The Anatomy of the Swipe by Ahmed Siddiqui

How strongly I recommend this book: 7 / 10

Date read: April 10, 2025

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Summary

This is a great book in general, and what I really enjoyed was how it broke down the entire payments ecosystem. It clearly defined the different players—the acquirer, the processor, and the network—and explained the complex rules of interchange. I now have a much clearer picture of what actually happens when a card is swiped: how all these players interact and how interchange flows between them. The book also explains the co-branded cards we all use, like the Amazon Prime card, detailing how they function, why they might restrict certain transactions, and how their loyalty programs are structured. It gets into a lot of technicalities, like just-in-time funding, but since we live in such a payments-oriented world, I found that getting this deeper understanding was incredibly valuable.

Favorite Quotes and Chapter Notes

I went through my notes and captured key quotes from all chapters below.

P.S. – Highly recommend Readwise if you want to get the most out of your reading.

Highlights and Notes

Introduction

Twenty- eight percent of US adults have no emergency savings, according to Bankrate’s latest Financial Security Index. 1 Even if they do have emergency savings, 57 percent of Americans don’t have enough cash to cover a $ 500 unexpected expense.
Stripe is a Gateway and gives you application program interfaces(APIs) and tools that enable you to Take payments— that is, if you have a website that sells coffee beans from all over the world, you could use Stripe to accept payments on your website.
Marqeta is an Issuer Processor and has tools and APIs that allow you to Make payments— that is, you can use Marqeta’s APIs to create the credit or debit card that would allow you to buy those special coffee beans from Yemen.

Payments Ecosystem Overview

Key Term: Issuer An Issuer or Issuing Bank’s function is to underwrite the user by giving them a bank account, a debit card, and potentially access to credit facilities and a credit card. Examples include Citibank, Wells Fargo, US Bank, and Chase. Key Term: Issuer Processor The Issuer needs a technology provider that can connect with the payment networks. Usually, the Issuer Processor will have a piece of hardware in their data centers and a fast network connection directly to the payment networks to approve or decline a transaction. Sometimes, the Issuer may have built this technology in- house or may rely on a third- party Issuer Processor to handle this. Examples include Marqeta, Tsys, Galileo, i2c.
Key Term: Merchant Acquirer The Merchant Acquirer goes out and acquires Merchants and provides them the tools and facilities to accept and process card- based payments. Examples include Citibank, Wells Fargo, US Bank, and Chase. Key Term: Acquirer Processor The Merchant Acquirer needs a technology provider that can connect with the Payment Networks. Usually, the Acquirer Processor will have a piece of hardware in their data centers and a fast network connection directly to the Payment Networks to request approval of a transaction. Sometimes, the Merchant Acquirer may have built this technology in- house or may rely on a third- party Acquirer Processor to handle this. Examples include Chase Paymentech, Tabapay, and Fiserv.
Key Term: Payment Network Sometimes referred to as a“Card Scheme” or just as a“Network.” Examples of Payment Networks include Visa, Mastercard, American Express, and Discover. These Payment Networks provide the rails for card- based transactions to occur. They sit in between Acquirers and Issuers and pass messages back and forth to make the transaction happen. The Payment Networks also set the communications rules and standards that the Acquirers and Issuers need to adhere to.
So how did Emmet get this card? Emmet first needed to get a debit card for all of this to work. Issuers like Moneybin Bank distribute cards and underwrite the transaction on behalf of Payment Networks. The Payment Networks rely on Merchant Acquirers to get as many card terminals into the hands of as many Merchants as possible.

