Payments 101. An Overview the US Payment Networks. René M Pelegero, President, Retail Payments Global Consulting Group

Transcription

1 Payments 101 An Overview the US Payment Networks René M Pelegero, President, Retail Payments Global Consulting Group

2 A Payment is an Exchange of Value Value Financial Non Financial In Financial Institutions Outside Financial Institutions Reward Miles & Points Goods & Services Deposits Credit Lines Credit Lines Cash Other Today, most payments are funded by credit lines and deposits being held at financial institutions 2

3 RPGC Payments Framework Delivery Layer Wallets Gateways Aggregators Other This layer evolved to address the deficiencies in traditional payment instruments Sometimes consumers think of this as the payment instrument Instrument Layer Credit Cards Debit Cards Prepaid Cards Network Layer VI/MC/AX. etc. EFT Networks ACH Networks RTN/Acct Numbers Check/Paper Clearing Houses Paper Docs (Checks, Boletos, etc.) Pre-Paid Vendors Value holders (e.g. financial institutions,) provide Payment Instruments to access the value Instruments contain credentials used to initiate transactions (e.g. account numbers) Payment instructions initiated by credentials must travel through payment networks Networks are sometimes branded & brands often extend to the instruments (e.g. Visa / Mastercard) Value Layer Credit Lines Deposit Accounts Stored Value Typically value is money which is kept in Financial Institutions Value is also a credit line or a stored value in a pre-paid account Copyright RPGC Group LLC 3

4 RPGC Payments Framework New Players New players entering across all Framework layers Players expanding their presence across other layers Delivery Layer Wallets Gateways Aggregators Other Instrument Layer Credit Cards Debit Cards Prepaid Cards RTN/Acct Numbers Paper Docs (Checks, Boletos, etc.) OBeP userid & password Phone # Network Layer VI/MC/AX etc. EFT Networks ACH Networks Check/Paper Clearing Houses Pre-Paid Vendors Telco carriers OBeP services C-stores Value Layer Credit Lines Deposit Accounts Stored Value Telco/Retailer Credit Lines Third Party Credit Lines Cash Other (e.g. FF miles, mobile minutes) 4

5 RPGC Payments Framework Multiple Access Points Consumers Merchants Delivery Layer Wallets Gateways Aggregators Other Instrument Layer Credit Cards Debit Cards Prepaid Cards RTN/Acct Numbers Paper Docs (Checks, Boletos, etc.) OBeP userid & password Phone # Network Layer VI/MC/AX etc. EFT Networks ACH Networks Check/Paper Clearing Houses Pre-Paid Vendors Telco carriers OBeP services C-stores Value Layer Credit Lines Deposit Accounts Stored Value Telco/Retailer Credit Lines Third Party Credit Lines Cash Other (e.g. FF miles, mobile minutes) 5

6 Payments Mix and Match Pay Before Pay Now Pay Later How/when consumers pay Merchant Pull Consumer Push How merchants collect funds Batch Based Networks Real Time Networks Speed of funds transfer Paper Checks Bank Transfers (ACH, Giro) Local Payment or Pre-paid Cards Int l Credit & Debit Cards ATM/EFT Wire Transfer (SWIFT, Fedwire) 6

7 Payment Networks Around The World 7

8 Payments 101 Card Based Networks

9 Card Processing Models Two Corners Merchant issues card and has direct relationship with cardholder Pros Sometimes a third party acts as issuer on behalf of merchant (e.g. GE, Citi) Lower payment cost, support promotions, better consumer data Cons Credit losses, cardholder can only use card at issuing merchant Merchant Cardholder 9

10 Card Processing Models Three Corners A Third Party card issuer has relationships with both cardholder and merchant and acts as intermediary between them in a transaction Pros Access additional consumers Cons Higher payment costs, additional contract & reconciliation processes Some 3-corner model brands turning into 4- corner Merchant Cardholder 10

11 Card Processing Models Four Corners Card Issuer has a relationship with cardholder but not merchant; Card Acquirer has a relationship with merchant but not cardholder. GPPC Brand acts as intermediary between four parties in transaction Acquirer Issuer Merchant Cardholder 11

