Payments 101 - Basics of Payments

PAYMENTS 101
Basics of Payments
KAPISH KAUSHAL
https://in.linkedin.com/in/kapishkaushal

The following document is a collection of personal notes on understanding the basics of the
payments industry. All the information in the document was accumulated from public sources –
Annual Reports, Payments Publications, Newspaper Articles, Magazines etc.
Source List (Not Exhaustive)
▪ Red Book – Published by BIS
▪ The Economist
▪ The Ken
▪ PYMNTS.com
▪ Let’s Talk Payments
▪ Investopedia
▪ Economic Times
▪ Annual Reports – Banks, Card Networks, Merchant Acquirers etc.
▪ Reserve Bank of India – Whitepapers / Statistics / Annual Publications
▪ Company Websites

PAYMENTS – BASICS
Table of Contents
1. Instruments (Checks, ACH, Real Time ACH, Wire Transfers and Cards)
2. P&L (Issuer Costs, Acquirer Costs, Economics of Credit Card Business)
3. End to End Transaction Flow
4. Other Parties (Merchant Acquirers, Issuer Processors, Wallets)
5. Cross Border Payments
6. Cash Networks
7. Technology (NFC, MST, Contactless, EMV, APIs)
8. Glossary
9. Difference Questions
10. Miscellaneous
1. Instruments (Checks, ACH, Real Time ACH, Wire and Cards)
Checks
▪ Pull Payment System
▪ Check clearing houses are owned by banks or private processors
▪ Most banks assume that their checking customers aren’t profitable customers because
checks are expensive to process. They have warehouses full of scanners to capture the check
images. It’s a laborious manual process. Also, the error percentage is much higher with
checks than any other payment type, which adds even more to the expense
▪ But at the same time, banks benefit from check use. Check receivers tend to leave money in
their account a little longer than they need to. Check writers tend to have more money in
their account than needed to cover the checks. This is a big part of how banks make money
▪ So banks are in a peculiar place. They would like to eliminate checks because they are
expensive. But then, they also make lots of money from people that write lots of checks. On
top of that, the checking account is a key enabler for banks to build a broader relationship
with the customer that encompasses other products & services
▪ For banks, checks are also important because of float. Float is the money that the bank holds
for an extra day or two when the money has to be transferred from the payer’s account to
the payee’s account. In older days, both banks (payer bank and payee bank) would get the
float for 1-2 days
▪ The clearing house also makes money from check payments (routing the payments,
calculation of the net settlement positions)
ACH
▪ Owned by banks
▪ It is a bank owned utility used for many different types of consumer and enterprise
applications. The non-profit association (NACHA) – formerly the National Automated
Clearing House Association, but now NACHA: The Electronic Payments Association – serves
as the trustee of the ACH network and manages the regulatory and rule making processes,
which then define the NACHA operating rules
▪ Transaction switching among the intermediary banks is done by an ACH operator (currently,
there are two operators – the Federal reserve bank and Electronic Payments Network (EPN),
owned by The Clearing House)

▪ ACH Cycle: Credit Transfer (also called Direct Deposits / Push Payment): The consumer
makes an instruction to his / her bank to transfer money into another account (ODFI:
Originating Depository Financial Institution); the ODFI will send the instruction to Automated
Clearing House (Operator); the operator sends it to the merchant’s bank (RDFI: Receiving
Depository Financial Institution); money flows from the ODFI to the RDFI
▪ ACH Cycle: Direct Debit (also called Direct Payments / Pull Payment): Used for recurring
payments like gas bill. The gas bill’s bank (ODFI) will send the instruction to the operator;
operator will forward to the consumer’s bank (RDFI); consumer’s bank will make funds
available to gas company’s bank (RDFI to ODFI)
▪ ACH operates in a batch environment and it can be 24-72 hours before an issue with
payment is known; credit cards charge 2-3% charge whereas in ACH it is 25-50 cent fee
▪ Most of the ACH transactions currently don’t happen in real time. Instead “batch
processing” is used so that a whole day’s worth of requests is sent all at once. As a result,
you don’t get paid immediately after your employer authorizes payment
▪ In some countries, ACH is called GIRO or Electronic Funds Transfer (Small value payments
are transferred from one payment account to another payment account within a country)
▪ Card payments itself can be made through ACH (Setting a fixed time to clear card bills
outstanding)
▪ ACH origination is often sold as part of a package of specialized services, such as payroll
(banks and third parties compete to provide payroll services to enterprise of all sizes), retail
and wholesale lockbox, supplier payments (banks and third parties to compete to handle
outbound business remittances to suppliers. These services may include printing checks and
associated remittance data, preparing ACH transactions, and managing outbound
remittance data through a variety of channels, including ACH, mail fax etc.
▪ Banks remove “on-us” ACH transactions submitted by originators and post those
transactions directly to the receiver’s account. The bank then sends the remaining
origination transactions to its ACH operator, which sorts the transactions and send them on
to either the RDFI (if both use the same operator) or to another operator, as appropriate.
Operators charge for both receipt and delivery of ACH batches – costs are dependent on
volume – but, at high volumes, are in fractions of a penny per transaction
Real Time ACH
▪ Brazil, Mexico, South Korea, Sweden and Russia: All have real time ACH networks but all of
them tend to have a limit on the amount that can be transferred (so right now, not used for
everyday payment for consumers)
▪ Faster Payments in UK: Settlement happens 3 times in a day instead of overnight batch (First
real example of real time ACH)
▪ Here’s how it can work: you go into a store, and instead of using a card, you use your cell
phone to transfer money from your bank account to the store’s bank account. The merchant
sees the money. It’s authorizing and arrives immediately. That can happen online and in
physical stores. Real-time clearing and settling is a game changer because it gives ACH a
completely different value proposition than its traditional overnight batch method
▪ Merchants embrace it because they pay almost nothing for it and they get the money with
very little delay
▪ A substantial barrier to global adoption of real-time ACH is that it isn’t cheap or easy to build
a network to support it
▪ A very significant part of the same day ACH is the institution of ACH interchange on these
transactions. The ODFI will pay the RDFI a flat fee of $0.052 (NACHA calls this a “Same Day

Entry Fee”) per transaction. This was apparently necessary in order to get the thousands of
small participating RDFIs to agree to the new rule, which will require them to invest in new
processing capabilities
▪ SDA’s (Same Day ACH) greatest strength is ubiquity. ACH is already integrated into nearly all
financial institutions and can reach all customer, small business and corporate entities that
have a domestic transaction amount.
▪ SDA is a premium priced product compared to the pricing of legacy ACH, but in comparison
to other existing faster payment types, such as Zelle, Mastercard Send, Visa Direct, SDA is a
lower cost option
▪ Users that send or receive ACH have no implementation expenses and very few changes are
required to make use of the faster form of ACH
▪ However, compared to other faster payment schemes, SDA is relatively slow. SDA
transactions are available for processing within a day, but not within seconds or minutes.
Also, SDA operates only on regular business days, within business hours
Wire Transfers
▪ The generic name for “Wire Transfers” is RTGS
▪ The wire transfer is a RTGS and processed individually
▪ A wire transfer is a “push” payment: the payer pushes money directly from their bank
account to the receiver’s bank account
▪ There is no risk of not receiving the funds because it clears and settles in real-time. But you
can imagine why it is expensive because there needs to be a huge clearing and settling
engine to make this happen – and banks need to have funds on deposit with the network
operator to” cover” wire transfers. For this reason, RTGS transactions typically involve larger
sums. Since usually both the payer and payee have to pay some sort of fee, neither would be
interested in shelling out $50 to give / receive $200. On the other hand, $50 might not seem
like much of a charge to instantly receive a $200,000 payment
▪ Unlike ACH, which are effectively free, banks actually make money from wire transfers. The
amount they charge depends on the number and amount of the wire transfer. But banks
also get the value of offering their customers a service that will encourage them to keep
money in their checking account, as well
▪ The sender’s bank also like wire transfers because they are efficient and have the lowest
possible number of exceptions. Efficiency in payments is all about minimizing exceptions –
because exceptions are expensive. When you have to assign somebody to follow up on a
problem, it costs money, there are fewer problems with RTGS because it happens in real-
time.
▪ The receiving bank sometimes deduct a fee for receiving money via wire. They also make
money from a float. There usually isn’t a float in a wire transfer, but a bank may have a
policy where they don’t release the money until a later time or the next day. They certainly
get the money right away, but sometimes they might not give it right away to the payee
▪ The network receives some amount of money, normally 40 cents to a $2 USD per
transaction, compared to half a cent per transaction that network collects on ACHs. That’s
because it cost a lot more to run the RTGS network than it does the ACH network (The
network here refers to Fedwire)
▪ About $3trn USD per day goes through the RTGS system. That’s close to $35,000 a second.
This is a staggering amount, but many consider few of those transactions to be payments.
They are banks or securities firms settling with each other or facilitating payments

▪ Financial institutions use wire transfers to settle with each other at the end of the day
because values are large
▪ Commodity markets and capital markets also use RTGS
▪ Bank already have funds with the Federal Reserve (through Fedwire) and its’ basically a
movement of funds between those banks (funds have to be made available before you do a
real transfer) (Since banks need to maintain these high amounts, the cost of a wire transfer
is large). When the Fed runs this kind of network, it is mostly to provide convenience and to
cover costs, not to make a profit
▪ Wire transfer systems would represent less than 1% of the total count, but 93% of the total
amount because of the high value financial market transactions that use wire transfers
▪ Wire transfer systems, like all “open loop” payments systems, have “on-us” transactions
where the sending bank and the receiving bank are the same. Since wire transfers are
particularly concentrated among the largest banks that provide transaction services to the
largest financial institutions (other banks, investment banks, brokers etc.), a higher than
normal percentage of transactions may be assumed to be “on-us”. So, when you look at the
transaction numbers reported by the Fed and CHIPS, you need to make an assumption about
the additional number that do not flow through the Fed or CHIPS, but are kept in house by
the sending institution as an “on-us”
▪ Software & Services for Wire Transfers: Fundtech, ACI Worldwide and FIS / Sunguard
Cards
▪ Issuer processors / Acquirer processors are the third party institutions with proprietary
technology platforms to handle the transaction processing for those issuers that do not have
in-house capabilities. Issuers often outsource the transaction processing to the issuer
processors
▪ Originally most banks were both issuers and acquirers, card acquiring was not nearly as
profitable as card issuing. The different economic models of these two sides of the card
business led many banks to separate management of card issuing and acquiring, with many
banks dropping out of the card acquiring business in the 1980s after the acceptance
environment evolved from paper-based (requiring local capture of paper sales drafts using a
process similar to checks) to electronic POS terminals
▪ Merchant discount rates is set by the acquiring bank (Merchant commission is same as
merchant discount rate)

