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

Transcription

1 Retail Payments Global Consulting Group L.L.C. 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

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 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 All rights reserved

4 RPGC Payments Framework New Players New Instrument, Network, and Value layer elements are being introduced 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) Copyright RPGC Group LLC All rights reserved

5 Payments is A 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 Payment Networks Around The World

7 Retail Payments Global Consulting Group L.L.C. Payments 101 Card Based Networks

8 General Purpose Payment Cards (GPPC) Can be used globally Can support multiple currencies Can be credit or debit depending account type being accessed Strength is their brand recognition

9 Local Payment Cards Can only be used in the country of issuance Generally support only one currency Most are debit cards Well recognized in their countries but many are cobranded allowing them to be used internationally

10 PIN Based Cards Can only be used with a PIN (PIN Pad) Most are domestic cards only Primarily debit cards

11 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

12 Co-Branded Cards and Affinity Cards GPPCs issued with a third party name on the face of the card Issued by a bank ( funding source is a bank credit line) Third party (retailer or sponsor) actively engaged in recruiting cardholders for a bounty

13 Corporate and Purchasing Cards Specialized cards issued to corporations for purchases and for travel & entertainment Specialized issuers that provide detailed reporting to corporate accounting depts. Different fee structure than consumer cards

14 Private Label Credit Cards Funding source normally outside financial institutions Generally, they can only be used at the retailer that issued the card Provide more consumer data than GPPCs

15 Pre-Paid & Stored Value Cards Issued by retailers, financial institutions, and companies that specialize in the business Can be open loop (e.g. Visa or MasterCard) or closed loop (e.g. Starbucks) Huge growth area in last few years

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

17 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

18 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 Brands ( i.e. VI/MC) act as intermediaries between four parties in transaction Acquirer Issuer Merchant Cardholder

19 Card Processing Models Acquirers, Processors, ISOs, & Gateways Acquirers and Issuer can perform their functions themselves or engage third party processor to perform some or all of their functions Merchant can connect directly to acquirer (or processors performing the work on behalf of an acquirer), Independent Sales Organizations or ISOs, or Gateways Gateways and processors do not assume financial responsibility for transactions, ISOs and Acquirers do Acquirers Issuers Processor Processor ISO Gateway Merchant

20 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 VI/MC switch Acquirer Issuer Merchant-Device-ID CC Number Amount Curr CVV TRK2 ExDt Time Stamp USD 425 xxxxx 01/ Merchant Cardholder

21 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 Declined Ask for another payment instrument 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 Call (referral) Contact voice authorization center Pick-up Keep card No Match Keep card & Code 10

22 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 Merchant-Device-ID CC Number Amount Curr CVV TRK2 ExDt Resp Auth # Time Stamp USD 425 xxxxx 01/ Acquirer Issuer Merchant Cardholder

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

24 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

25 Four Corner Model CNP Authorization Reply* Issuer replies with a response code, an authorization code, AND a CVV and AVS codes If transaction is approved, CVV and AVS match, proceed with, 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 Merchant-Device-ID CC Number Amount Curr CVV ExDt Resp Auth # CVN AVS Time Stamp USD / Y P Acquirer Issuer Merchant Cardholder * Not including 3DSecure processing

26 Four Corner Model Special Authorization Cases Stand-In Processing Provided by VI/MC whenever an Issuer cannot deliver a timely response to authorization requests (positive or negative files, limits & velocity checks, name match, etc.) VI/MC also provide fraud detection tools through the use of neural networks, delivering risk scores to the acquirer Balance Inquiries & Partial Authorizations In support of pre-paid cards and allowance of split tender Single Message vs Dual Message authorizations 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 3D Secure Account Updater Program

27 Four Corner Model Clearing, Settlement, Funds Transfer Merchant (or its processor/gateway) transmits all transactions to Acquirer for a given processing period (if Acquirer has not performed draft capture) 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

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 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 * Not including 3DSecure processing

29 Interchange Transfer price between the Acquirer and Issuer Originally intended to reimburse issuers for specific costs (i.e. Authorization, Clearing, and Settlement) Explicit revenue to Card Issuer, cost to Merchant Acquirer Not a revenue source for Visa or MasterCard or Acquirers Set by the VI/MC to balance the needs of issuer incentives to issue cards and the reluctance of merchants to pay high swipe fees Card Brand 4% Acquirer 7% Interchange to Issuer 89% Approximate Breakdown of $1 Merchant Fees (USA)

