Daily Deposit 3.2.2023

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Today in Banking

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Congress passes Corporate Transparency Act (CTA) to fight money laundering

Banking 101

How the heck do payments work?

Let's start with who are the players in the payment ecosystem. As you can see form the chart below there are several different players:

Issuing Bank: This is the bank that issued the card to the customer. In the current environment, this could be a card issued by a Fintech company through a sponsor bank relationship. Meaning the Topkey card actually was issued via the sponsor bank. Fintechs offering a banking products will partner with a middleware provider like Unit, providing a platform for banking services. An entity with a bank charter is the only player that has the license to provide cards. Hence the Fintech - Middleware - Bank relationships.

Acquiring Bank: Merchants who accept card payments typically pay a fee to the acquiring bank (bank that processes the transaction) for processing of the payment. A merchant, which can be another Fintech, can't process a payment without the bank. Insert Payfac, like Stripe. This is a payment facilitator 3rd party that helps merchants accept payments from customers. They are the intermediary between merchants and payment processors and simplify onboarding for merchants and handle the underwriting and risk management associated with payment processing.

Network: These are the 'rails' that card payments are processed on. Networks like VISA and Master Card provide the infrastructure and technology that enable payments to be processed securely and efficiently. They are the intermediary between the issuer and acquirer. Transactions are routed through the network in order for card details and availability of funds to be checked. The network also ensures security by implementing fraud prevention measures like authentication and verification.

So how do all these players make money in this ecosystem? Well there are few ways:

1) Interchange fees: When a card is swiped the issuing bank charges a fee to the merchant's bank, called an interchange fee. This is typically a percentage of the transaction amount. The amount will vary depending on the type of card used, debit or credit. Interchange is roughly 3% and split between the issuer and acquirer. If the issuer or acquirer are using a middle man like Stripe or Unit, these fees may be split even further.

2) Network fees: This is the fee paid to the network providing the rails for the transaction. This fee is paid by the acquiring bank.

3) Merchant fees: Merchants who accept payment typically pay a fee to the acquiring bank. Merchant fees, aka discount rate, is also usually a percentage of the transaction amount.

4) Annual fees: Some banks charge an annual fee for their credit cards, like that fancy metal AMEX Platinum. This varies from $0 to upwards of $650.

5) Interest charges: When a customer carries a balance on their credit card, they are charged interest on the unpaid balance. Unfortunately, credit card balances are currently at an all-time high in the US, >$900 billion, and many are carrying ~20% interest. Yikes!

6) Late fees: If these payments aren't made on time, customers will likely be charged a late fee.

In the example below, we can see a customer makes a $100 dollar payment at the merchant's store. The merchant receives $97. The remaining $3 is split between the issuer, acquirer, and network as described below. The acquirer receives the $3 initially, keeps it's cut, then pays the network fee to the network and the remaining interchange to the issuer.

As you can see, the relative amount per transaction is minimal. When you extrapolate this out to all of the transactions made in the course of a year, this is big time $$$. There was roughly $11 trillion, with a "T", in total card transaction value processed in 2022, and predictions from Insider Intelligence show 2024 will see over $14 trillion in total card transaction value.

This is a massive market providing serious revenue potential for banks in the card game. Banks should mix this in as another source of revenue as issuers, acquirers, or both…

LULZ

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a) like it

b) love it

c) gotta have it