▪ In the card payments systems, merchant acquirers use ACH to credit merchants with funds
from their card payment activity
▪ The switching of a transaction will involve the below 3 steps (If it’s an on-us transaction,
then the bank does not need to switch)
▪ Authorization: When the acquirer accepts the transaction from the merchant, the
transaction is sent via the network to the issuer, and the issuer approves or declines a sales
transaction before a purchase is finalized or cash is disbursed
▪ Clearing: Calculating the settlement obligation of the issuer and the amount due to the
acquirer, net of applicable fees and charges / Determination and exchange of financial
transaction information between issuers and acquirers after a transaction has been
successfully conducted at the point of interaction.
▪ Settlement: The issuer sends funds to Visa / MA’s designated settlement bank in the amount
of its settlement obligation. The settlement bank, at the direction of Visa, transfers funds
due to the acquirer
▪ If the cardholder makes a $100 payment, it is not completely transferred to the merchant
account. The merchant gets the amount net of the merchant discount fee. If the merchant
discount fee is 2.4%, then the merchant would receive $97.60 from the transaction. The rest
of $2.40 is split unevenly between the issuer and the acquirer, depending upon the
interchange rate. In case of an interchange rate of 1.8%, the issuer will keep $1.80 and the
acquirer will keep $0.60. Issuer gets to keep more of the merchant discount fee because of a
higher risk of payment default from the cardholder.
▪ The merchant discount rate is established by the acquirer to cover its costs of both
participating in the four party system and providing services to merchants. The rate takes
into consideration the amount of interchange fee which the acquirer generally pays to the
issuer
▪ Visa and Mastercard guarantees the settlement of many of the transactions between the
issuers and the acquirers to ensure integrity of the network. This is referred to as the
settlement exposure
▪ Visa and Mastercard do not make money from individual transactions. Instead, it earns
revenues from the issuers and acquirers based upon the overall payment volumes and the
number of transactions processed
▪ The primary customers of Visa and Mastercard are the issuers and acquirers. They offer a
wide range of branded payments product platforms to the issuers, which they use to
develop and offer credit, debit, prepaid, and cash access programs for the cardholders
(individuals, businesses and government entities). In addition, Visa and Mastercard provides
transaction processing services (authorization, clearing and settlement) and various other
value-added services such as risk management, debit issuer processing, loyalty services,
dispute management and value-added information services)
▪ Settlement Process (in detail)
o Merchant’s bank sends clearing data to Visa / MA
o Visa / MA calculates net settlement position and sends advisement to merchant’s
bank and cardholder’s bank and transfer funds order to settlement bank
o Settlement bank facilitates exchange of funds to guarantee payment to merchant’s
bank
o Cardholder’s bank sends payment to settlement bank
o Merchant’s bank pays merchant for cardholder’s purchase
o Cardholder’s bank bills cardholder for purchase
▪ More on Settlement

o In many countries around the world, big changes are happening in how inter-bank
net settlement is being done. Settlement times are shortening: instead of being
done at the end of a business day, the net settlement calculation (and resulting
funding or drawing of settlement account) is done every few hours, or minutes, or
after a certain amount of transaction value has passed through the system.
o Some systems are moving towards pre-funding requirements of participating banks
– rather than allowing banks to overdraft their settlement account, they must
already have sufficient funds in the account to handle the transactions processed
o Finally, some systems are moving towards allowing non-banks to have direct access
to core payment systems and the settlement services supporting these systems. The
non-banks are institutions chartered within a country and permitted by national law
to do certain types of payments transactions
▪ Debit transactions exceed credit transactions by count but are less by amount due to the
higher “average ticker” (purchase amount) on credit cards vs debit cards. Debit cards are
typically used for “everyday spend”, lower-value purchases – while credit cards continue to
be used for higher value purchases, travel, entertainment etc.
▪ Card networks are fundamentally “pull” payment networks. Card payments don’t bounce –
but this doesn’t mean that they are push transactions. They are guaranteed “pull”
transactions. The card networks accomplished this by adding a separate message flow,
called the authorization, that runs through the network before the “pull” payment
transaction is submitted
▪ General Purpose Payment Networks: Visa, Mastercard etc; outside of the US, networks such
as JCB in Japan and Union Pay in China have leading positions in their domestic markets. E.g.
Union Pay currently operates the sole domestic payment switch in China
▪ Debit and Local Networks: ATM and POS debit networks in various countries such as
Interlink, Plus and Visa Electron, Star (owned by First Data Corporation), NYCE (owned by
FIS) and Pulse (owned by Discover). Certain jurisdictions have also created domestic card
schemes that are mostly focused on debit (including RuPay in India and MIR in Russia)
▪ Three Party Payments Networks: American Express and Discover; these have direct
acquiring relationships with merchants and direct issuing relationships with account holders.
These networks do not require formal interchange fees to balance payment system costs
between the issuing and acquiring sides of their business, even though they have the ability
to internally transfer costs in a manner similar to interchange fees
▪ Credit Card Products
o Charge Cards: Have no revolving credit associated with them and require the
cardholder to pay the balance in full each month
o Revolving Credit Cards: Normal credit card
o Premium Cards
o Affinity and Co-Branded Cards: Affinity cars carry the name and brand of an
organization (perhaps a school, alumni association or football team)
o Small Business Cards: Offered to small business, often with specialized rewards
programs
o Corporate Cards
o Purchasing Cards: Charge cards issued to a corporation (to either employees or
departments) used to buy goods and services from company suppliers
o Private Label Cards: Closed loop cards offered by a single sponsor; not usable at
other merchants
▪ Closed Loop Payment Networks

o Closed look payment processing includes applications that are limited to a specific
vendor or location. Consumers are able to load money into a spending account that
is linked to a payment item
o MCX (Merchant Customer Exchange) was created in the US by a group of the
nation’s leading merchants. Their goal is to offer consumers a customer-focused,
versatile and seamlessly integrated mobile-commerce platform. The application is to
be available through virtually any smartphone. In May 2016, MCX announced it was
significantly scaling back its efforts and in March 2017 that it was selling its
technology assets to JPMC
o A clear winner in terms of innovation in retail payments is Starbucks
o Payment service providers, such as Paypal or Western Union, operate closed loop
systems. But it is important to note that these providers themselves are users of
open loop systems, often on an aggregated basis. They use the open loop systems to
fund transactions from senders and / or to deliver payment to the receiving party
▪ Sending money to a debit card vs Sending money to a bank account
o Paying via debit card – Uses card network rails – payment is made available to seller
instantly (interchange will be involved; merchant gets a lower value)
o Paying via bank account – Batch / Real Time – ACH – less fees paid by merchant
o Debit cards can be used both in-store and online
o Instant Transfer feature offered by Paypal: Funds transferred to debit card in
minutes whereas it takes 1-2 days for transfer to bank account
▪ Four Party Model in case of transactions on commercial cards
o The biggest difference is that the issuer will connect with the corporate client which
in turn will have the details of the cardholder
o Visa / MA will have no visibility of corporate client in their data
2. P&L for Cards Business (For Issuers and Acquirers)
Issuer Costs
o Processes cardholder applications
o Performs credit scoring
o Issues cards
o Guarantees funds to merchant
o Processes authorizations
o Receives and posts transactions
o Issues statements
o Runs customer service
o Take responsibility for credit risk
o Takes responsibility for (most) fraud
Acquirer Costs
o Contracts merchants
o Connects merchants
o Collects and submits merchants
o Pays merchant
o Issues statement to merchants
o Maintain service desk for merchants

Revenue Items for an Acquiring Bank
▪ Commission Income (MDR / MSC)
▪ Float Income
▪ Acquiring Service / Package Fees
▪ Value Added Services (DCC, Loyalty, Instalment Fraud Monitoring etc.)
▪ Other Commissions (Dispute Fees, Rental Charges, Payments etc.)
Cost Items for an Acquiring Bank
▪ Interchange
▪ Scheme Charges
▪ Switching and Processing
▪ Funding Cost
▪ Tech Development and Maintenance Cost
▪ POS Terminal Related Costs (Hardware, Field Service etc.)
▪ Fraud and Chargeback Cost
Profitability of an Acquiring Bank
▪ The optimal margin level for the acquirer depends on the value of having merchant in the
book
o Volume (scale drives down cost for the whole book)
o Products linked or sold through acquiring (such as VAS, loans)
o Merchant relationship
o Acquirer margin (bottom line impact)
▪ Acquiring is a business of scale: margins are low, and there is a large overhead cost, so very
high volume acquirers are typically much more profitable than low scale local acquirers
▪ Central acquiring and acceptance offer a number of benefits as the merchant consolidates
its card payment traffic through just one acquirer. Although multiple borders may be crossed
during merchant POS activity, the traffic is routed to a central host which allows transaction
volumes to be recorded by a single acquirer. This model allows for flexibility, the
consolidation of volumes across national borders and currencies, and the implementation of
value added services according to client specifications. Larger merchants, who are driving
the demand for central acquiring services, undoubtedly benefit greatly from this
arrangement as they tend to operate both e-commerce and / or bricks-and-clicks locations
in multiple countries
▪ In India, there are 50m merchants and just 3m POS terminals. POS did not find many takers
all these years because merchants had to pay for that service (MDR). Of the 3m merchants,
only about 20% are with large merchants, but they account for nearly 50% of all POS
transactions that take place today. The rest of the terminals are deployed at medium, small
and micro-merchants
o On its own, the POS business makes little sense for banks. A bank would spend Rs
2,500 ($38.4) in just acquiring the merchant; add Rs 8,000 ($123) to the cost of the
PoS machine and a monthly spend of Rs 250 ($3.8) per terminal in servicing costs. In
return, banks earn 5-8bps on a transaction of Rs 100 if they acquire a merchant.
Moreover, PoS transactions from a small merchant would be too few for a bank to
recover its cost
o Banks see POS as that necessary bitter pill to acquire other business opportunities.
Like having a current account relationship with the bank. A current account brings

