Overview of Cards ecosystem. April 2016

Transcription

1 Overview of Cards ecosystem April 2016

2 Content Debit card ecosystem Card processes overview Revenue flow in the ecosystem Charges Slide 2

3 Content Debit card ecosystem Card processes overview Revenue flow in the ecosystem RuPay Charges Slide 3

4 Market Overview: Two sided market A two-sided market consists of two distinct groups ; cardholders and retailers ; that provide each other with benefits. Cardholders want a payment card that they can use at as many merchants as possible. Merchants want to accept a payment card that is carried by as many customers as possible. Like other two-sided economic models, the cards payments system must balance the needs and desires of all of those involved. Slide 4

5 Players in card ecosystem Merchant Acquirer Issuer Card Scheme It is the store, restaurant, hotel, or other entity that accepts the card as payment It is the financial institution that signs up merchants and manages the merchant relationships to accept card payments It is the financial institution that issues cards to its consumers It provides the network that allows transactions between all the parties i.e. merchants. acquirers and issuers Slide 5

6 Types of merchants Merchant Category Code Merchant category code defines the merchant s type of business. It designates the principal trade, profession, or line of business in which a Merchant is engaged Channel The channel will define the transmission media of the transaction. It can be POS, ECOM, IVR etc. Card Present environment: In a POS environment, physical card is accepted Card not Present environment: Channels like ecommerce, IVR and mobile accept cards details for processing transaction. Slide 6

7 Issuing Banks Linking cards to account Account Opening Issuing banks target customers to open retail CASA accounts Customer applies for a savings account Bank generates a savings account Customer applies for a debit card Bank authorizes the application and issues the debit card to customer Bank links the card to the savings account Bank sends the debit card and pin to the customers Issuing Banks take majority of liability for the cardholder including aspects like fraud, incentivisation, activation and usage of card Slide 7

8 Acquiring Bank Merchant Relationships The acquiring banks ties up with multiple merchants for acceptance of card payments across channels Major Channels of Acquiring ATM POS Ecommerce The Bank sets up ATM network. It receives interchange from the issuer for the transactions acquired on their ATMs Banks set up POS networks Banks receive merchant discount rates from merchants and pay interchange to the issuer Banks provide payments gateways to merchants Banks receives Merchant Discount Rates and pays interchange to issuer Slide 8

9 Role of scheme Dispute Management Risk Management Authorization Transaction Settlement Network Training & Support MIS & Analytics Testing & Certification Core Role International Acceptance E- commerce/iv R/Mobile Slide 9

10 Types of cards Debit Cards Prepaid Cards Credit Cards Buy Now, Pay now Pay First, Buy Later Buy Now, Pay Later Linked to bank account for real- time debit Debit cards support online transactions Limited credit risk to issuers as it is linked to retail CASA bank account Pre-loaded with desired amount Avoids exposure of banks account or credit card information, credit check not required Recharge activity required Gift cards, reimbursement cards and travel cards are the major prepaid cards in Indian market Not linked to bank account No recharge activity required Credit risk borne by issuing bank Other variant of credit cards include charge cards. Slide 10

11 Type of authentication Signature Based Pin Based Smart Card(Chip Based) The authentication is done based on magnetic strip reader and signature of the customer 99% of the cards issued in India are magnetic strip cards Although widely prevalent, the risk is higher in this form of authentication The authentication is done based on magnetic strip on the card and pin which is provided by the customer This is considered more secured than the signature based cards The authentication is based on the chip on the cards and pin This is considered to the most secured technology in the current scenario Chip prohibits any skimming of card details and pin provides another layer of security to the cardholder Slide 11

12 Content Debit card ecosystem Card processes overview Revenue flow in the ecosystem Charges Slide 12

13 Definitions 01 Authorization Authorization After a merchant swipes the card, the data is submitted to merchant s bank, to request authorization. The acquirer then routes the request to the card-issuing bank, where it is authorized or denied, and the merchant is allowed to process the sale 02 Batching Batching At the end of a day, the merchant reviews all the day s sales to ensure they were authorized and signed by the cardholder. It then transmits all the sales at once, called a batch, to the acquirer to receive payment. 03 Clearing Clearing After the acquirer receives the batch, it sends it through the card network, where each sale is routed to the appropriate issuing bank. The issuing bank transfers the amount back to the acquirer through the network 04 Funding Funding After receiving payment from the issuer, minus interchange fees, the acquirer subtracts its discount fee and sends the remainder to the merchant. The merchant is now paid for the transaction, and the cardholder is billed. Slide 13

