Acquirers are licensed institutions that enable a merchant to accept payment card transactions in F2F environment (Customer Present) or virtually/online (Customer Not Present). The channels used to facilitate payments can be card terminals, website, app, email link, virtual terminals etc. Acquirers authorise, process, and settle the transactions through the relevant card schemes, such as Visa and Mastercard. The merchants get a merchant identification account (MID), which enable the acquirer to facilitate the payments through a payment gateway (proprietary or 3rd party).

The merchants pay the acquirer a percentage of the cost of purchases in exchange for the services. This is referred as Merchant Services Costs (MSC).

Issuers

An issuer is an institution that provides cards to businesses or end users (e.g. Barclays, Revolut, Socgen etc). They are a vital connections with the card schemes, such as Visa and Mastercard as their cards get processed through the network rails. They [pre]authorise, approve or decline a transaction.

On each transaction, the card issuer receives an interchange fee from the merchant acquirer, who works directly with the merchant.

The interchange fee is set by the card network and the amount tends to be highly variable, based on a combination of factors.

These include card type, transaction type, merchant type, and level of risk for the given transaction.

In order to accept payments irrespective of the channel, a business needs to set up a merchant account (MID) with an acquirer. The process of setting up such an account can vary in simplicity and timescale depending on various parameters. The Payments Services Providers divide merchant accounts into high risk and low risk categories. However, the classification is not as straightforward as it may sound. Some of the criteria that tend to determine the low risk vs high categories are:

- The level of chargebacks
- The industry and business profiles, typically determined by a Merchant Category Code (MCC)
- A business model, where there is high-value transactions
- A business without 2 or 3 years of trading history
- A business with long fulfilment terms (i.e. timescale between purchase vs consumption of a product)
- A business with a free products or services guaranteed/deployed over a long period of time.
- A business that trade in countries with history of high levels of fraud

Ultimately, a merchant account is a line of credit and therefore such applications get underwritten by a credit risk team. They typically look at the operational history of a business, the business profitability, assets, reputation, the business senior principals' credit worthiness and calculate what they deem to be the exposure levels.

This is a measurement of the maximum potential loss they, as the acquirer (aka merchant payment processor), may incur if the merchant defaulted.

The current economic context has certainly driven acquirers to be more risk averse and therefore the opening of a merchant account is more scrutinised than ever before.

Card Scheme /Card Network

The schemes are the payment system (rails) that enable a transaction to be processed through, e.g. Visa, Mastercard, American Express, China Union Pay, Discover and JCB. Any cards issued are always endorsed by a scheme and bear their logo alongside the issuing organisation on the card.

The schemes set the rules and regulations around the use of the cards. The scheme also provides the network which carries the card transactions to the next link in the payments chain. Whenever there’s a transaction, there’s a fee for those in the payments eco-system. The scheme typically get paid either a variable fee of the transaction expressed in % and/or a fixed fee.

Variable fees change according to the card type, acceptance method, and geographic location. Fixed fees may depend on the card scheme services used and the volume processed.

Visa, MasterCard, American Express and Discover are among the largest global card schemes. Typically local acquiring is key as it significantly impacts payment approval rates and profitability. In some markets, it’s nearly impossible to convert consumers without processing on the local rails. Certain issuers treat authorisations from other countries differently, based on that country’s global risk ratings, irrespective of the bank or merchant. Interchange, scheme and processing fees are often more expensive with cross-border transactions.

Working with a single global payment partner is more an utopia than a reality as typically acquirer will require local acquiring licenses or processing capability in each of the targeted countries. The reality is that most aggregate or ride on the back of other local 3rd party.

All payments card processing are typically made up of three components:

• Acquiring fee: this is mark-up the acquirer apply for the provision of their card processing services (auth, acquiring, settlement).

• Card scheme fees: This is the fee the scheme charges for providing the network rails through which cards are processed. These fees can be expressed as % or flat rate for using its network.

• Interchange fee: This fee is set by the schemes and is paid to the cardholder’s issuing bank (issuer). Interchange fees make up the most significant chunk of the card processing fees.

The Interchange fees and are non-negotiable and are also regularly adjusted (e.g. V/M review their rates in April and October every year).

When these three items are combined into one charge, it is often referred to as an [un]blended pricing. It is a simplified pricing model with the rates expressed as a % (e.g. 1% debit cards, 2% credit cards). It is an easier model to understand.

Interchange++ is a transparent pricing structure, whereby the acquirer only quote their mark-up and pass through the other two component to the merchants. The merchants therefore get a detailed breakdown of the three payment card costs and can benefit from a fee reduction where the interchange fees are reduced, as these fees are simply passed through.

Blended pricing models are most widely used in smaller, mid tier merchants whilst large account tend to be on the IC++ model (i.e. Interchange Plus Plus).

Alternative Payment Methods (APMs) used to mean anything that wasn’t cash or a credit card. Now it’s used to mean anything that doesn’t use traditional payments infrastructure, specifically, credit card companies like Visa and MasterCard.

The EU’s PSD2 legislation that came into effect in 2018 has a lot to account for the flood of innovation erupting in payments over the years. Newer payment methods reflect the changing reality of consumers behaviours that are choosing to shop more online and via a mobile devise.

PSD2 was designed to boost competition in financial services and modernise the payments infrastructure. This involves a new kind of payments company, able to provide A2A (account-to-account) transactions throughout Europe.

Open banking enable users to grant permission to third parties to access their financial information.

Companies that create application programming interfaces (APIs) are able to provide innovative financial services via technology without first needing to have a physical presence like high street banks.

Payment Information Service Providers (PISPs) access consumer and business bank accounts directly via the banks’ APIs. This lets them move money directly between accounts, without any other intermediary.

Comparing Open Banking with card payments, card transactions pass through a chain of several companies. This typically includes a payments gateway, acquirer and processor, as well as a card scheme and the customer’s bank. Card transactions take several days to settle and incur fees from each intermediary, eating into the merchant’s margins.

Open banking is a very hot topic. Until now, account-to-account payments had only been a viable alternative to cards in some countries, like the Netherlands, where the iDEAL systems had been leading there for years. The UK has one of the most mature open banking environments in Europe.