with it precious float income which makes for cheap capital to lend as banks don’t
pay any interest to the account holder on that money. On top of that, the endless
possibilities of providing term loans, working capital to the account holder
Revenue and Costs
▪ The economics of the credit card industry are dominated by interest earned on revolving
loans to credit cardholders who are revolvers. The interchange component of the merchant
discount fee in an open loop network and the entire merchant discount fee in a closed loop
network are important but secondary sources of revenue. Charge cards without the interest
income from consumer borrowing must rely exclusively in interchange and cardholder fees
for revenue
▪ Credit Card Issuer’s P&L: Revenue (Interest: 57%, Interchange: 17% and Fees: 13%);
Expenses (Cost of Funds: 17%, Charge offs: 25%; Ops Marketing: 25% and Fraud: 1%)
▪ From a credit card issuer’s standpoint, the level of interchange income received is based
primarily on the type of card issued. American Express (which now can be issued by other
banks following the outcome of earlier litigation against Visa and Mastercard), Visa
Signature and Mastercard Worldcard Products are higher interchange products, as are small
business cards. To increase interchange revenue, issuers have migrated some existing cards
to these products as they go through reissuance, as well as using them and their higher
rewards features to try to gain new customers
▪ The Durbin amendment and the resulting Federal reserve regulation II eliminated any
potential differential in cost between signature and PIN debit for regulated debit card
issuers
▪ The bank earns interchange revenue on every debit card transaction, but nothing on cash or
checks
▪ Generally, debit card rewards are less “rich” than credit card rewards, because of the lesser
interchange revenue from debit card transactions, which funds the costs of rewards
▪ The transaction processing fees charged by Visa and Mastercard are miniscule amount
charged for each transaction (a volume game). These fees are charged for providing
authorization, clearing, settlement, maintenance and network access services, and are
charged as a percentage of the total transactions processed for a client
▪ Domestic assessment / Service fees are charged to issuers and acquirers based on the total
spending that happens on the cards (value) (Other factors: Number of Cards Issued,
Merchant Relationship Development, Brand Promotion at POS, Acceptance Development
Fund
Benefits to Issuers for issuance of commercial cards
▪ Revenue from yearly card fees
▪ Revenue from interchange
▪ Payment transactions in foreign currencies
▪ Entry point to new customers (big card portfolios may be the first cash management product
sold to the client)
▪ Tangible marketing tool: Brand building a successful professional experience with issuer may
encourage cardholders / users to choose issuer for their personal banking needs
▪ Creates loyalty and barrier to exit: Deployment of a card program usually takes time and
sometimes entails strong integration into the client’s process; once a card program is
deployed, it helps in securing the banking relationship with the client

Benefits of corporate card to corporates
▪ Savings through automation, simplification and standardization e.g. online booking and
expense management systems
▪ High levels of card acceptance drive down costs
▪ Worldwide acceptance
▪ Optimal control and cost containment due to online reporting capabilities
▪ Enforce spend policy and compliance rules; global control and insight on all expenses
▪ Extra services via SafeGuard support, insurance and services
Revenue Items Cost Items
Issuing Bank Interest Rate on Outstanding
Balances
Interchange Fees
Annual Fees
ATM
FX Fees and Mark Up
Other Fees (Late Fees, Cash
Advance)
Cost of Funds
Transaction Costs (Payment to
Card Networks)
ATM
Card Issuance
Operations and Marketing
(including loyalty rewards)
Technology Costs (Data Process
and IT Costs)
Fraud losses and related costs
Acquiring Bank Merchant Service Charge
Acquirer Service / Package Fees
Value Added Services to
Merchants (Loyalty, Instalment)
Transaction Costs (Interchange to
issuing bank, Payment to Card
Networks)
Technology Costs (Data Process
and IT Costs)
POS Terminal Related Costs
Fraud & Chargeback Cost
Merchant Acquisition Cost
3. End to End Transaction Flow

▪ Once the consumer is ready to make a purchase, he or she presents their card for payment;
▪ The card is swiped in the Point-of-Sale (POS) device at the business location, which captures
the account information contained on the card's magnetic stripe or Europay, MasterCard
and Visa (EMV) – compliant chip
o In a mobile commerce transaction facilitated by a mobile wallet, such as Apple Pay,
the appropriate card details are stored virtually on an application on the phone and
transmitted to the POS device through a chip equipped with near-field
communication (NFC) technology;
o In an eCommerce transaction, the POS device is replaced by a virtual terminal
application and the consumer types the card number into the check-out page of the
online storefront. In some circumstances, an online wallet, such as PayPal, may be
used to transmit the appropriate payment credentials

▪ The customer's card details are transmitted from the POS to the merchant acquirer, or the
merchant acquirer's processor, via an internet connection or a phone line;
o In an eCommerce transaction, the information is encrypted and then transmitted to
the merchant acquirer, or merchant acquirer's processor, via an online gateway;
▪ The merchant acquirer, or the merchant acquirer's processor, identifies the appropriate
payment network affiliated with the card, such as Visa, MasterCard, or STAR, and forwards
the card details to the appropriate network;
▪ The payment network receives the request for payment authorization, identifies the
appropriate card issuing bank, and routes the transaction to the bank or its issuer processor;
▪ The card issuing bank, or its issuer processor, receives the request and then executes a
series of inquiries into its account systems to assess the potential risk of fraud for the
transaction, establish that the account is in good standing, and verify that the cardholder has
sufficient credit or adequate funds to cover the amount of the transaction;
▪ The card issuing bank, or its issuer processor, approves or declines the transaction and sends
back the response to the payment network. In this example the transaction is approved;
▪ The payment network receives the approval and forwards the authorization to the merchant
acquirer, or merchant acquirer's processor; and
▪ The merchant acquirer, or merchant acquirer's processor, sends the authorization back to
the POS device at the business location, which provides an approval confirmation and prints
a receipt;
o In a mobile commerce transaction, the approval confirmation and receipt may also
be transmitted to the consumer's mobile wallet application or to the consumer via
email;
o In an eCommerce transaction, the authorization is sent to the online storefront,
which communicates the approval to the consumer on the screen, and may provide
the receipt for printing online or via email
▪ Typically at the end of the day, the business submits a batch of all of its approved
authorizations to the merchant acquirer, or the merchant acquirer's processor, through a
function on its POS device;
o In the case of an eCommerce business, the online storefront's gateway sends the
batch to the merchant acquirer, or to the merchant acquirer's processor;
▪ The merchant acquirer, or the merchant acquirer's processor, receives the batch, notes the
final amounts due for settlement, and routes the batch of approved authorizations to each
applicable payment network;
▪ Each payment network sends the batch of approved authorizations to the applicable card
issuing bank, or its issuer processor, which posts the transaction to the consumer's
statement;
▪ Typically within 48 hours, the payment network calculates net settlement positions for the
merchant acquirer and the card issuing bank, sends advisements to the merchant acquirer
and card issuing bank, and submits a fund transfer order to a settlement bank; and
▪ The settlement bank facilitates the exchange of funds between the merchant acquirer and
the card issuing bank; and the merchant acquirer transfers the funds to the business owner's
account.
4. Other Parties (Merchant Acquirers, Issuer Processors, Gateway Providers, Wallets etc.)
Third Party Processors and ISOs

▪ Large merchants are more likely to buy acquiring services on an a-la-carte basis, assembling
the bundles themselves. Smaller merchants are more likely to buy bundles of fully packaged
services
▪ ISOs have frequently been referred to as “feet on the street” for acquirers. They have played
an essential role in reaching small merchants, in particular, for acceptance of card payments
▪ Issuer and Acquirer Processors: First Data, Heartland Payment Systems, Moneris, Vantiv,
TSYS, BluePay
▪ Debit Card Issuer Processors: Visa DPS, First Data Corp, TSYS, Vantiv, Mastercard Payment
Transaction Services, FIS, Fiserv
▪ PIN Debit Networks: Interlink (Visa), Maestro (Mastercard), STAR (First Data Corp), NYCE
(FIS), Accel (Fiserv), Pulse (Discover)
▪ ISOs: Merchant accounts are marketed to merchants by two basic methods: either directly
by the processor or sponsoring bank, or by an authorized agent for the bank and additionally
directly / registered with both Visa and Mastercard as an ISO / MSP (Independent Selling
Organization / Member Service Provider) (Names are same as in Issuer and Acquirer
Processors) (Other names: Monex, Everlink, Pivotal)
▪ Aggregators: Paypal, Stripe, Square, 2CC, WePay, ProPay; allow merchants to process
payments without setting up their own merchant account. They bundle several merchants
together and allow them to process payments using a joint merchant account. The set-up is
simple and straight-forward
▪ Merchant Account Providers: BluePay, Chase Paymentech, First Data, Payfirma, Vantiv,
TSYS, WorldPay; individual account for each merchant; provide technology and hardware
which enables the merchant to process the transaction
▪ By removing entry barriers and allowing instant credit card processing, aggregators take on
more risk. Aggregators assume the risk of fraud of all the merchants under their umbrella;
higher fees for merchants; lower limits for merchants (they charge merchants based on
gross processing volume, which means the processing limits might be lower than with a
separate merchant account); aggregators are not banks so they are not necessarily required
to follow strict banking regulations or be PCI compliant
▪ Separate merchant account has a longer application and approval process; plethora of fees;
more expense upto a point (once a merchant starts processing more than $40,00, you hit a
ceiling where processing your own merchant account will actually save money because fees
are tailored to more unique business and more competitive)
▪ The two largest processors in the US for credit card processing are First Data Corporation
and TSYS. In addition to the credit card processing, they also provide processing services for
debit and prepaid cards along with merchant acquiring
Mobile
Mobile Wallets: Google Wallet, Apple Pay, Masterpass, Samsung Pay, Visa Checkout, Android
Pay etc; applications that replace a physical wallet by storing virtual versions of payment cards,
pre-paid cards, or gift cards on mobile devices
Mobile Wallet Platforms: Vantiv, Dwolla; Commerce infrastructures that companies can
configure to offer a mobile wallet solution to their consumers (Others: Hyperwallet, Omnego,
Fundamo, Zenius, SafePays)
Mobile Payment Processors: Square, Payfirma, Stripe, Clover, Elavon, Global Payments, Paypal
Here; allow merchants to accept payments using their existing mobile phones by keying the
payment info into an app or via an attached card reader