12 Card Processing Models Introducing Processors Acquirers and Issuer can perform their functions themselves or engage third party processor to perform some or all of their functions Acquirer Issuer Processor Processor Merchant Cardholder 12

13 Card Processing Models Introducing Gateways and PSPs Sometimes merchants use Gateways or Payments Service Providers (PSP) as connectivity tool to access multiple acquirers or to access alternative forms of payment Gateway or Payments Service Provider (PSP) Acquirer Issuer Merchant Cardholder 13

14 Card Processing Models Introducing ISOs Some Acquirers employ Independent Sales Organizations (ISOs) to solicit and sell card acceptance services to smaller (e.g. mom and pop ) merchants Independent Sales Organizations (ISO) Acquirer Issuer Merchant Cardholder 14

15 Four Corner Model Authorization Request Merchant swipes card through POS device and enters transaction amount POS devices composes message including CVV and Track 2 data and sends it to merchant acquiring bank Acquiring bank sends authorization request to Issuer via the GPPC Brand switch Acquirer Issuer Merchant-Device-ID CC Number Amount Curr CVV TRK2 ExDt Time Stamp USD 425 xxxxx 01/ Merchant Cardholder 15

16 Four Corner Model Authorization Request Processing Issuer (or its processor) receives authorization request Issuer performs a number of checks prior to authorize transaction Response must be delivered back to VI/MC in less than 5 seconds average Issuer Approved Ask customer to sign sales receipt Check card data (e.g. check digit) & run fraud checks Run velocity & limits checks Run behavioral checks Check balances and open to buy Place HOLD on authorization amount Compose response message Declined Call (referral) Pick-up Ask for another payment instrument Contact voice authorization center Keep card No Match Keep card & Code 10 16

17 Four Corner Model Authorization Request Reply Issuer replies with a response code and an authorization code If transaction is approved, customer must be asked to sign receipt and merchant captures the transaction If transaction is declined, customer must be asked for another payment instrument Acquirer Issuer Merchant-Device-ID CC Number Amount Curr CVV TRK2 ExDt Resp Auth # Time Stamp USD 425 xxxxx 01/ Merchant Cardholder 17

18 Four Corner Model Special Authorization Cases Stand-In Processing Provided by VI/MC whenever an Issuer cannot deliver a timely response to authorization requests Balance Inquiries & Partial Authorizations In support of pre-paid cards and allowance of split tender Estimated Authorization Amounts Allowed only to special merchant category codes (e.g. T&E and transit, fuel dispensers, some service related merchants) Allows for incremental authorizations Authorization Reversals To undo the effects of an authorization when transaction is not completed or amount is less than authorized amount Must be done within 24 hours (Card Present) or 72 hours (Card Not Present) E-Commerce/MOTO (Card Not Present) Merchants Additional information requirements Batch processing 18

19 Four Corner Model CNP Authorization Request* Merchant asks for billing address and Card Verification Value (CVV2) Merchant servers compose message and sends it to merchant acquiring bank Acquiring bank sends authorization request to Issuer via the GPPC Brand switch Acquirer Issuer Merchant-Device-ID CC Number Amount Curr CVV2 Billing Address ExDt Time Stamp USD Main St. Anytown, CA / Merchant 3 digit Card Verification Number * Not including 3DSecure processing Cardholder 19

20 Four Corner Model CNP Authorization Processing* Issuer (or its processor) receives authorization request Issuer performs a number of checks prior to authorize transaction Response must be delivered back to VI/MC in less than 5 seconds average Additional Checks Issuer Approved Declined Ask customer to sign sales receipt Ask for another payment instrument Check card data (e.g. check digit) & run fraud checks Check CVV and AVS Run velocity & limits checks Run behavioral checks Check balances and open to buy Place HOLD on authorization amount Compose response message Call (referral) Contact voice authorization center Pick-up Keep card No Match Keep card & Code 10 * Not including 3DSecure processing 20