Anatomy of the swipe

Well, actually, in the three seconds, a lot of things were going on. Emmet participated in a Dual- Message Signature transaction with his debit card. Referred to as a Dual- Message transaction or a Signature transaction because, typically, an Authorization(message One) happens at the time of swipe— which was the process discussed above. This is then followed up with a Clearing(message Two) that happens in bulk at the end of the night— which will be discussed in the following chapter. In some cases, the Authorization message(message one) can be different from the Clearing(message two) if a tip is included or some adjustment is made.
Key Term: Clearing The term“Clearing” is used primarily by Issuers, but can also be referred to as“Capture” by Merchant Acquirers. Clearing happens toward the end of the day for most Merchants and will factor in tips, transaction reversals, and returns. This is basically the Merchant confirming these transactions are valid and that these funds are ready to be moved or“settled.” Key Term: Settlement Settlement is the actual movement of money from the cardholder’s bank account, the Issuing Bank, to the Merchant’s bank account, the Acquiring Bank. This movement of money typically happens via Fedwire as instructed by the payment networks.
In the case of online transactions, clearing typically happens when goods are shipped. This is why you may see a transaction that you may have made online staying in a“Pending” state for a long period of time.
Key Takeaways• Money doesn’t move at the time of swipe. It typically happens a day or two later.• The cardholder doesn’t pay any fees for the transaction.• The Merchant pays a set of fees for the transaction.• The fees being charged to the Merchant are netted out of the transaction amount paid out to the Merchant during settlement.– Network and Card Issuer Fees are moved at time of settlement.– The Merchant Acquirer in many cases collects their fee at the end of the month.
Consumers are protected by laws put in place by the Federal Reserve. More specifically, Regulation E for Debit Cards and Regulation Z for Credit Cards allow consumers to“Chargeback the Transaction.”
Key Term: Chargeback When a cardholder doesn’t recognize a charge on a credit or debit card, they may request their money back through their Issuing Bank. Chargebacks can also be used in case goods and services have not been provided by the Merchant, but the Merchant refuses to return the money. This step will happen after settlement.
Would Visa be paying for that? Well, not really, but this is what is commonly referred to as a Chargeback. This type of chargeback(a chargeback due to the cardholder thinking that their card was stolen), accounts for 30 percent of all chargebacks according to Chargebacks911 Chargeback Stats report.
The Federal Trade Commission has set some policies for handling chargebacks on debit and credit cards, 6 but ultimately, it falls on the card Issuer to make a decision as to how much liability will actually fall on the cardholder.
How the Chargeback Is Processed Key Term: EMV Chip Card EMV originally stood for“Europay, Mastercard, Visa,” which established the technical standard for encoding the card data onto a secure chip placed on a card. Cards with this type of chip and data encryption can be“dipped” into card terminals to pay for goods and services in a secure way. This method of storing card data is considered far more secure than data stored on the magnetic stripe on the back of a card used to“swipe.” The EMV standard is now managed by EMVco, which is now a consortium of financial companies.
The rules are evolving around this, however, considering that Emmet was using an EMV Chip card, the flow would work like this: 1. Emmet would report the transaction as fraudulent to Moneybin Bank’s cardholder support. 2. Moneybin Bank’s cardholder support would freeze Emmet’s card and reissue him a new card with a new card number. 3. Moneybin Bank, as the Card Issuer and the Issuing Bank, would file this chargeback with Visa, the Card Network. 4. Visa will then immediately send a credit transaction back to Emmet’s card. This is referred to as a provisional credit. 5. Visa would take the money back immediately from Katy Spade because it was a“Card Not Present” transaction. 6. Visa would then send this transaction to Katy Spade to request some documentation. 7. Katy Spade has forty- five days to respond to the chargeback request.
Disputing the Chargeback Katy Spade, the Merchant, can either dispute the chargeback or do nothing: 1. Do nothing— If Katy Spade does not respond within the forty- five- day window, then the chargeback case is closed, and Katy Spade would be paying for the chargeback. The Network assesses chargeback fees between $ 25 to $ 35 just to process the chargeback. This fee is applied regardless of if the chargeback is disputed or not. Had the amount been for less than that, it doesn’t make sense for the Merchant to fight it because they would need to pay the chargeback fee regardless. Additionally, paperwork that the Merchant needs to provide to fight the claim is needed, such as a receipt proving that the user actually made the purchase and how it was purchased(online, in person, and if in person, then was the EMV Chip used or was the magnetic stripe used?). Some Merchants may just build in a threshold for certain types of chargebacks where it isn’t worth fighting and bake it into their overall business model.