Online Payment Gateways and E Commerce Payment Processors
Online Payment Gateways: Gateways facilitate online credit card payments by transferring data
between eCommerce websites and acquirers e.g. BluePay, Converge, 2CC, Moneris, Shopify,
Vantiv Integration Payments
eCommerce Payment Processors: From integrated APIs to hosted checkouts, eCommerce
providers are enabling websites to simplify the checkout process and accept payments securely
over the web e.g. Paypal, 2CC, Global Payments, Payfirma, Amazon Payments, Braintree
Point of Sale
Tablet POS Providers: Enable merchants to run a full register (with POS, inventory and customer
loyalty software) using just a tablet e.g. Square, Moneris, Lightspeed, Shopkeep, Squirrel
Systems
Terminal Hardware Providers: Payment processors who equip merchants with traditional
terminals. Often considered the standard and incumbent payment channel, traditional terminals
are hardware that allow merchants to swipe or insert a consumer’s credit card to process the
transaction e.g. Chase, First Data, Payfirma, Moneris, Blue Pay
POS Terminal Companies: Unlike terminal hardware providers who supply merchants with
terminals, POS terminal companies manufacture them e.g. Verifone, Ingenico, IDTech, Magtek
POS Software: Software which brick and mortar businesses use to conduct sales, run their
business, and manage inventory e.g. Squirrel Systems, Vend, Micros, Shopkeep, Lightspeed,
Vivonet
5. Cross Border Payments
Money Transfer Operators
▪ Also known as Money Service Businesses (MSB), that offer cross border remittance services
▪ Western Union, MoneyGram International
▪ MTOs compete by building ubiquitous networks at both side of the major Send and Receive
remittance corridors. They make money by charging fees that differ widely across the send
markets. They also earn on the foreign exchange conversion (FX) inherent in multi-currency
transfers. The average cost of remittances varies between 5% and 10%, but the cost that
MTOs charge can vary from 0% to 41.51%
▪ Core differentiator for MTOs is the widespread agent network they have put into place
▪ Sending via banks alone costs 11% of the money transferred on average; sending through a
traditional money transfer agent costs 6%, while sending it via phone using mobile operator
costs around 3%
▪ There are several reasons why the cost of sending money cross-border is currently high.
Most payments start and finish as cash, which means that human agents need to be
employed to receive and disburse the money, raising the price for everyone
▪ Remittances totalled $429bn in 2016, are worth 3 times as much as all the foreign aid doled
out by governments worldwide

▪ Despite $0.6T of money transfer volumes, due to low margins, the international consumer
remittances are a relatively small global market. The revenue pie is $35B with around 90% of
money transfer volume sent in cash. While transfer volumes will keep increasing, the
margins will keep declining (assuming 1% in next 10 years)
▪ Only around 10% of remittance volume is currently sent digitally. That ratio is growing at 15-
20% per year, but a larger part of this growth is coming from former wire transfer customers
than growing offline users
▪ Offline to online shift in remittances is happening at a crawling 1-2% annually. This is not
unique to remittances. Such slow adoption is actually quite typical for other types of
transactions: from cash to plastic cards, from checks to online billing, or wearables etc.
▪ Gross Profit Margins
o Western Union: 5.5%
o MoneyGram: <5%
o RiaMoney: <4%
o WorldRemit: 4%
o Xoom: 2.5%
o Azimo: 2%
o Remitly: 2%
o TransferWise: 0.8%
▪ Two major expenses: Paying to receive funds and paying to discharge money (These costs
could comprise up to half of all expenses for a traditional remittance provider)
▪ Money transmitters are paying agent networks for collecting cash transfers and to banks for
sending money from a customer’s bank account or from a linked debit / credit card
o Bank charge relatively little for transfers from their customers’ accounts (~30 cents;
Fed ACH)
o Payment for card funding is usually variable (1-2% of the transfer amount). That is,
why, consumers who want to use a debit or credit card for funding their transfers
are typically charged a much higher fee (credit card funding method has the highest
fees in order to cover its higher non-payment risk)
o Some money transmitters are trying to minimize the card-based funding cost by
using so called “on-us” technique. They are accomplishing it by applying to be a
processor of debit-credit card transfers in agent locations. In a sense, they are
closing a loop between sending money from a linked debit-credit cards and
processing such transfers internally without leveraging Visa / MA networks
▪ Money transmitters have been deploying its transfer services via intermediaries for some or
all of the markets. In some cases Xoom uses Earthport, Transferwise – Earthport,
WorldRemit – Earthport and BTS, Azimo – CurrencyCloud
▪ Fixed Costs: Licenses (in a state where money transmitter operates), Fraud, Cybersecurity
and Compliance
o Compliance is very expensive. It costs Western Union $200m per year and involves
2,200 employees or more than 20% of workforce dedicated to compliance
Startups
▪ Xoom now allows its users to top up prepaid phone balances and pay bills in other countries
▪ Some of the startups are already using bitcoin and blockchain to cut time and cost. They
don’t give bitcoin directly to their customers but use it to move big sums of money across
borders

▪ Manila based Rebit, which specializes in transfers between South Korea and the Philippines,
teams up with partners to accept South Korean won and releases Philippine pesos into bank
accounts. But behind the scenes, it speeds up the process and lowers the cost by using
bitcoin
▪ TransferWise
o It pairs up people needing to send money in different directions, so the money never
needs to go cross-border
o TransferWise charges 1% of the transfer amount up to $5,000 with no additional
charges hidden in the exchange rate conversion
o Today, TransferWise supports bank to bank transfers. Outside of Indians and expats
from developed countries, receiving funds into a bank account will remain relevant
only for a small portion of consumers in each corridor. The transition from offline to
online method of sending money is crawling at 1-2% per year
▪ Bitcoin and Blockchain
o Abra uses bitcoin to transfer value instead. You load money from a bank account or
human teller to a mobile phone wallet. Abra converts the money into bitcoin,
transfers it across the digital currency’s blockchain, then settles the amount in a
local currency on the other end. Importantly, customers never know they have just
undergone a bitcoin transaction
o Bitcoin’s key FX challenge remains an insufficient liquidity in many corridors. The
spreads are so high that even die-hard bitcoin players are using non-blockchain rails
to complete transfers for those destinations
▪ Traditional Banks
o Remittances being the standard service offerings for MTOs is too small to matter to
most banks. In terms of importance for a large bank, remittances stand somewhere
between a travel insurance and overdraft product and executives in charge tend to
be 3-4 level below heads of retail banks
o For a large bank, the burden is twofold: offering remittances to its own customers
and providing banking services to remittance companies. The latter has grown so
complicated that banks en masse have been closing accounts of remittance
providers – in other words, whatever money banks make of remittance providers
does not justify the additional investment requirements and liabilities created by
new regulations
o There are 3 go to market models for banks in remittances
▪ Ignore: Most banks offer only wire transfers
▪ Prioritize: Build a separate remittance business
▪ Partner: Rely on a specialist to serve your customers
o In the US, the world’s largest outbound country representing 20% of all global
remittances, only 10% of around 6,000 banks offer remittances. A wire transfer is
the primary method for 90% of those banks. Out of that group, top 4 US banks are
responsible for almost half of total remittance volume, with JPMC and BOFA
transferring more remittances from USA than MoneyGram
o Banks’ primary consumer sub segment is different: a less frequent sender who
remits larger amounts and uses a wire transfer method for sending money. Not
surprisingly, wire transfers are best suited for larger amounts
Ripple

▪ The first strategy is becoming a viable replacement for SWIFT by being a faster, cheaper and
more secure settlement platform. The second strategy is its native token XRP
▪ XRP aims to establish itself as a “bridge currency” which can be used for real-time cross
border settlements by institutions and individuals
▪ XRP could be a digital asset that connect different fiat currencies like a bridge currency
▪ The next big payment opportunity for a blockchain payment system like Ripple is to replace
both value transfer and the nostro account. This is where XRP comes in, which basically
means, in the sending country, one can convert fiat to XRP, and in the recipient country, XRP
is converted into fiat. This would allow the XRP users to bypass the nostro-vostro system
while maintaining liquidity and compliance
TerraPay
▪ While TerraPay is not consumer-facing, it partners with financial institutions to rewire
payments. It is a middle man, which ironically helps bring costs down
▪ Spend a little time to understand this well. The chunkiest portion of the costs associated
with a cross-border transaction goes into compliance checks. First, for every transaction
initiated, anti-money laundering checks are conducted. Then the individual is screened to
ensure that there are no political motivations and that he or she is not a terrorist. Different
regulators also have different lists that need to be screened. Not long ago, banks used to
conduct these checks manually. Read that as costly and time-consuming.
▪ But technology can help automate those checks. “Sixty per cent of the costs are usually for
compliance,” says Sundaram. “The amount of paperwork is enormous. But we have built a
compliance engine that can analyse all the requirements and screen the various lists
maintained by every regulator. It helps flag anything suspicious.” But to get to the stage
where they can deploy tech effectively, companies like TerraPay must first obtain licenses in
every country they operate in and conduct KYC of their customers
6. Cash Networks
▪ Cash networks generally comprise a hierarchy of agents that move cash into and out of the
new digital services
▪ Largely owned by local players, but must be brought together into globally managed
networks, often by other players who have control over technologies, regulatory and
financial aspects required to make the business model work
▪ Cash networks provide ability for agents to register transactions that affect the agent
account and the consumer account, in order to carry out a cash load or withdrawal
transaction. Agents are expected to sell from pre-bought top-up balance, which means they
must invest in maintaining a float. They earn commissions and are paid for every
transaction. Transactions typically consist of cash-in, cash-out and customer registration
▪ Today large agent networks have been created in countries such as the Philippines and many
parts of Africa. However, even in Kenya, where there is maximum mainstream use of mobile
money, agents report they find it hard to conduct business profitably
▪ Cash Delivery Service Providers: Loomis, Garcia and Brinks
▪ Anti-Money Laundering Software: Oracle / Mantis and Actimize / Fortent
▪ Counterfeit Detection Hardware: Ace Depot
▪ ATM Manufacturers: Diebold, NCR
▪ Non-bank ATMs: Cardtronics, Payment Alliance
▪ Surcharge Free Networks: Allpoint (Cardtronics) and MoneyPass