21 Four Corner Model CNP Authorization Reply* Issuer replies with a response code, an authorization code, AND a CVV and AVS result codes If transaction is approved, CVV and AVS match, proceed and capture, transaction If transaction is approved, but CVV and AVS do not match, merchant must decide if to proceed If transaction is declined, customer must be asked for another payment instrument Acquirer Issuer Merchant-Device-ID CC Number Amount Curr CVV ExDt Resp Auth # CVN AVS Time Stamp USD / Y P Merchant * Not including 3DSecure processing Cardholder 21

22 Four Corner Model Fraud and Risk Management Address Verification (AVS) Issuer matches the numeric values of the billing address with the billing address submitted in authorization request Can result on full match, partial match, or no match but issuer will not decline transaction Card Verification Value 2 (CVV2) Issuer matches number provided in authorization request against its own calculated value Can result on a match or no-match some issuer will decline transaction on nomatch 3D Secure (Verified by Visa and MasterCard s Secure Code) Requires cardholder enrollment with issuer where s/he obtains a userid/password Cardholder is re-directed to issuer for authentication Can result on an authenticated or non-authenticated transaction Other Tools Neural networks Risk scores EMV 22

23 Dynamic Currency Conversion Definition Allows merchants to charge the card (and submit the transaction for settlement) in the currency of the card, rather than the merchants normal transaction currency Benefits Merchants get some of the foreign exchange revenue that used to go exclusively to VI/MC and the issuer bank Merchants get to close more sales as studies have shown that consumers like to pay in their own currency Drawbacks Consumers are double charged as VI/MC and the issuers charge a cross border transaction fee regardless of currency to replace the old currency conversion fee International and cross border assessments could eliminate any FX gains 23

24 Dynamic Currency Conversion 24

25 Dynamic Currency Conversion % Cross Border Conversion Fee DCC Income 15 Minus 1.85% Assessment Or 9.25

26 EMV What is EMV? EMV = Eurocard, MasterCard, Visa Name of security standard implemented on chip in credit cards Standard implemented across Europe, Asia and many other countries around the world (e.g. Canada) How does it work? Chip only POS reads Chip and ensures the card is authentic (i.e. not forged) Chip and PIN POS reads Chip and ensures the card is authentic (i.e. not forged) PIN ensures that the user of the card owns the card State of Affairs Oct liability for counterfeit card transactions shifts to party not equipped with EMV (2020 for fuel dispensers) 2.3 million EMV chip card accepting merchant locations and 62% of Visa cards have chips* * Source: Visa Inc. as of June

27 Four Corner Model Clearing, Settlement, Funds Transfer Merchant (or its processor/gateway) transmits all transactions to Acquirer for a given processing period Acquirer collects all transactions from all its merchants and submits them to the appropriate card scheme (e.g. Visa or MasterCard) Acquirer Issuer Merchant-Device-ID CC Number Amount Curr CVV ExDt Resp Auth # CVN AVS Time Stamp Merchant-Device-ID CC Number Amount Curr CVV ExDt Resp Auth # CVN AVS Time Stamp Merchant-Device-ID CC Number Amount USD Curr 425 CVV 01/08 ExDt 000 Resp Auth # Y CVN P AVS Time Stamp Merchant-Device-ID CC Number Amount USD Curr 425 CVV 01/08 ExDt 000 Resp Auth # Y CVN P AVS Time Stamp USD / Y P USD / Y P Merchant 27

28 Four Corner Model Clearing, Settlement, Funds Transfer VI/MC collect transactions from all Acquirers (or their processors) VI/MC calculates interchange and fees and sorts transactions by destination BIN VI/MC prepares & sends files to issuers (or their processors) for posting Check acquirer files Calculate acquirer fees and assessments Sort by BIN Calculate Issuer fees and assessments Calculate Net Position for Acquirers and Issues Create and transmit outbound files to issuers 28

29 Four Corner Model Clearing, Settlement, Funds Transfer VI/MC advice all member banks of their respective net positions each settlement day VI/MC settle Net Positions with its members through Wire Transfers (e.g. Fedwire or SWIFT) Acquirer Issuer 29