Dispute— If Katy Spade responds with a receipt and proof that Emmet did make the purchase, then the chargeback can be disputed. a. The chargeback then goes into arbitration and this is where Moneybin Bank as the Issuer would then have to make the decision as to“eat the cost” or to pass it back on to Emmet. The good news for Emmet is that the Federal Trade Commission has capped the liability to the consumer to $ 50 for unauthorized spend on a credit card. The consumer liability is higher for debit cards if a card is reported lost and based on when the lost card was reported.
b. If Katy Spade is able to provide good documentation that this purchase was made by Emmet’s card, but then we find out that Emmet’s physical card was lost or stolen, then the card Issuer, Moneybin Bank, would be liable to eat this cost. In addition to the actual cost of the item, Moneybin Bank will also be charged a fee from the network in the range of $ 25 to $ 35.
EMV Chip— More Liability on to the Merchant With the advent of the EMV Chip card, even more scrutiny is placed on the Merchant. In physical locations, had this been a physical Katy Spade store, Visa would check to see if this transaction was done by using the EMV Chip or if it was swiped using the magnetic stripe across the top. In the United States, if an EMV Chip card is available, and the Merchant does not use the chip and instead swipes using the magnetic stripe, the chargeback liability immediately goes to the Merchant and the Merchant will not be able to fight it. This is how the card networks have been able to mandate that new payment terminals be rolled out that can accept EMV- Chip- based transactions. The reason for this is that the EMV Chip is far more secure than the magnetic stripe. It isn’t so easy for card thieves to install a“card- skimmer” device that can read the card data off of the EMV Chip.
Online Transactions— Different Liability Rules For online transactions like this one, since you can’t physically insert the EMV Chip into the card reader(referred to as a“Card Not Present” transaction), Visa will check that the card number was entered with the Card Verification Value(CVV) code(three- digit code on the back). If we find that the CVV was missing, this could also put the Merchant at risk for paying for this chargeback.
3D Secure Key Term: 3D Secure This is a standard for offering cardholders one more layer of security for online transactions. When card numbers are entered into a website to pay for something, 3D Secure will require the cardholder to enter one more form of authentication, such as a one- time- use PIN or passcode, similar to how two- factor authentication works for websites.
More recently, the card networks are requiring Merchants and card Issuers to roll out a service called 3D Secure. The technology is standard in Europe but not yet in the US.
Calculating Chargeback Rates Merchants will typically want to keep their chargeback rates below 1 percent. Once a Merchant gets close to 1 percent or goes over, it needs to work to bring that percentage down or risk losing their ability to accept card- based payments through their Merchant Acquirer. The card networks place stringent rules on their Merchant Acquirers to make sure that all Merchants maintain chargeback rates below 1 percent. Specialized Merchant Acquirers will underwrite riskier businesses but will charge a lot more per transaction. Chargeback rate is calculated by taking the total number of chargeback transactions in a month and dividing it by the total number of transactions in a month. Depending on the type of business, the percentage could vary significantly; however, it should be below 1 percent to be in good standing.
Preventing Chargebacks While certain types of fraudulent transactions are unavoidable, having a good return policy and collecting more information about the consumer upfront will help reduce chargebacks. For online transactions, asking the consumer to enter their CVV number during checkout and asking for their billing address can help prevent fraudulent transactions upfront. For in- person transactions, asking the consumer to transact with their EMV Chip will help reduce the chargeback burden on the Merchant.
Key Takeaways• Consumers are protected from fraudulent transactions because of consumer protection laws. The Networks reinforce this because they want consumers to feel secure in using their credit or debit cards for their purchases.• The card networks have implemented“Zero Liability” policies for their cardholders to help ease consumer concerns that card transactions“aren’t safe.”• The chargeback is paid for by the Merchant or the Card Issuer. Visa or Mastercard do not pay for these chargebacks directly.• The Burden of Proof always falls on to the Merchant. They can choose to fight the chargeback by providing additional documentation.• If the Merchant can provide proof of the transaction, then it is up to the card Issuer to request further documentation from the cardholder or just“eat the cost.”• Newer technologies such as the EMV Chip and 3D Secure are giving more tools to Merchants to help prevent chargebacks. If the transaction was processed correctly by using these new technologies, the Merchant typically doesn’t end up paying for the chargeback.