▪ If a customer goes to another bank’s ATM to withdraw cash, a number of fees may apply:
o The ATM network that connects the two banks sets an interchange fee, which the
customer’s bank pays to the bank whose ATM was used (This can be thought of as
“backward interchange”, as it flows away from the customer’s bank rather than
toward it as for POS debit transactions)
o The bank whose ATM is used may assess a fee (the surcharge) which is taken out of
the customer’s account along with the withdrawal
o The customer’s bank may assess a fee to its own customer for using a foreign ATM
7. Technology
NFC (Near Field Communication)
▪ Short range wireless connectivity standard that uses magnetic field induction to enable
communication between devices when they are touched together, or brought within a few
centimetres of each other
▪ To enable a connection using NFC, users can launch the payment application on a
smartphone and then tap the phone on the credit / debit card terminal POS. A biometric
authentication is required to further process the transaction. The transaction is validated
through a separate chip known as secure element or through cloud based host card
emulation, which relays the authorization back to the NFC modem, thus completing the
transaction
▪ Since NFC uses radio waves to transmit and exchange data, and does not need an internet
connection to work, it can be used in areas that have poor network availability.
▪ Jointly developed by Philips and Sony, the standard specifies a way for the devices to
establish a P2P network to exchange data
▪ After the P2P network has been configured, another wireless communication technology,
such as Bluetooth or Wi-Fi can be used for longer range communication on for transferring
large amounts of data
▪ NFC is an evolved form of RFID. The difference is that RFID is a one-way street: Your EZ Pass
transmitter beams your $4.25 toll to the tollbooth’s receiver and that’s the extent of the
transaction. But crucially, NFC is two way, allowing your NFC enabled gadget to both send
and receive information
▪ Compared to other wireless protocols like Wi-Fi___33 or Bluetooth, NFC is exceedingly slow,
with a maximum data transfer speed of 0.424MBPS, less than a quarter of Bluetooth. But
NFC has several key advantages over Bluetooth: It consumes a mere 15MA of power, it has
the possibility of greater security and it foregoes the involved “pairing” process of Bluetooth
entirely. Bluetooth needs to be configured; NFC is completely effort-free, requiring nothing
more than a tap
▪ A smartphone with an NFC chip could very easily be configured to work as a credit or debit
card. Just tap your phone against an NFC enabled payment terminal and bam, money spent,
consumerism upheld, everyone’s happy. But that’s really only the start of what NFC can do
in terms of the transaction
▪ NFC could work well for public transit passes, library cards, hotel room keycards, and office
building passcards. Even keys could someday become a relic of the past, replaced by the tap
of a phone to lock
▪ NFC, an evolved form of RFID is actually compatible with existing RFID terminals, which are
distributed by companies like Visa and Mastercard and are present in businesses

▪ Apple Pay, Android Pay all work on NFC
▪ In India, adoption of NFC is still at a nascent stage.
▪ The main disadvantage of NFC payments is its low adoption rate primarily due to the lack of
support on phones. The NFC payment method is inherently accessible to only a niche
segment, thus reducing the scope of its uptake. Currently, not only smartphones support
NFC and those that do, belong to the mid and high segments, making it beyond the reach of
the masses. Moreover, greater participation is required by both commercial and payment
banks to support such technology. Another major hurdle is the unavailability of merchant-
side infrastructure as vendors are reluctant to incur the additional cost of upgrading their
PoS terminals to support NFC
▪ In order to achieve mass-scale adoption, handset makers need to provide NFC support on
low range smartphones to generate compelling use cases and inculcate habit among users.
As payment tools are crucial for the government’s vision of transforming India into a
knowledge economy and a digitally empowered society, this segment offers huge growth
potential owing to its quick and convenient usage
Open Banking and APIs (Application Programming Interface)
▪ As more websites and applications were created, common features began to surface. As a
result, APIs for popular functions surfaced. APIs simplified and sped up the development
process by allowing developers to build on top of, or integrate with existing products rather
than building an entire system from scratch. APIs appealed to software vendors as they
realized they didn’t need to dedicate developer resources to build these standard
functionalities into their software; they could utilize an API and stay focused on their core
product. These APIs are typically more flexible and robust than those built internally. As a
result, there has been an increase in reliance on 3rd
party APIs from larger platforms and
specialized developers
▪ Open banking is the concept that allows banks to share customer data with 3rd
party
companies or applications securely and in real time, through the use of open application
interface platforms
▪ Online banking before open banking was rife with risks. “You as a customer would give your
account login and password” and the app has it stored somewhere – there is a security
threat
▪ With open banking, the third party provider accesses a user’s bank information through a
token, allowing the bank to be a gatekeeper of the information so that the app doesn’t need
to store any of the information
▪ Open banking is dependent on banks sharing APIs with third parties. At a broad level, APIs
are what’s happening at the back end of one piece of software to allow it to interact with
one another
▪ APIs are really a pipe which connects two software components and through it data is
circulating
▪ In an open banking environment, bank APIs are available to outside developers to allow the
development of other applications, with the goal that the customer has as many resources
as possible with which to view or understand their finances
▪ Open banking is the idea that we have APIs freely or publicly accessible for anybody to
review and there’s no paywall or documentation to sign
▪ The ultimate objective is the creation of a universe of apps that use your bank account
information to offer as a broad range of products as possible to suit a customer’s needs

▪ Open banking is actively catching on quickly outside the US. The European Union’s PSD2,
which regulates payment services and PSPs throughout the EU, includes provisions to allow
banks to allow third party API access. Earlier, this month, the UK’s competition and Markets
Authority gave the country’s largest banks a year to develop an open banking API interface
▪ An API specifies the connection mechanism, the data and functionality that are made
available and what rules other pieces of software need to follow to interact with this data
and functionality. An organization can use a public API to allow third parties to access their
data or services in a controlled environment
▪ Using an API means that only desired aspects of software functionality are exposed, while
the rest of the application remains protected. A Facebook like on a 3rd
party website and an
embedded You Tube video are typical examples of the use of public APIs
▪ The key competitive advantage of these firms is that they target one specific banking service
and are able to focus fully on customer experience within that service. In contrast, banks
traditionally try to lock in customers in an end to end vertical structure. That is because
historically banks owned the product, process and customer engagement
▪ Banking APIs include account authentication and information, analytics, loyalty programs
and payment processing
▪ Paypal announced its users can now send and request money via a voice command with Siri
▪ Telefonica Deutschland launched a mobile only bank account, built on German bank’s Fidor
platform. O2 banking offers transactions via mobile phone number, small instant loans, and
better mobile data plans. This is a good example of how a third party can create a new
banking experience on top of a platform created by an established bank
▪ Users of Facebook messenger can transfer money to their friends without leaving the
service. The company is working with major players in the industry including Stripe, Paypal,
Braintree, Visa, Mastercard and Amex. Facebook is building messenger as a bot platform
that will allow users to access many third party applications
▪ With a stack of about 100 APIs, Yes Bank has made available the largest set that nearly 75
fintech firms use. These include APIs for opening accounts, lending and trading, among
others. Similarly RBL, too, has over 50 APIs and works with about 80 fintech firms. With API
banking, both these banks have a shot at tapping into a larger customer base
▪ The biggest efficiency for banks here is the dramatically lower acquisition costs. Pai says that
it can cost anywhere from Rs 1,200 to Rs 1,300 to acquire a customer in a brick and mortar
setup. With digital partners, this can come down to Rs 500 – 600. Besides cost efficiency, the
other reasons for banks to get excited about fintech partnerships (new customers, more
float income, more transaction based income, access to customer spending habits and an
opportunity to cross-sell its products)
MST (Magnetic Secure Transmission)
▪ A mobile wallet payment app in a handset can work with MST – a current transmits card
data from secure memory to a magnetic read head to initiate a transaction. Merchants don’t
have to change their EMV or mag-stripe terminals, software or IT infrastructure to have their
magnetic stripe readers become receive for contactless payments from smartphones. MST
can also transmit tokens that represent a card’ primary account number. Using MST,
merchants can create mobile wallets for their mag stripe private label payment and loyalty
cards. NFC payments require merchants to install new card readers. MST payments do not.
However, MST can’t make in-app payments
Contactless Cards

▪ They eliminate the need for swiping at checkout, or dipping your card into the terminal
▪ A contactless card is a chip card that also has technology embedded in it that lets you pay
over a secure radio interface, much like Apple Pay, Android Pay or other mobile wallets
▪ Contactless cards are also called dual interface cards because they contain the now standard
EMV chip and contactless technology
▪ Leading provider of contactless cards: Gemalto
▪ Contactless cards cater to those who are making smaller purchases
▪ When you tap contactless chip card, a cryptographic code that’s unique to the card and to
the transaction is created. The cryptogram can only be decoded by your bank to validate the
transaction
▪ Each credit card network sets a limit for tap and go transactions. Mastercard, for example,
has a $100 limit on contactless payments. If a consumer exceeds the card issuer’s limit, he or
she keys in the PIN for additional security
▪ Credit or debit contactless cards come with a NFC chip that contains your account
information, and an antenna that picks up the signal sent out by the card reader. When a
purchase is made, the transaction details are sent to the contactless payment terminal from
the cash register
▪ Once the customer taps his / her device on the terminal, it recognizes the device and
exchanges payment account details. The device then creates a dynamic cryptogram that
allows a secure transaction to take place. The transaction data is then transmitted to the
issuer along with payment account details – the issuer validates the dynamic cryptogram,
authenticates the data, and authorizes the transaction
▪ Contactless payment can be adopted as long as you have a POS terminal at your business
premises. There are a variety of POS systems that offer contactless payment solutions. The
Square POS system is a compact card reader that accepts any contactless payment and reads
EMV cards by having the customer “dip” the card into a reader slot. Meanwhile, the app-
based POS system Paypal Here employs Bluetooth technology to connect to a mobile device
such as smartphone or tablet to accept payments via the phone based app. This innovative
technology is also capable of reading EMV cards, contactless cards and regular credit cards
▪ Ingenico Smart Terminals are often used by larger retailers due to its good technical
specifications. A countertop POS system, Ingenico accepts EMV and contactless cards, and it
also has a magnetic stripe reader. Lastly, PayAnwhere is a contactless reader that connects
to the audio jack of your phone and can accept EMV, contactless, and magstripe payments.
Apart from offering convenience to customers, adopting contactless payment solutions
allows businesses to save time, money and resources by largely removing the element of
cash from their transactions
EMV
▪ Shared body of technical standards for the secure processing of payments using public key
infrastructure
▪ EMV (also known as Chip and Pin, Chip and Signature or generally as chip technology) is the
most recent advancement in a global initiative to combat fraud and protect sensitive
payment data in the card present environment
▪ Initially, there were only magnetic stripe (magstripe card)
▪ Payment data is more secure on a chip-enabled payment card than on a magnetic stripe
card, as the former supports dynamic authentication, while the latter does not (the data is
static)
▪ Traditional Magnetic Stripe Card: Swipe