30 Four Corner Model Consumer and Merchant Settlement Issuer collects payment from cardholder plus any finance fees if the cardholder does not pay the full amount (i.e. revolves ). Acquirer pays merchants the value of the transaction minus any Merchant Service Fees (MSF) Acquirer Issuer 30

31 Four Corner Model Merchant Service Fees (MSF) Merchants have two options to pay for processing fees Discount based (e.g. 3.00% - Acquirer pays merchant $97.00 on a $100 transaction, Pass-through plus fee (e.g. $0.05/transaction Acquirer pays merchant $98.07, netting $0.05) Pass through fees are fees charged by Visa and MasterCard, not the Acquirers Discount Transact ion Fee Card Scheme fees Card Brand 4% Acquirer 5% Other Fees Interchange Assessments Issuer 90% Approximate Breakdown of $1 Merchant Fees (USA) 31

32 Four Corner Model Dispute Processing Three Steps Copy or Retrieval Request Chargebacks Pre-Arbitration and Arbitration Chargeback types Technical Service Related Fraud Special Cases Mail Order and e-commerce Merchants Recurring Transactions 32

33 Four Corner Model Dispute Processing Copy/Retrieval request follows the same paths and it is usually performed before a dispute is submitted as a chargeback VI/MC send chargeback to Acquirer after Including financial impact on Net Position Acquirer forwards chargeback to merchant after including financial impact on net settlement Acquirer Issuer issuer sends chargeback Information electronically to VI/MC Merchant accepts the chargeback or resubmits transaction ( representation ) with supporting documentation to validate original transaction Merchant Cardholder cardholder initiates dispute 33

34 Four Corner Model Dispute Processing Visa and MasterCard differ regarding the handling of second chargebacks. Visa does not support 2 nd chargebacks, asking instead to go to pre-arbitration Acquirer reviews representation and, if it believes the supporting information is adequate represents transaction and supporting information to VI/MC Acquirer VI/MC forward representation to Issuer after Including financial impact on Net Position Issuer Issuer may accept representation and re-post transaction to cardholder s account or alternatively go to pre-arbitration (Visa issuers) or submit a second chargeback (MasterCard issuers) Merchant Cardholder 34

35 Card Based Payment Attributes Global GPPC Cards are accepted pretty much anywhere around the world Timely Card payments are authorized and guaranteed to merchant. Payment to merchant is usually within 2 days Expensive Because of interchange and assessments, GPPC fees can be very expensive in certain countries 35

36 Payments 101 EFT Networks

37 USA EFT Networks Historical Evolution Origin of EFT Networks Created in the late 1970 s to allow banks to share ATM access amongst member banks customers Generally owned by member banks They were primarily local each state had at least one network Evolved in the early 1980 s to support transactions at the Point of Sale using a PIN Evolution PIN Pad requirement limited the networks expansion to supermarkets and fuel stations A merger and consolidation trend started in the late 1980 s which reduced the number of networks to 4 major ones and a small number of special affiliations networks 37

38 US EFT Networks Footprint Specialty EFT Networks Card Scheme Owned Networks 38

39 Cards Can Have Multiple Personalities Signature based, international use Signature based, international use International ATM use International ATM use International POS use International POS use Domestic ATM use Domestic ATM & POS use Domestic ATM & POS use Domestic ATM use 39

40 EFT Networks Alternatives & Dilemmas* MERCHANT More expensive BANK More profitable Less expensive Less profitable * Price differential applies only to unregulated debit cards. All regulated debit cards cost the same to the merchant and generate the same revenue to bank Copyright RPGC Group LLC

41 EFT Network Attributes PIN Requirements Merchant must invest in PIN Pad devices Domestic Only Most PIN based cards can only be used domestically Less Expensive than GPPC Applies only to Non Durbin Regulated Debit Cards Less Prone to Fraud PIN based transactions have proven to be more secure than signature based transactions 41

42 Payments 101 Bank Transfer or ACH Networks

43 Automated Clearing House (ACH) Origin Deposit and funds availability delay Printing and mailing costs Lost, stolen and fraudulent checks Mail Delays 43