Payments Ecosystem

Visa and Mastercard: Open Card Networks The key difference is that Visa and Mastercard will have relationships with multiple Merchant Acquirers and multiple Issuers. They typically don’t play any favorites and like to work in more of a marketplace function. This is why these Card Networks will typically invest in Issuers and Acquirers, but they won’t actually purchase these players.
American Express and Discover: Closed Card Networks American Express and Discover typically issue their own cards, are their own bank, and typically provide their own acquiring services. This level of control affords Discover and American Express to control and own Interchange revenue, Card Network revenue, and Acquirer revenue.
Fees Assessed to the Issuer The card Issuer, Moneybin Bank, is charged the following fees:• After the transaction has cleared, a reporting settlement fee is typically charged to the Issuer from the Card Network; this is typically a flat fee per transaction.• The Card Network will also charge the Issuer a per- transaction fee that is assessed on the authorization transaction and the clearing transaction. Another way to think about this is that the Issuer is assessed a usage fee for transmitting data through the Card Network’s“rails.”• There are other Software- as- a- Service- type fees charged to the Issuer like fraud services and settlement services.
Because of this, they can adjust these fees depending on the size of the Merchant but also, their revenue per swipe is significantly higher than Visa and Mastercard. However, their total swipe volume is significantly lower than Visa and Mastercard because they don’t have a network of Issuers and Acquirers getting their cards or card terminals into the market on their behalf. As a good frame of reference, in 2017, Visa accounted for 60 percent of all purchase volume in the US for all debit and credit cards. American Express only accounted for 13 percent, and Discover was at 2 percent.
PIN Debit Networks(Single Message) For debit cards, each Card Network has a secondary network brand for PIN Debit or Automated Teller Machine(ATM). This mode typically yields a much lower Interchange. So, if you are using a Visa debit card from Bank of America, when it runs on the VisaNet“Credit” network, the Interchange is higher, whereas, in the“Debit” mode running on the Interlink network, the Interchange will be lower. This transaction mode is also referred to as a“PIN Debit Purchase.” When the cardholder selects this mode, they will be prompted to enter their four- digit PIN, and then the transaction will complete. Since this is considered a“Single- Message” transaction, there isn’t a distinct authorization transaction followed by a clearing transaction like in a Dual- Message transaction. All of it happens in one transaction, meaning that the cardholder’s available balance and actual balance are reduced at the same time. The concept of“holding funds” does not exist in this transaction.
The PIN Debit networks are as follows: Visa Mastercard Discover PIN Debit Network– Interlink– VisaNet Debit Maestro Pulse
Taking money off of a debit card actually works the inverse of a typical card swipe.
Here is a breakdown of fees charged by an ATM: The ATM will charge the user a flat fee, typically around $ 3. If the ATM is included in your bank’s network, like if you bank with Wells Fargo and you go to a Wells Fargo ATM, then this fee is waived. However, if you bank with Wells Fargo and you use a Bank of America ATM, you will be charged around $ 3. So, if you need $ 20, then it will remove $ 23 from your bank account and give you $ 20 cash. Additionally, the Issuer of the card is charged an Interchange fee by the ATM(sometimes referred to as reverse- Interchange), which is counter to how a swipe transaction would work at the register. This is typically a percentage of the transaction. This is why most card Issuers will encourage their users to use ATMs within their network.
The reason why you can take money out of just about any ATM is because of the Durbin Amendment and its requirement that every debit card must have a secondary unaffiliated network. This law was put in to give consumers more choice in finding an ATM network. For example, if you have a debit card from Visa and the ATM doesn’t support Visa’s ATM networks, then it can run on Mastercard’s ATM network, Cirrus. ATM transactions follow a pattern similar to a Single- Message transaction in that everything happens as one single transaction and the cardholder’s available balance and actual balance are reduced at the same time. The concept of“holding funds” does not exist in this transaction.
The ATM networks are as follows: Visa Mastercard Discover ATM Network Plus Cirrus Pulse