▪ EMV Card: Insert into the card reader
8. Glossary
▪ Payee: A person to whom money is paid or to be paid
▪ Credit Transfer: A way of sending money directly from one bank account to another without
using a cheque (Bank to Bank Transfer)
▪ Direct Debit: A direct debit is an instruction from you to your bank especially for paying bills,
subscriptions etc.
▪ ACH (Automatic Clearing House): Enables the processing of credit and debit payments, such
as payroll and prearranged bill payments, between depository institutions
o ACH is an electronic payments network that can probably best be described as
writing an electronic check and which is commonly used in applications like direct
deposits and payroll
▪ EBT (Electronic Benefits Transfer): Allows a recipient to authorize transfer of their govt.
benefits from a federal to a retailer account to pay for products received
o A system that allows state governments to provide and track benefits to authorized
recipients via a plastic debit card
o Common benefits provided via EBT are food stamps and cash benefits
o Cash benefits include general assistance, TANF (temporary aid for needy families),
refugee benefits
o Cash and food stamp benefit are deposited into EBT accounts which can be accessed
using a common benefit identification card (CBIC) and PIN number
o The card can be used at EBT participating merchants and ATM machines and POS
terminals throughout the state
▪ Payment Rail: Technology and network behind the payment platform
▪ Check 21: Allowing an image of a check to actually represent the check. Basically, when a
check is imaged, it stops being a check, it becomes an ACH payment
▪ Gateway: A device used to connect two different networks, especially a connection to the
internet; in the US market, the eCommerce industry vertical is one major user of gateway
services
o The job of the payment gateways (CC Avenue, EBS, InstaMojo) is to aggregate
various payment methods like credit cards, debit cards, mobile wallets and net-
banking. So, the UPI might become the new net banking, by replacing it as a
payment mode
o These payment gateways also offer detailed information on received payment (who
paid and for what), apart from providing transaction management, reconciliation,
insights etc. They also offer customization at every level (payment options, payment
page etc.) which is beyond a simple push-n-pull movement money via UPI
▪ Tokenization: Process of replacing sensitive data with unique identification symbols that
retain all essential information about the data without compromising its security
o Apple Pay was one of the first pay adopters of this tokenization technology and uses
it to store a totally different card number in the mobile device than is on the
cardholders’ card
▪ Payment Processing: Automated processing of electronic payment transactions between
merchants and consumers

o Front End Processing: Merchant acquirers that route transactions originated by
consumer transactions with the merchant to appropriate payment networks for
authorization
o Back End Processing: Ensure that each transaction is appropriately cleared and
settled into the merchant’s bank account
▪ API (Application Programming Interface): Set of routines, protocols, and tools for building
software applications that facilitate communication between applications (service products,
software programs, applications etc.)
o Think of APIs as plug points. If a bank creates enough plug points in its circuitry, a
company with the bank’s consent, can plug into them. This would allow it to use the
bank’s tech infrastructure and regulatory cover to create a brand new product. For
instance, Happay, an expense management app for businesses, needed access to
RBL Bank’s payments APIs to let people pay through Happay’s prepaid cards
o Over 2m websites currently use the Google Maps API
▪ ODFI: Originating Depository Financial Institution
▪ RDFI: Receiving Depository Financial Institution
▪ Open Banking: Banks partnering with third parties to offer customer a wider (and more
easily customized) set of services
▪ Correspondent Banking: Correspondent banking relationships between banks allow smaller
banks, which may not participate directly in a payments system, to access that system on
behalf of their customers through a relationship with a participant bank. Many smaller banks
in the US gain access to the wire transfer systems in this way. This model is also used
extensively for cross border payments
▪ Interchange: Interchange is a transfer of value from one intermediary in a payments
transaction to the other intermediary in that transaction. The payments system sets the
interchange prices, but does not itself receive the value of interchange. Interchange creates
an incentive for “one side” of the transaction to participate, by having the other “side”
reimburse some of the costs incurred
o The rationale for the unusual economic structure of interchange rests on the
concept that one “side” of the transaction, the merchant (and its acquiring bank),
benefits from the use of the card (primarily through increased merchant sales),
while the other “side”, the card issuer incurs costs associated with making this use
possible. Interchange is the mechanism the card networks established early on to
have the value receiving merchant compensate the cost incurring issuer for some of
the issuer’s expenses. It would be too complex, according to this rationale, to have
each issuer individually negotiate compensation with each merchant. The network,
by defining the appropriate cost reimbursement between the parties, defines how
the economics work
o As such interchange is an expense to the acquiring bank and revenue to the card
issuing bank (note that interchange on ATM transaction flows in reverse – the card
issuer pays an interchange fee to the ATM deployer for servicing the issuer’s
cardholder)
o Closed loop networks do not have interchange, although the network assesses to
the merchant a “merchant discount fee” which is generally similar to the merchant
discount fee than an acquiring bank charges for a merchant’s access to the open
loop networks. In a closed loop network, the entire discount fee is kept by the
network rather than being shared among three parties (acquiring bank, network and
issuing bank). As the traditional closed loop networks – Amex and Discover have

recently been opening up to working with acquirers to expand acceptance of their
card brands, they have created an analogous structure which provides
compensation to acquirers for their help in increasing acceptance
▪ MICR: Magnetic Inc Character Recognition
▪ Disbursement Float: The gap between what a corporation mails a check (and presumably
discharges its obligation to a vendor) and the time that the check is actually presented to its
bank for payment
▪ PAN / BIN / IIN: The key card data element is the PAN or Primary Account Number. The first
six digits of the PAN are the IIN, or Issuer Identification Number, which identifies both the
card network and the issuing bank. Earlier these digits were called the BIN, or bank
identification number. The American Bankers Association acts as the registration authority
for IINs and manages the allocation of IINs to issuers.
▪ Decoupled Debit Card: A normal signature debit card is issued to a consumer by a bank
different from the one at which the consumer has a checking account. The issuer authorizes
the merchant transaction through normal card authorization processing and then uses ACH
to pull funds from the consumer’s checking account – which the consumer registered upon
enrolment. The issuer keeps the signature debit interchange, but bears the risk of NSF or
fraud on the ACH transaction
o When the cardholder makes a purchase, the card issuer pays the retailer, and then
charges the cardholder’s bank account with an ACH transaction
o Only in the US; Capital One introduced the concept of decoupled debit card and at
that time in 2007, it did not offer the checking account facility to its customers
o Today, decoupled debit cards are typically issued and branded by retailers without
any association to a national network such as Visa, Mastercard. The retailer has
complete control over the issuing of the cards to their customers and the processing
of the payment. By definition, decoupled debit cards are processed via the Federal
Reserve ACH system as the mechanism for reaching a consumer’s checking account
as a debit to their account for their purchase
▪ Decoupled Transaction: Paypal provides the appearance of a sender’s funds arriving
instantaneously in the receiver’s account even though the transaction may actually be
funded using the sender’s credit card – using a system providing funding on a next business
day cycle. Paypal found it to its advantage to offer this instant payment capability, built the
systems, and designed its own set of operating rules to bring together disparate systems to
provide the solution
▪ Chip Technology: It generates a one-time use code for every transaction that is used to
authenticate that the transaction is originating from a valid card
▪ BACS: Bank Automated Clearing Service
▪ CHAPS: Clearing House Automated Payment System
▪ CVC: Card Verification Code
▪ CVV: Card Verification Value
▪ ATM Interchange
o Interchange fee is the amount charged if a consumer uses the ATM of the non-home
bank, that is, the bank, whose ATM is being used, charges the card-issuing bank
o In India, at present, the fee is Rs 15 per financial transaction. This has been
recommended to be revised to Rs 16.5 plus Service Tax (12%) taking the amount to
Rs 18.48
o The net issuers pay interchange fees and net acquirers are the ones who make
money from the issuers when customers use other than their own bank ATMs

