session will cover: 1.credit cards – original purpose and successes 2.origins of interchange...
TRANSCRIPT
Session Will Cover:Session Will Cover:
1. Credit Cards – Original Purpose and Successes
2. Origins of Interchange
3. Interchange – Should Everyone Pay the Same?
4. Debit Cards
5. PINless Debit
6. Contactless Debit
7. New Technology
Credit cards are widely acknowledged as the most successful Credit cards are widely acknowledged as the most successful consumer financial service product in the past half-century; the consumer financial service product in the past half-century; the original rationale addressed important societal goalsoriginal rationale addressed important societal goals
• Supported widespread, non-collateralized lending to qualified consumers– At efficiency levels better than merchants could
provide (including lower cost of money)– With ability to use credit at any accepting merchant– And get instant gratification for purchases
• Facilitated more efficient electronic purchases– Provided merchants with guaranteed payment– Provided end-to-end electronic processing– Moved consumers out of cash and checks– Reduced fraud and NSF risk
Credit Cards
Original Purpose of InterchangeOriginal Purpose of Interchange
• Compensate issuers for costs of lending
• Compensate acquirers for merchant vetting and processing tasks
• Recover costs of network development and operation
• Manage costs of fraud, given guarantees provided
Although little is publicly available about interchange, it is possible to piece together some cohesive theories on the original rationale and structure; the structural components had clear purposes:
“Fraud is at a historic low at a time usage is expanding. FraudIn the US is just $.05 for every $100 spent”
Visa’s Patrick Gautier
Issues “Interchange”
Fixed per transaction fee regardless of total:– Assessed Fee (% of total sale) PLUS a per transaction fee of
$0.10 Credit and $0.15 Check Card ???
– “Know Your Customer” Loyal monthly customers present little if any risk yet are assessed by the same basic rate ???
CITIZEN PAYMENTS TO STATE & LOCAL GOVERNMENT FOR TAXES, AUTO RENEWALS, FISHING/HUNTING LICENSES AND OTHER VERYLOW RISK OR NO RISK PAYMENTS SHOULD BE TREATED AS A SPECIAL CLASS REGARDING INTERCHANGE RATES.
Interchange Fee could be fairly and equitably modified to at least give the appearance of cost = value of services rendered
Support NASACT’s Multi-State Alliance
The Basic Financial Breakdown of Interchange
Source: Diamond Cluster, 2005
The idea was to compensate transaction parties for the work they did
Customer (Cardholder)Purchase an item
Via INTERNET for $100
PAYS $100 ONTraditional
CREDIT CARD
PAYS $100 ON Check Card
(Internet Sale)
PAYS $100 FOR MONTHLY ELECTRIC BILLW/PINLESS DEBIT CARD
$1.85* + $0.10 (per item) to Merchant Acquirer
(retains 98.05)
$1.60* + $0.15 (per item) to Merchant Acquirer
(retains 98.25)
PAYS $0.50* to Merchant Acquirer
(retains 99.50)
MERCHANT MERCHANT ACQUIRER
Pays Discount Fees: Pays Various Fees:
$0.30* to Acquirer/ProcessorSplit between Acquirer/Processor
Auth,Capture, Settlemt
$1.55* To Card Issuer Interchange
$0.10* To Card Asso.Card Asso.
Network Assessm.
Fees:
Auth,Capture, Settlemt
Interchange
Card Asso./Network Assessm.$0.10* To Card Asso.
$1.40* To Card Issuer
$0.25* to Acquirer/ProcessorSplit between Acquirer/Processor
$0.18* to Acquirer/ProcessorSplit between Acquirer/Processor
$0.27* to Card Issuer(Interch)
$0.05* To Card Asso.