Free ATM Networks Two major ATM Networks, MoneyPass(32,000 ATMs in the US), and Allpoint(45,000 ATMs in the US) have a network of ATMs throughout the US that are“Free” to end- users if that Issuer offers either of these two networks. Many of the neo- banks(online only banks), such as Branch, Chime, Money Lion, and Varo offer access to these networks. In this case, the end- user of their debit card could go to these ATMs and take money out without incurring any fees. These fees, however, are passed on to the card Issuer, so in effect, Chime is paying for these ATM withdrawals. Both of these networks have ATM locators, and in the case of Allpoint, many of their terminals are inside of Target, CVS, and Walgreens stores.
Key Takeaways• The Card Networks serve as the“rails” that the card- based transaction will travel on. The Card Networks pass data between Acquirers and Issuers to ensure the transaction completes on these“rails.”• The Card Networks establish the rules for the ecosystem.• Visa and Mastercard are considered“Open Card Networks,” while Discover and American Express are considered“Closed Card Networks.” Visa and Mastercard rely heavily on their network of Acquirers and Issuers to distribute their brands out into the market. Discover and American Express control their ecosystem and take on the role of distribution by themselves.• Visa and Mastercard are able to charge Merchants and Issuers via different fees.• The card networks have subnetworks to facilitate credit, debit, and ATM transactions.
Banks serve three primary functions:• Issue debit and credit cards to cardholders• Serve as Acquiring Banks to Merchants• Facilitate movement of real money
Sponsoring a BIN Only banks are allowed to issue cards for open card networks, such as Visa and Mastercard. It is important to understand that the open card networks, Visa and Mastercard, are not banks, they provide the infrastructure to transact with debit and credit cards. In effect, Visa and Mastercard are providing banks with a license to use their infrastructure. Alternatively, Discover and American Express will issue their own cards in most cases and will not issue through third- party banks.
Each card(debit or credit) has a six- digit Bank Identification Number(BIN), which is offered by Visa or Mastercard to a bank. The bank then issues the card to the cardholder. The Bank may or may not have their logo on the card, but it will usually have its name somewhere in the fine print on the back of every card they issue.
In the US, the only entities that can actually move real money are banks or entities with money transmitter licenses.
The main reason is that these new“neo- banks” aren’t actually banks but rather tech companies that partner with regional banks such as Sutton Bank, Bancorp, or Meta Bank. These regional banks have less than $ 10 billion in assets and are able to charge a higher Interchange rate because they are considered exempt from the Interchange rules set forth in the Durbin Amendment and are considered“unregulated.” This means that these regional banks are able to issue cards that earn higher“unregulated” Interchange. Instead of making their money from monthly account maintenance fees or overdraft fees, these challenger banks make their money from interest on the deposits and debit card Interchange.
If Mufasa doesn’t have a direct relationship with a Merchant Acquirer, such as Wells Fargo, he could go through an Independent Sales Organization(ISO) to establish this relationship. The Merchant Acquirer, in this case, Wells Fargo, then offers point- of- sale devices to accept card- based payments through its partners such as First Data. Going with a Merchant Acquirer directly will take a little more onboarding time but will provide a wider range of choice of hardware and software for the Merchant. Key Term: Independent Sales Organization(ISO) An ISO is granted a license to sell Merchant acquiring services from a Merchant Acquirer such as Wells Fargo or Chase Paymentech.
Use a Payments Facilitator Another option, since he is just starting his business, is to work with a payments facilitator(sometimes referred to as a PF or PayFac) like Square or Toast to open a sub- Merchant account and get the point- of- sale device directly through them. Key Term: Payments Facilitator(PF or PayFac) This is a layer on top of a Merchant Acquirer. Payments Facilitators can typically onboard Merchants very quickly and offer out- of- the- box hardware and software to enable a Merchant to start accepting card- based payments quickly.
Managed Fraud When a customer sees a transaction that looks inaccurate, they will often call their Issuing Bank to get money back; this is referred to as a chargeback. In this scenario, Mufasa doesn’t have to worry about a chargeback because the Payments Facilitator will provide Mufasa with tools to combat these chargebacks. Mufasa doesn’t need to do any direct follow- up with Visa or Mastercard or the customer in this scenario.