o IAD: Independent ATM deployers
o ATM / Banking Networks: Accel, Star, NYCE or Shazam
o Every time a card is used, a small fee is added to the cost – and this is charged to the
card provided by the ATM operator
o This balances out in most cases, as when HSBC customers use their cards at
Santander machines, for example, this will cancel out the fees charged the other
way around
o When it comes to independent cash machine operators (non-bank machines), that
fee will instead go to the shop or business where the ATM is located, or to the
people who supply it. In other words, the more often a cash machine is used, the
more money a machine operator will make
o In areas where people take out money a lot, a cash machine operator pays the
owner of the premises rent for putting the machines there
o Rural India is largely underserved since banks were not keen on expansion. It was
white label operators that expanded into rural areas. But demonetization pushed
costs sky high for the ATM industry, the business became unviable and the network
shrunk. Other white label operators like Riddhi Siddhi Bullions have also had to bring
down their ATM network to 128 from 210 post demonetization. Only larger players
like Tata Communications Payment and BTI payments have been able to expand
their network.
▪ White Label: A manufacturing and marketing practice in which a product or service is
produced by one company and then rebranded by another company to make it appear their
own
o Traditionally, ATMs have respective bank’s logo. So just by looking, this is SBI’s ATM,
this is ICICI’s ATM and so on
o But white label ATMs doesn’t have such bank logo, hence called white label ATMs
o RBI has given license / permission to non-bank entities to open such ATMs
o Tata Communications Payments Limited: The first company to get RBI’s permission
to open white label ATMs. They started their chain under the brand name “Indicash”
o Other White Label ATMs: Muthoot Finance, SREI Infra, Vakrangee Software, Prizm
Payments, AGS, FSS (More than 15 companies given such permission by RBI)
o World’s largest ATM makers: Diebold Nixdorf and NCR Corp
▪ B2B Payment Gateway: The B2B payment gateway provides the essential buying experience
by synchronizing customer accounts including buyer information, purchase orders, purchase
history, fulfilment tracking, discount management, payments method (virtual card, bank
account information)
o Push Payments: Supplier Initiated Payments
o Pull Payments: Buyer Initiated Payments
▪ Gross Dollar Volume: Aggregate dollar amount of purchases made, and cash disbursements
obtained with Mastercard branded cards and the impact of balance transfers and
convenience checks (Total Spend / Total Value) (Also called as Purchase Volume)
▪ Transaction Volume: This represents the number of transactions using a Mastercard
branded card to make a purchase at a retail or service POS or virtually (E Commerce) (Also
called Purchase Transactions)
▪ Funded Credit: Advances given by banks including overdraft facilities
▪ Unfunded Credit: Guarantees such as LC for which banks charge a commission
▪ Dual Message Debit Transaction: A debit card transaction in which the data streams for
authorization and clearing are two separate events. Dual-message debit transactions usually

require a signature as the cardholder verification method, but that requirement can be
waived by the merchant or in some cases a personal identification number (PIN) can be
requested
▪ PIN Authenticated Visa Debit (PAVD): PAVD is a transaction type that operates using Visa’s
dual-message processing network and a PIN, should the merchant request it. A merchant
selling valuable good like electronics or jewellery who wants an additional level of
cardholder verification may utilize this transaction type. Around the time PAVD was
launched, Visa encouraged its adoption through the announcement of an incentive called
Fixed Acquirer Network Fee (FANF). FANF offers merchants a fixed monthly fee and lower
per-transaction fees, incentivising merchants to send as much of their transaction volume as
possible to Visa to maximize their incentive
▪ Single Message Debit Transaction: A debit card transaction in which the data sent from a
merchant’s terminals includes all the information necessary for authentication and clearing
all in a single event. These transactions are still commonly referred to as “PIN debit”
transactions even though personal identification numbers are not always required to
execute a transaction
▪ PINLess Debit Transaction: PINless debit, a single-message debit transaction that doesn’t
require a PIN, was first rolled out by the electronic funds transfer (EFT) debit networks to
support the use of debit for online bill payments. The transaction type is now available for all
online transaction types as well as lower-value purchases conducted in stores
9. Difference Questions
▪ On-Us and Off-Us Transactions: On us are same bank transactions and in Off Us, sending
and receiving banks are different
o On-us transactions occur when the bank intermediary is the same on both sides of
the transaction. Depending on the payments system, the transaction may stay
within the same bank (e.g. never be submitted to a clearing house or “hub” for
switching), in which case the bank settles the transaction through an internal book
transfer. In other systems, an on-us transaction is passed through the system and
returns to the bank, just like a regular “off-us” transaction. The growing
concentration of US banks is increasing the percentage of on-us transactions
▪ Offline Debit Transaction (Signature) vs Online Debit Transaction (Pin): Offline is more
useful for a bank as they are able to charge a higher interchange fee on this
▪ RTGS and ACH: RTGS is gross settlement and ACH is net settlement
o RTGS is real time whereas ACH / NEFT is batch
▪ Pass Through Digital Wallet and Staged Digital Wallet:
o In pass through digital wallet, the consumer selects the wallet operator method and
the card data is passed to retailer / merchant for processing at the time of the
transaction
o Consumer shares his / her account information with the digital wallet operator and
the digital wallet operator shares it with the merchant. Examples of pass through
wallets are Masterpass, V.Me and ISIS
o In staged digital wallet, the consumer selects the wallet operator method of
payment and funds are paid to the retailer from the wallet operator. The wallet
operator is funded with the consumer account data on file through a separate
transaction either at the time of the transaction (payment stage) or at a different
stage (funding stage) to “top up” the wallet account

o In a staged wallet, two separate transactions take place: a payment transaction and
a funding transaction
o Consumer shares his / her account information with the digital wallet operator, the
digital wallet operator crypts this information and shares it with the merchant
o The key distinction between the two wallets is that in pass through, merchant gets
to see the actual cardholder information and in staged, merchant sees only the
encrypted information
o Examples of staged wallets are Google, Paypal, Square etc.
▪ Dual Message vs Single Message: In dual message system, two transactions are required to
complete the payment (authorization network, clearing / presentment via Global Clearing
Management System) and in a single message system, a single transaction performs the
approval and debit to the cardholder account (previously known as Mastercard debit switch)
▪ Push Payments vs Pull Payments:
o Push Payments: The party who has funds is sending the money, so there is
essentially no risk of NSF, or non-sufficient funds. The transaction is initiated by the
sender’s bank, which knows that its end party has the money
o Pull Payments: The bank initiating the transaction does not know whether or not
the bank receiving the transaction will be able to successfully apply that transaction
to the credit or debit account of its customer. Furthermore, “pull” transactions
depend on the payer (who makes the payment) having authorized the “sender” of
the message to affect the transaction. A signed check to a merchant or a card swipe
with signature / PIN are examples of such an authorization
▪ White Label ATM vs Brown Label ATM
Brown Label ATM White Label ATM
When banks outsource the ATM operations
to a third party
When ATMs are owned and operated by non-
bank entities, but they are not doing
“outsourcing contract” from a particular bank
The private company owns & operates the
ATM machine, pays office rent. They
negotiate with the landlord, electricity
company, telecom company and so on
Same
The bank (which has outsourced this work)
provides cash for that ATM
Sponsor bank provides the cash
ATM has logo of the bank (which has
outsourced this work)
White Label ATM doesn’t have such logo. Not
even of the sponsor bank
RBI not involved directly. These outsourcing
companies have contractual obligations with
their respective banks
RBI directly involved because these white
label companies have to separately get
license / permission from RBI to run business
If you used card in your own bank’s ATM,
everything’s free
First five transactions are free every month
If you used your card on other bank’s ATM,
first 5 transactions are free (every month).
After that, commission charges of ~Rs 17-20
for taking out money and Rs 5-9 for making
balance inquiry or mini statement (This
commission directly charged on your
account)
Then, transaction fee of Rs 15 and balance
inquire fee of Rs 5, but commission is paid by
your bank to the white label company. The
bank cuts those charges from your account

▪ Initially, RBI did not permit white label ATMs, and banks wanted to reduce the operational
cost, so they came up with brown label ATM (outsourcing system)
▪ Debit Card Interchange vs Credit Card Interchange: Merchants pay less for accepting debit
card payments than they do for credit cards. Banks charge retailers fees for processing
payments to cover the cost of fraud and maintaining the networks. The interchange fee, as
it’s called consists of a fixed rate plus a % of the total sale – usually 1.8% for credit card
transactions and 0.3% for debit. The difference in interchange fees between the two
payment methods is due to the Dodd Frank – Financial Reform Act and the Durbin
amendment, which were signed into law back in 2010. The act puts caps on the fees banks
are allowed to charge on debit transactions, and left credit card ones unrestricted. This
difference results in the fact that some merchants may require a minimum purchase account
before accepting credit card transactions. The maximum allowable amount, by law, is $10.
Debit card minimums are less frequent, though they can happen
o Debit cards have lower interchange than credit cards because of the lower credit risk
o Reward cards have higher interchange costs to fund the reward programs to the
cardholders
o With credit card transactions, the merchant receives the payment in 2-3 days.
Consumer too can make the payment later for the credit card bill. So, the issuer is
accepting a degree of risk and thus charges higher fees to merchants
▪ Signature Debit vs PIN Debit
o In Person debit transactions – customer can choose to complete the transaction by
signing for it or by entering the PIN
o Signature Debit Transactions – Dual Message (just like credit card transactions)
o PIN Debit Transactions – Single Message
o Dual messaging is essential for car rentals, ride-sharing, e-commerce orders with
delayed shipments and many other transactions in which the final payment amount
may not be known at time of authorization. Dual message capability is critical in the
fast growing segments like digital commerce and the internet of things
o PIN debit transactions are processed through Interlink, Maestro, Star, Pulse, NYCE
etc.
o PIN debit transactions must be made via an encrypted PIN device, making the PIN
option unavailable for most web and mobile debit card transactions
o PINless debit transactions in which the PIN authentication is eliminated, also uses
the single message format
o PINless for CNP payments gives merchants the option to route transactions via
domestic networks instead of being limited to a card’s main global brand. This
option has previously been available to a small number of very large merchants, but
this is changing fast
o Debit cards used for online payments are signature debit transactions
o Interchange fees are higher for CNP transactions. The higher fee is to help offset the
costs of online gateway, higher risk with transactions, and increased frequency of
fraudulent transactions
o The major domestic debit networks – NYCE, Pulse, Star, Accel all now have the
capability to handle both single and dual message transactions. Single message
transactions should only apply to CNP order that are ready for immediate fulfilment.
This would apply to products in stock and ready to ship or virtual cards such as e-
tickets etc.