Merchant Processing
$0.03* to Network
POS Network
EXAMPLEPAY FOR SERVICES ON-LINE
USING PINless Debit
* Average Transaction Cost. Maximum Days to Deposit and Settle (2). The Credit and Check Card rate category are based upon Card Not Present/E-commerce Basic. Consumer Traditional Card. Card Not Present/Signature Not Obtained. Address Verification Required. Authorized. Invoice No. Required. Authorization Amount must equal Transaction Amount. $0.10 Per Item Fee for Credit and $0.15 Per Item Fee for Check Card. Pin rates represented here are based on historical data and published reports. The information presented is illustrative of the economics for the three forms of payment.Sources: AIM&Debit News, 2006 Visa Interchange Programs, Diamond Cluster, 2005 ,BetterbyDesign, Dec 2005
Debit Cards
• 3 Types of Cards– Credit Cards – the cardholder “pays later”– Stored Value – the cardholder “pays before”– Debit Products - You Pay Now.
• Two Major Types of Debit Authorizations:– PIN (Personal Identification Number) PIN Based Debit
• Run by Regional ATM Networks (Names like NYCE, Interlink, Cirrus, Honor, MAC, CashStation, Pulse)
– Check Cards (Authorized when you sign) Signature Based Debit• Evolved from credit card world
• Opened up millions of merchant acquirers to accept debit cards by processing as credit transactions.
PAYCARDS:
•Stored Value Cards
Stored Value Cards
processed by Merchants
processed by Merchants
as Signature Debit Cards
as Signature Debit Cards
with higher In
terchange
with higher In
terchange
Fee!Fee!
FLEX DEBIT CARD
• Quote from web page:MYCAFETERIAPLAN.COM
“The Flex Debit Card is actually a signature "debit card" or "stored value" card. It is not a credit card, but is to be treated as so when using it to pay for your eligible flexible spending account (FSA) purchases. The use of a Flex Debit Card will provide benefits to both the employer and employee.”
How is PINless Debit Used Today?How is PINless Debit Used Today?
• Allows ATM/Debit cardholders to pay bills at
Bill Payment Merchant Web site or via an interactive
telephone voice unit (IVRU), or call center
• Transactions limited to biller categories that fit a specific lowrisk model. Categories include telecom, cable, and satellite companies, utilities, insurance carriers, government agencies, and educational institutions.
– Transactions are processed online, in real time, similar to PIN debit transaction at point of sale (POS)
– Contains a unique transaction type to identify as a bill payment transaction
– Bill Payment Merchant assumes the transaction liability and is responsible for authenticating cardholder at time the transaction is initiated
Contactless Debits:Contactless Debits:
• The Same Product with a New FeatureThe Same Product with a New Feature• Uses RFID (Radio Frequency)
– Showing up as Employee Identification Passes• Security Fears are Just Growing Pains. • Migrates Card Payments into Areas Formerly Dominated by Cash
– High traffic areas where purchases are around $20 or less– Fast Food, Movie Theaters, Tolls, Parking Meters
• Big Investment Made by Visa/Mastercard/AMEX/Discover• Processed as Signature Debit via the Credit Card System
Pay PilotPay Pilot
Pay Pilot puts the power of contactless payments into merchant hands
Tuesday, August 16 2005
New offering promises to lower card acceptance fees and empower retailers :
“We had two prerequisites – installation within hours and return on investment within months,” said CEO Tom Bartz when announcing Accelitec’s new contactless payment solution. These are lofty goals for any payment system, but particularly for one that can enable credit, e-check/ACH, and stored value payments via a single contactless token.
So how can PayPilot reduce a merchant’s card-acceptance fees?In general, it is more costly for a merchant to accept a credit card payment than it is to take ACH/e-Check or stored value payments. That is because credit card fees are assessed as a percentage of the transaction value rather than a flat fee. For all but the very small transactions, the percentage fee exceeds the flat fee. Thus most merchants would rather steer a customer away from the credit card payment. On a $50 transaction, the cost difference between a credit card and an eCheck transaction could approach $1. Multiplying this additional cost across the many customers and business days it becomes clear that the incentive for a merchant to encourage these non-credit options is significant. But it is easier said than done.Mr. Bartz thinks that PayPilot makes this possible. With multiple payment mechanisms controlled by the same token, the choice can be more readily influenced. “The merchant can incentivize the customer to choose the better (lower-fee) form of payment,” he points out. “Give them a discount not to use credit or give them loyalty points to redeem on the next visit.”Even a gradual influencing of customer behavior can have a significant impact on a merchants overall basis point pool and bottom line.
PayPilot SolvesSolves the Payment Puzzle