14 Authorization Step 1: After cards holder uses the card, the merchant sends the authorization request to the merchant s acquiring bank Step 2&3: The acquirer routes the transaction to the issuer through RuPay. Step 4-8: The Issuer authorizes i.e. approves or declines the transaction and sends the response back to RuPay which is sent back to merchant through acquiring bank. Slide 14

15 Clearing & Settlement Step 1 & 2: Merchant submits the transactions to the acquiring bank kfor payment and the acquiring bank submits the clearing file to network for settlement. Step 3,4&5: The network clears the submitted file after which the Issuer posts the entry to cardholders account Or Disputes transaction Step 6&7: Card scheme completes the settlements by debiting issuer settlement account and crediting acquirer settlement account Slide 15

16 Transaction Processing Types Single Messaging System ( SMS) Dual Messaging System ( DMS) In a single message system, there is no need for the acquirer to present a separate clearing file for successful online authorizations Each successful authorized transaction is considered directly for settlement by the cards schemes Maestro product by MasterCard and RuPay debit card are examples of Single Messaging system All ATM transactions are settled through SMS Dual message system transactions are the ones in which authorization and clearing file transmission occurs in two separate steps Unlike in SMS transactions, the acquirers need to send separate presentments for the transactions they wish to claim for settlement Visa Product and MasterCard product settlement process for non ATM transactions are currently on Dual Messaging System Slide 16

17 SMS vs. DMS Authorization Automatic Download RGCS Clearing & Settlement SMS Auth Fees No Fees After the authorization stage, all successful transactions are considered for clearing and settlement at end of day. Authorization Presentment by acquirer RGCS Clearing & Settlement DMS Auth Fees Clearing and settlement Fees After authorization stage, the acquirer presents the file to the scheme system post which clearing and settlement cycle takes place Slide 17

18 Dispute Management Acquirer Transactions routed to RuPay RuPay Transactions sent to Issuer Issuer Retrieval request Request fulfillment Retrieval request Request fulfillment RR Charges Disputes sent to Acquirer Issuer raises Disputes Submits Re-presentments Re-presentments sent to Issuer If the issue is not resolved through any of the above mentioned means, members can raise Arbitration or compliance Arbitration/ Compliance Charges Slide 18

19 Content Debit card ecosystem Card processes overview Revenue flow in the ecosystem Charges Slide 19

20 Important terminologies Merchant Discount Rate The rate charged by the acquiring bank to the merchants is termed as the merchant discount rate Merchant fees are often explicitly formulated on an interchange-plus basis. Interchange Fees The transfer rate exchanged between financial institutions each time a payment is done at ATM & POS locations Interchange provides a fair mechanism for fuelling business growth and sharing system costs and benefits Network Fees The networks charge various fees to members to recover their transaction processing costs Such fees may be charged on a daily, monthly or quarterly basis. Slide 20

21 Network Fee and Interchange flow in POS Network Fees Issuers Customers Networks Interchange Fees Price markup Network Fees Acquirers MDR Merchants Flow of funds MDR flow When a customer uses the card for a Off Us transactions, the acquiring bank pays interchange to the issuing bank which it recovers from the merchants through MDR Slide 21

22 Content Debit card ecosystem Card processes overview Revenue flow in the ecosystem Charges Slide 22

23 Network Charges Fee Categories Transaction Level Fees Service Level Fees Transaction level fees are charged to the members for processing their transactions through RuPay network The major transaction level fees are as follows: Authorization Fees Clearing & Settlement Fees Service level Fees are charged to the members for the different service offered by the scheme. These are usually fixed charges unrelated to transactions with the exception of assessment fees Membership fees Assessment Fees Training & certification Fees Network connectivity fees Audit & license Fees Slide 23

24 Transaction Level Charges Authorization Charges Charged at per transaction flat fee to its member banks for authorization The fees will be based on a tiered structure to encourage members to reach the slab with lowest fee Clearing and Settlement Charges Clearing and settlement fees to its customers for routing transactions through Network This will also be a per transaction fee Slide 24

25 Service Level Charges Assessment Fees Fees charged to the member bank quarterly for using Network brand. Monthly Administrative Fees It will a monthly fixed fees for all member banks Training Fees Network providing training to its members. Audit Fees Audit fees to its member Certification Fees Certification fees to it members Arbitration/compliance Fees The arbitration fees have been kept high to discourage member banks to file arbitration cases Slide 25

26 Thank you