o Dual message transactions send separate authorization and settlement files: an
authorization file putting a temporary hold on customer funds and the settlement
file pulling those funds once goods have been dispatched
▪ PIN Debit Networks vs Debit Card Issuer Processors
o Under the Durbin amendment, a debit card must provide merchants with a choice of
at least two unaffiliated networks for transaction routing. Most issuers complied by
keeping a global network logo such as Visa’s or Mastercard’s on the front of the card
for signature transactions, while the back would display the logo of an EFT network
such as Accel for PIN based transactions
o For a while the arrangement diverted more than half the traffic on the Visa-owned
Interlink PIN debit network, the market leader, to its rivals. But Visa fought with new
programs to attract transactions, including its PIN authenticated Visa Debit (PAVD),
which capitalized on the backbone VisaNet network’s underutilized ability to handle
PIN as well as signature transactions
o In the past few years, EFT networks have been broadening their services and are
now directly challenging Visa and Mastercard on their signature turf, which accounts
for majority of the debit transactions
o Accel and its surviving EFT network cohorts originally offered PIN-authenticated
transactions, which used a so-called single-message format in which the
authorization and clearing and settlement functions were contained in one message.
Traditional signature debit transactions went over Visa and Mastercard networks in
so-called dual message format, one for authorization and, later, another for clearing
and settlement
o Offering signature debit gives the EFT networks access to potentially huge markets,
including e-commerce, where credit cards and Visa and Mastercard signature debit
cards dominate. Some networks and tech companies have tried for years to bring
PIN debit to the web, with little success
▪ NFC and EMV
o EMV is the security standard for the chip embedded in the card and NFC is the
technology that allows data to be read by compatible machines without contact
o Although NFC is most often associated with mobile payments and EMV is most often
associated with chipped cards, both technologies can be used in both payment
options. The NFC chip in mobile phones can also be used for contactless chip cards,
and the encryption that protects payment information on both is the EMV standard
o Many newer terminals allow you to accept both NFC and EMV payments, but its
important to note that some machines take only one or the other. Square, for
example, has a mobile card reader that accepts magnetic stripe cards and EMV
cards, but not NFC payments. (An NFC / EMV reader is available but it doesn’t take
magnetic stripe cards)
o NFC payments made with a mobile phone in-store by “tapping” the phone to an NFC
capable terminal are considered “card-present” transactions. Your card-present
pricing will apply. NFC in-app purchases are considered “card-not-present”
transactions and your CNP / e-commerce pricing will apply
o Not all smartphone payments require NFC capability
▪ Samsung Pay is equipped with magnetic strip emulation. That means a
customer can “slide” their phone along with your regular credit card
machine to pay. This means customers can use Samsung Pay even if you are
not equipped with NFC capable equipment

▪ Chase Pay utilizes QR codes. To make a payment, customers pull up the
Chase Pay option on their phone. Then, cashiers scan the QR code on the
phone’s screen
o At this point, EMV and NFC payments make up a small portion of overall card
processing payments. These numbers are expected to rapidly rise over the next 5
years as the technology’s usage becomes more widespread. EMV chip cards in
particular will see greater usage as banks phase out traditional magnetic strip cards
and consumers have no choice but to use chip cards
o NFC is not a payments technology; it applies to how devices communicate
o NFC is a set of standards that enables proximity-based communication between
consumer electronic devices such as mobile phones, tablets and personal
computers. NFC communications technology enables contactless EMV payments
o What makes NFC contactless payments stand out most is its speed. When you tap
your smartphone at an NFC-enabled reader, it takes a fraction of the time to process
a transaction than that of EMV chip or traditional credit cards.
o NFC also uses tokenization for added security, which EMV chip cards do not always
utilize. As a result, EMV’s security technology becomes obsolete for e-commerce
where there’s no way to utilize the chip. Instead, the chip cards become just as
secure as traditional swipe cards. Tokenization in NFC mobile payment systems like
Apple Pay, though, works both online and in store.
o The main drawback of NFC is the lack of standardization compared to EMV. Because
of its global standards, EMV upgrades has become an absolute necessity for
merchants. NFC, however, still lacks a streamlined set of rules and is plagued by
other misconceptions that thwart its way to faster growth.
o There are two different implementations of EMV technology: One is called Chip and
Signature, while the other is called Chip and PIN. The vast majority of EMV cards
issued in the US use Chip and Signature, which (as the name implies) still requires a
signature at the point of sale (when card is present). Chip and PIN cards are
compatible with terminals that require a PIN number, which is often the case at
unattended kiosks in Europe and elsewhere. Locations that require CHIP and PIN
equipped cards include train stations, toll booths and gas stations
10. Miscellaneous
▪ There are distinct categories of services and distinct positioning towards high volume low
margin versus low volume high margin ones. While the unbanked and under-banked
segment is huge, with 5.7bn of the world’s 7bn people, the 1.7bn people with an income of
over $10 a day represents an opportunity for high margin services
▪ Secondly, it is claimed that when interchange fees have dropped due to regulatory
intervention merchants have typically passed on just 50% of cost savings to consumers
▪ The Infocomm Development Authority (IDA) in Singapore played a key role in creating an
interoperable mobile payments service that was launched by all mobile operators and
initially powered by the DBS One Tap Card, the first virtual card on a mobile phone in
Singapore
▪ Kaching: An integrated mobile banking solution that allows face to face and remote
payment, payment to a mobile number etc.
▪ Nearly cashless countries: Belgium, France, Canada, UK, Sweden, Australia and Netherlands
▪ Tipping Point: US, Germany, Korea, Singapore, Japan

▪ Digital wallet adoption is high in Japan & South Korea
▪ Marketplace Lenders: Targeting lucrative credit card customers: People with large revolving
balances paying interest rates in the high double digits. They are aggressively marketing
their loans as a way to refinance expensive credit card debt
▪ Global B2B payments arena is supposed to be about $124trn, of which only $20trn is
negotiated at point of sale. The rest is negotiated via ACH, check or cash
▪ Cards based on program type
o Co-Branded Card: A co-branded card carries the brand of a partner separate from
the bank behind the card
o Affinity Card: Similar to co-branded cards, except that the bank’s marketing partner
is typically a charity, an association, educational institution etc.
▪ Card types based on technology
o Magstripe
o Chip / EMV
o Contactless
o Virtual
▪ There are two main types of schemes in merchant pricing
o Blocked Deposit: Blockage of transaction amount for certain duration on acquirer
o Commission Based: Next day payment to the merchant principle
▪ P2P digital payment services (Venmo) are an invaluable source of user acquisition and user
engagement in payments, because as free services often recommended by friends, they
jump start a user base and create loyalty
▪ Apple, Facebook, Google, Square are focusing their efforts on building a user base through
P2P services (Apple Pay Cash, Facebook Payments, Google Wallet, Square Cash etc.)
▪ Major US banks are now heavily invested as well, with their Zelle P2P service, which works
through mobile banking applications and is posting some impressive metrics
▪ These new P2P services poses risk to Paypal, who depends heavily on P2P for user growth
▪ We are not concerned about the threat to Visa and Mastercard, as the networks’ remittance
products (Visa Direct and Mastercard Send) power most P2P services
▪ Business can now buy what is referred to as “integrated payments” – their payment systems
(POS, terminals) and acquirer processing bundled with, and integrated into their overall IT
systems – the software and hardware they are using to run their business (e.g. a reservation
system for a hotel). The ability to deliver integrated payments is an important differentiator
in merchant acquiring and we have seen numerous acquisitions as a result (Vantiv –
Mercury, Global Payments and Heartland Payments, First Data and Card Connect, First Data
and Blue Pay)
▪ The role of merchant acquirers differs in an in-store environment, where the merchant
acquirer designs, installs and maintains POS systems compared to an eComm environment
where a merchant acquirer provides payment related software, a gateway and value added
services such as FX translation
o As a result, we have seen explosion of new entrants to merchant acquiring,
specialized in eCommerce e.g. Braintree, Stripe and Adyen
o At the same time, traditional acquiring is showing some signs of consolidation, as
players scale globally (Vantiv -WorldPay) and build integrated acquiring + IT
solutions
▪ B2B Payments Platforms: Xero, Paymint
▪ The personal payments are a $45-$50 trn opportunity (Domestic P2P: $12.5trn; B2C
disbursements: $35trn and cross border remittances: $0.5trn)

o In B2C disbursements, Mastercard provides the sender with a Mastercard personal
payment API and they can send the payment file to us. It displaces ACH by providing
a better consumer experience
o Most of the domestic P2P applications out there: Venmo, ACH, Google Wallet,
Western Union: None of them are real time. Only one real time is Square Cash
▪ At its most basic, every time you process a sales transaction, the merchant pays four fees
o A % of the transaction amount: The issuer gets paid by taking a percentage of each
sale, called the interchange. This fee varies depending on a bunch of things, such as
industry, sale amount, and type of card used. At last check, there were almost 300
different interchange fees
o Another % of the transaction amount: The credit card association (Visa, Mastercard
etc.) also charges a fee, called an assessment
o Yet another % of the transaction amount; The merchant bank takes a cut by
charging you a percentage fee. The amount here also varies by industry, amount of
sale, monthly processing volume etc.
o A dollar amount for every transaction processed: The payment processor (who
might also be your merchant bank) makes money by charging a fee, called an
authorization fee, every time you process a transaction (whether its’ a sale, a
decline, or a return – no matter). Plus, it can charge fees for setup, monthly usage
and even account cancellation
o Usually, the first 3 fees (the %) are all added together and quoted as a single rate
while the transaction fee is quoted separately (e.g. 2.9% + $0.30)
▪ Challenges of Cross Border Acquiring
o Regulatory / Licensing: Local license is required in each country – often linked to
having banking license or local issuing business
o Market Differences: Local schemes may exist, interchange and other local costs may
be very different, making it difficult to model
o Defensive Local Acquirers: Discount given from on-us interchange or prohibitive
(very low) bilateral interchange rates agreed
o Infrastructure: Requires local presence or local partner to deploy, maintain and
replace terminals etc.
o Language and Localization: Language on terminal, support language, legal
framework, local practices all put obstacles and barriers to enter a market
▪ B2B payments
o One reason for B2B payments not being evolved is there is a degree of risk aversion
when overhauling payment systems, in part because there is no guarantee that
companies suppliers’ would accept the payment form their clients prefer
o Factors in choosing the appropriate payment instrument for B2B Payments: Ease /
Convenience (includes speed), acceptance by suppliers, cost, better fraud
protection, better data security
o Many respondents anticipated using more ePayables for B2B payments over time.
This maybe because they expect the underlying technology to become more
sophisticated, be used more frequently or be accepted by more potential business
partners in the future
o Accounts Payable automation appears to be another increasingly popular B2B
payments innovation area, including services like ePayables, technology to
streamline payments and process invoices, invoice approval workflow software,
cloud services and data analytics. Moreover, accounts payable automation attempts

Payments 101 - Basics of Payments

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