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Overview – Payments Industry 101 and Payments Industry Series
Payment for goods and services has dramatically evolved since the days of bartering and exchange. Particularly, in the past few years, technology has played and continues to play a major role in accelerating this pace of change.
The Payments Industry 101 report provides a high-level overview to familiarize individuals with the payments industry.• Payments ecosystem• Participants and their roles• Revenue allocation among participants• Industry overview
TSG’s Payments Industry 101 is part of a larger Payment Industry Series that will include deeper dives into a variety of specific areas, participants, and trends.
There are two sides to a credit/debit card transaction – acquiring and issuing. Acquiring focuses on the merchant acceptance side and issuing on the cardholder side of the transaction. There are intermediary participants, and these entities facilitate the interaction between the acquiring and issuing sides. Below is a description of the participants; the diagram on following page shows how each entity fits within the payments ecosystem.
Acquiring Participants A. Merchant: The business, retailer, or any other person, firm, or corporation selling goods or services to consumers, and according to a merchant agreement, agrees to accept credit
cards, debit cards, or both, when properly presented. The merchant has a processing agreement with an acquirer, thereby, permitting the merchant to submit payment to the acquirer. The processing agreement is the written contract between the merchant and acquirer that details their respective rights, responsibilities, and warranties.
B. Acquirer: Financial institution or other entity that enrolls a merchant for the purpose of presenting transactions to the payment networks, and funding merchants for transactions presented to the acquirer. If the acquirer is not a bank, the acquirer must partner with a bank to access the payment networks.
Intermediary Participants C. Payment Networks: An electronic network maintained by Discover, Mastercard, American Express, or Visa that exchanges data relating to the value of card sales and credits between
issuers and acquirers, serving as an intermediary between the acquiring and issuing sides. Authorizations pass between merchant, acquirer, and issuer. Payment is settled through the network between the issuer and acquirer via the sponsor bank.
D. Sponsor Bank: Facilitates the transfer of funds between the acquirer and issuer.
Issuing ParticipantsE. Issuer: A financial institution or other commercial entity that that issues the credit card or debit card to the cardholder and maintains cardholder credit lines that are accessed
through the use of a card. (Also public and private companies and financial institutions that offer card-accessed lines of credit to consumers and businesses.) F. Cardholder: Any individual who possesses or uses a payment device.
There are various types of ISOs and sales distribution models in the merchant acquiring market.
Characteristics Specific Needs
Acquirer/ISO Types
Wholesale ISO
• Broad product offering• Feet on the street sales force• Provides its own back-office services with direct processor and bank
sponsorship relationship• Typically provides own risk-monitoring• May have some proprietary products• Typically owns the risk associated with merchant processing
Sponsorship and robust set of à la carte processing options
Retail ISO• Primary focus is the sale of merchant accounts• Utilize a third-party for all back-office support• No liability for merchant fraud and losses
New start up, revenue shared with contracted
entity
Distribution Model Examples
Relationship/Agent Bank• Sells through relationships with community banks and/or associations• Typically provides own back-office services• Broad retail focused product offering
Sponsorship and robust set of à la carte processing options
Integrated (ISV) • Markets through or in coordination with software partnersSame as above with processor certified applications
$1,345 $1,367$1,777
$1,374$1,647
$1,555
$653$693
$743$581
$619
$642$721
$700
$708$285
$278
$304
$127
$169
$220
2015 2016 2017
Visa Credit Visa Debit Mastercard Credit Mastercard Debit American Express Total Discover Total PayPal Total
Payments Industry Overview - PREVIEWThe growth opportunity in the U.S. consumer payments processing market continues to be attractive. Total estimated U.S. Visa,Mastercard, Discover, PayPal, and American Express payment volume nearly reached $6 trillion in 2017.
Note: PayPal figures represent PayPal’s estimated U.S. percent share of “Total Payment Volume” (TPV). PayPal volume includes volume from a bank account, a PayPal account balance, a PayPal Credit account, a credit or debit card or other stored value products such as coupons and gift cards. As such, some of this volume may be included in other networks as well. PayPal’s classification in the payments industry ecosystem is varied/debated as it performs functions attributed to a payment network, an issuer, acquirer, etc., and its financial reporting does not directly align with other payment network reporting structures and methods. Discover volume includes Discover Network and Pulse Network transactions.Source: TSG estimates, company financial records
Est. Payment Network Dollar Volume in the U.S. (Volume in billions, debit is signature and PIN)