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Financial Sector Spotlight: Card-based payments


Visa recently ran the “Kick the Cash” campaign aimed at promoting increased usage of Visa cards.

Report by Omen Muza

For three days from Thursday 27th to Saturday September 29 2012, Visa had a team of experts at Sam Levy’s Village fielding questions related to usage of Visa Cards.

The initiative, intended to highlight the utility of card-based payments at a time when the country is plagued by  general shortages of cash and, in particular, coins for change, made me realise how we readily use cards for payment purposes without ever thinking much about what happens in the background.

Resultantly, this week I decided to focus on the inner workings of card-based payments.

Before attempting to understand the transaction flow, let’s take a look at some of the key parties usually involved in a credit card or debit card transaction and their roles:

Cardholder: This is the consumer who holds the card that is used to make a purchase from a merchant.

Merchant: The individual or business — or in e-commerce, a Website — that accepts credit or debit cards in exchange for goods or services. Merchants must establish relationships with acquiring banks in order to process transactions and obtain cash from card purchases. Merchants can be supermarkets, car rental companies, hotels or any other retail outlet for goods and or services.

Card issuer: This is the financial institution or other party that makes available a credit limit against which it issues a card to the cardholder. This party is responsible for sending payments to merchants for purchases made with credit cards issued by that bank.

Card issuers, however, can’t issue cards all by themselves; they need the help of credit card companies.

Credit card companies: Visa and MasterCard are examples of credit card companies which provide payment processing networks and set transaction terms for merchants, card-issuing banks, and acquiring banks.

Visa is the network on which more banks issue their cards hence at the end of 2011, it had a total of 1,9 billion cards in issue while MasterCard had 1,1 billion.

This validates Visa’s payoff line “More people around the world go with Visa”. These statistics are reflected even in Zimbabwe, where of the card issuing banks sampled for this article, 11 are on Visa while only four are on MasterCard.

Acquirer: An acquirer or acquiring bank/financial institution processes credit or debit card payments for products or services, accepting payments on behalf of the merchant.

The term acquirer indicates that the bank accepts or acquires credit card transactions from the card-issuing banks. Acquirers need to be licensed with credit card companies such as Visa or MasterCard.

The transaction flow

Essentially, the transaction flow for a typical card-based transaction starts with the cardholder or consumer presenting the card as payment to the merchant, who then submits the transaction to the acquirer or acquiring bank.

The acquirer verifies the credit card number, the transaction type and the amount with the issuer or card-issuing bank and reserves that amount of the cardholder’s credit limit for the merchant.

An authorisation will generate an approval code which the merchant stores with the transaction. This entire process can take 10 to 15 seconds.

The consumer’s credit card is then charged and the acquiring bank receives the funds from the card-issuing bank and credits them to the merchant’s bank account.

The flow of information and money between these parties — always through the card associations — is known as the interchange hence the term interchange fees.

While cards may very well be the solution to some of Zimbabwe’s payment problems, the unstable state of the country’s telecommunications infrastructure coupled with power problems prevents their widespread use.

The cost of delivering card services is still beyond the reach of the majority at the bottom of the financial pyramid, so cards are likely to remain the preserve of the financial elite for the foreseeable future, forcing children of a lesser financial god to make do with mobile banking.

Typically, in order to secure an international debit card for instance, one has to pay a once-off application fee of $25,00 and another $25,00 in annual fees. Upon usage swipe fees cost $0,10 for local transactions and up to $3,50 for international transactions, irrespective of the size or nature of the transaction.

Lately, the issue of transaction or interchange fees has been a contentious one. Earlier in the year Visa, MasterCard and other card issuing banks agreed to pay US$6 billion in damages following a class-action lawsuit by seven million merchants. They also agreed to cut “swipe” fees for eight months, potentially giving merchants another US$1, 2 billion in relief.

The Future of Card Usage

Payment experts note that debit card usage is growing across the globe as consumers in developed markets are generally using their credit cards less due to the impact of the global credit crisis, while in developing markets some people are actually using debit cards for the first time.

The increase in debit cards is therefore attributed mainly to the banking of the unbanked.

While it is envisaged that cards will be around for a long time to come, markets such as Zimbabwe could leapfrog straight to mobile banking as has happened in Kenya where M-Pesa is pausing a strong competitive threat to other forms of payment, cards included. Locally, M-Pesa’s equivalent, EcoCash recently hit the 1.7 million subscriber mark and is still counting. Who knows what it could do to the local payments landscape.

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