44 Automated Clearing House (ACH) Origin 44

45 ACH Processing A Four Corner Model There are two Clearing House Operators in the US: The Federal Reserve Bank and The Clearing House (private) A Financial Institution can be both a ODFI and a RDFI at the same time Transactions can be both credits and debits to a Receiver s account ODFI Clearing House RDFI Originator Receiver 45

46 ACH Processing Written Authorization An Originator must have a written authorization (sometimes called a mandate) to debit a consumer s bank account Written Authorization is a paper document which is NOT sent to the RDFI and is only used in case of disputes ODFI Clearing House RDFI AUTHORIZATION AGREEMENT FOR DIRECT PAYMENTS (ACH DEBITS) Company Company Name ID Number I (we) hereby authorize, hereinafter called COMPANY, to initiate debit entries to my (our) Checking Account / Savings Account (select one) indicated below at the depository financial institution named below, hereafter called DEPOSITORY, and to debit the same to such account. I (we) acknowledge that the origination of ACH transactions to my (our) account must comply with the provisions of U.S. law. Depository Name Branch City State Zip Routing Account Number Number This authorization is to remain in full force and effect until COMPANY has received written notification from me (or either of us) of its termination in such time and in such manner as to afford COMPANY and DEPOSITORY a reasonable opportunity to act on it. Name(s) ID Number (Please Print) Date Signature NOTE: DEBIT AUTHORIZATIONS MUST PROVIDE THAT THE RECEIVER MAY REVOKE THE AUTHORIZATION ONLY BY NOTIFYING THE ORIGINATOR IN THE MANNER SPECIFIED IN THE AUTHORIZATION. Receiver 46

47 ACH Processing Origination Originator sends daily file(s) to ODFI with all credit and debit transactions ODFI collects all the transactions (both credits and debits) from all Originators and sends them to Clearing House Sometimes the net value of these files can be $0.00 ODFI Clearing House RDFI Originator Receiver 47

48 ACH Processing Clearing House Processing Clearing House calculates all processing fees and net position there is NO INTERCHANGE Clearing House pays/gets paid on the ENTIRE FILE, even though account existence and funds availability may not have been verified Clearing House Check acquirer files & validate data Sort by ABA- RTN Calculate processing and NACHA fees Calculate Net Position for ODFIs and RDFIs Create and transmit outbound files to issuers 48

49 ACH Processing Clearing, Settlement, Funds Transfer Clearing House settles net positions by crediting and debiting the DFI s accounts with the Federal reserve Bank NACHA also collects a fee on every transaction to offset rule making costs ODFI Clearing House RDFI 49

50 ACH Processing Clearing, Settlement, Funds Transfer ODFI pays or gest paid by Originator on the entire value of the file submitted, even though account existence and funds availability may not have been verified. Fee is pennies per transaction RDFI credits or debits Receivers directly to bank account. If Receiver is an individual, generally no fee is charged ODFI Clearing House RDFI Originator Receiver 50

51 ACH Processing Same Day ACH Moving from 1 clearing and settlement cycle per day to 3 cycles per day 51

52 ACH Processing Dispute Processing Copy/Retrieval request follows the same paths and it is usually performed before a dispute is submitted as a chargeback Clearing House send Return to RDFI after Including financial impact on Net Position ODFI forwards Return to merchant after including financial impact on net settlement ODFI Clearing House RDFI issuer sends chargeback Information electronically to VI/MC Merchant accepts the return, resubmits transaction ( representation ), or contacts Receiver for alternative account information Originator Receiver Receiver initiates Dispute by submitting a WSSUP 52

53 ACH Processing Attributes Domestic only International ACH only through gateways Inexpensive A flat transaction fee, usually pennies per transaction Time delay Lack of authorization and validation capabilities and delays in confirmation of payment increase the risk of debit transactions 53

54 Payments 101 Payment Network Economics

55 Payment Economics Cost per $50 Transaction in $$ Card present, Visa & MC using Signature and World card types, all transactions are domestic and properly authorized. Fees like FANF and similar monthly fees not added 55

56 Payment Economics Cost per $50 Transaction as % Card present, Visa & MC using Signature and World card types, all transactions are domestic and properly authorized. Fees like FANF and similar monthly fees not added 56

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