30 Interchange Rate Change Process Card schemes define rates for different types of transactions Rates approved by respective card scheme boards Card schemes have two major software releases per year April and October - where changes to interchange are announced Multiple interchange categories Rates are set by each region and by countries within each region Corporate offices set International interchange Merchant Country (Seller Business Address) Card Type (Visa): Signature, Signature Preferred, Rewards, Other Ticket Size Micro, Large Security: AVS PIN CVV2/CVC2 Signature 3DS Determines Interchange Rate Category Buyer Country (Card Billing Address) Distribution Channel POS, Web MCC & Eligibility Airlines, Retail, Recurring; Registration Program Type: Consumer v Commerci Debit v Credit Reward Txn Performance Speed of auth/settle Amt Tolerance

31 Four Corner Model Clearing, Settlement, Funds Transfer Transaction initiated by a Visa Signature Credit Card issued in the US at a US retailer that qualifies for CPS/Retail Credit interchange category and which is properly authorized Acquirer Fee Type Rate Calculated Issuer Submit $100 Interchange - Ad Valorem 1.65% $1.65 Interchange Flat Fee $0.10 $0.10 Assessment 0.11% $0.11 Visa Network Acquirer Processing Fee Debit (NAPF) $ $ Visa Settlement Network Access Fee (Base II Fee) $ $ International Acquirer 0.45% $0.00 Misuse of authorization $0.045 $0.00 Unauthorized transaction $0.10 $0.00 Fixed Acquirer Network Fee (FANF) (Monthly fee by location) TBD $0.00 Acquirer Fees Total $1.88 Issuer Assessment and Fees Total $0.03 IS OWED $98.12 NET POSITION OWES $98.15

32 Four Corner Model Clearing, Settlement, Funds Transfer VI/MC settle Net Positions with its members through Wire Transfers (e.g. Fedwire or SWIFT) Issuer pays Visa (or MC) $98.15 for the $100 transaction and Visa (or MC) pay Acquirer $98.12 for the $100 transaction, netting $0.03 on that transaction Acquirer Issuer

33 Four Corner Model Clearing, Settlement, Funds Transfer Issuer collects $100 from cardholder plus any finance fees if the cardholder does not pay the full amount (i.e. revolves ). If no finance fees are paid, issuer nets $1.85 on that transaction Acquirer Issuer

34 Four Corner Model Clearing, Settlement, Funds Transfer Acquirer pays merchant the $100 MINUS all agreed fees Two ways for merchant to pay its fees Discount (e.g. 2.00% - Acquirer pays merchant $98.00 on that transaction, netting $0.12) Pass-through plus fee (e.g. $0.05/tx Acquirer pays merchant $98.07, netting $0.05) Acquirer Issuer Discount Transact ion Fee Pass-through fees Other Fees Interchange Assessments

35 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

36 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

37 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

38 A Word on 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 Deadlines 2013 Acquirers, payment processors and service providers must be certified Oct liability for counterfeit card transactions shifts to party not equipped with EMV (2017 for fuel dispensers)

39 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, GPPC fees can be very expensive in certain countries

40 Retail Payments Global Consulting Group L.L.C. Payments 101 Bank Transfer or ACH Networks

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

42 Automated Clearing House (ACH) Origin

43 ACH Processing A Four Corner Model There are two Clearing House Operators in the US: The Federal Reserve Bank and The Clearing House (private) Originators are generally businesses and Receivers can be both Businesses and Consumers 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

44 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. Originator 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

45 ACH Processing Origination Originator sends daily file(s) to ODFI with all credits and debits 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

46 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

47 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

48 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, charging the Originator a fee of a few 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

49 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 RDFI sends return Information to ODFI via Clearing House Merchant accepts the return, resubmits transaction ( representation ), or contacts Receiver for alternative account information. There can be as many as 3 representations for a single transaction Originator Receiver Receiver initiates Dispute by submitting a WSSUP

50 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

51 Retail Payments Global Consulting Group L.L.C. Payments 101 EFT Networks

52 US EFT Network Topography Fragmented EFT Network environment

53 EFT Processing Similar to GPPC MERCHANT More expensive BANK More profitable Less expensive * 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 Less profitable

54 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

55 Retail Payments Global Consulting Group L.L.C. Payments 101 Online Banking epayments (OBeP)

56 OBeP Attributes How they work Link consumers from the merchant web site to the consumers online banking where buyers are authenticated by the bank and the payment authorized online. API Screen Scraping Settlement of transaction can happen in real time or through the ACH. Value proposition Consumer Safety of financial information Convenience Merchant Lower fees Sales lift Guaranteed payment, no chargebacks

57 The Netherlands - ideal Demo

58 OBeP Attributes Inexpensive Real time authorizations and payments made on real time or next day Safe No chargebacks, no disclosure of financial information to third parties Fragmented No standardized APIs, each bank is a different implementation

59 Retail Payments Global Consulting Group L.L.C. Payments 101 Payment Network Economics

60 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

61 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

62 Contact Information th Ave NE Woodinville, WA 98077, U.S.A. Phone: Web: RPGC Group LLC Proprietary and Confidential