotiate fees with each merchant.

5️⃣ The card network sets up the 𝐧𝐞𝐭𝐰𝐨𝐫𝐤 𝐚𝐬𝐬𝐞𝐬𝐬𝐦𝐞𝐧𝐭𝐬 𝐚𝐧𝐝 𝐟𝐞𝐞𝐬 with each bank, which pays the card network for its services every month.

For example, Visa charges a 0.11% assessment, plus a $0.0195 usage fee, for every swipe.

6️⃣ The cardholder pays the issuing bank for its services.

Why should the issuing bank be compensated?

► The issuer pays the merchant even if the cardholder fails to pay the issuer.

► The issuer pays the merchant before the cardholder pays the issuer.

► The issuer has other operating costs, including managing customer accounts, providing statements, fraud detection, risk management, clearing & settlement, etc.

Traditional card payments have been around for decades, ruling the overall payment space. They aren't going anywhere buuuut other forces are driving innovation & need to be brought into your payment stack for cost efficiency, higher acceptance and speed:

🔸Real-Time Payments

🔸Open Banking

🔸Buy Now Pay Later

🔸Digital Wallets & Super Apps

🔸Embedded Payments (white labeling)

🔸Digital Currencies and hashtag#CBDCs

🔸Crypto Payments

Technology is driving & disrupting payments continuously! Open Banking, Embedded Finance, rise of digital currencies, AI boom and many more forces are the future 🚀

eBay | Deel | Coinbase | Intuit

Source: Alex Xu from ByteByteGo

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✍️ Arthur Bedel, Connecting the dots in payments... & Marcel van Oost