Drawbacks of Using a Payments Facilitator Being a Sub- Merchant While from the get- go, this didn’t matter so much to Mufasa, his donut shop is actually considered a sub- Merchant. Square is considered the main Merchant and already works with several Acquirers and banks to build a set of Merchant types. Mufasa’s business fell into the“Restaurants” category. Because Square services so many restaurants, this was a very easy business for Square to underwrite. The drawback here is that anytime someone swipes a card at Mufasa’s donut shop, the transaction history at the customer’s bank will always start with an“SQ*.”
Fixed Pricing Can Be Expensive in the Long Haul While the pricing was very transparent with Square, it was a bit pricier than some of the other options out there. Had Mufasa gone with a Merchant Acquirer directly, his cost would go down over time as he sells more donuts.
Potential Funds Settlement Delay If a customer buys a donut from Mufasa today(time = t), the network typically clears the transaction the following day(t + 1). When this happens, funds settle with Square’s bank tomorrow(t + 1), and then Square will perform a calculation taking their 2.6 percent plus 10 cents out of the transaction and then send the funds to Mufasa’s account at Square. If Mufasa would like these funds to go to his Wells Fargo bank account, then Square will send an ACH of this to Wells Fargo, which could take at least another day if not more(t + 2).
How Do Payments Facilitators Make Money? Most Payments Facilitators make money in two ways: Revenue From Software or Hardware Because most Payments Facilitators offer their own hardware, they make money off of the initial sale or sometimes lease the hardware. In addition to that, Payments Facilitators like Square and Toast offer other software and services like inventory management, payroll, and scheduling software. Additionally, Merchants can take working capital loans from some Payments Facilitators. Revenue From Each Transaction The major revenue source for most Payments Facilitators is the per- transaction fee. To make things simple for Merchants, Payments Facilitators typically charge a flat fee regardless of the type of card
On the back end, the Payments Facilitators are paying the card Issuers Interchange and the network’s network assessment fees. Additionally, they are paying their Merchant Acquirer the Acquirer fee. Because the Payments Facilitator is underwriting multiple Merchants under them as sub- Merchants, the transaction volume from all sub- Merchants is aggregated for the Payments Facilitator. With higher transaction volume, the Payments Facilitator is able to negotiate very low Acquirer fees. The flat transaction fee that is charged to the sub- Merchants in most cases is higher than what the Payments Facilitator pays in Acquirer fees, Interchange, and network assessments, which is where they make their margin.
Being a Direct Merchant As a direct Merchant, Mufasa would be able to show the name of his donut shop in the transaction history of his customers’ accounts. There wouldn’t be an“SQ*” added to the front of the transaction as there would as a sub- merchant. He also would be able to control the exact Merchant Category Code associated with his business, which could help lower his Interchange rate. He also won’t have a top limit of dollars he can transact within a year, which opens him up for growth. This is typically $ 500k for Payments Facilitators under the sub- merchant arrangement.
Interchange Plus works much like Emmet’s mocha example, where each swipe would incur an Interchange fee that would be a percent of the total transaction, a Network Assessment fee that is typically percentage based, and then an Acquirer fee that can be a percentage or a flat amount per transaction. Based on Mufasa’s donut shop’s Merchant Category Code and the type of card his customers use, Interchange Plus pricing could vary dramatically for each transaction, but overall, his costs should go down because he is doing some serious volume! Typically, the Acquirer fee can be set up on volume tiers, meaning that this cost could go down based on the total monthly volume at Mufasa’s donut shop.
Faster Funds Settlement With a direct Merchant account, Mufasa would set up a bank account with the Merchant Acquirer. Funds would settle with the network directly. Visa and Mastercard will take out any network assessment and Interchange from the transaction and leave the remainder for Mufasa’s donut shop. For example, if a customer buys a donut today, then funds will settle tomorrow in Mufasa’s bank account. The additional step of moving the funds to Mufasa’s Wells Fargo account via ACH is not needed.
Most Merchant Acquirers make money in two ways: Revenue From Hardware Since the primary focus of a Merchant Acquirer is to process transactions, its software and services are limited. They may have reseller agreements with point- of- sale manufacturers like Vantiv and First Data, where they would earn some commission. Alternatively, they could have their own hardware, where they would make a margin off of the hardware itself. For some of the newer point- of- sale systems, they may have an app store where third- party developers can build apps. They could earn money from the app developers as well. Revenue From Each Transaction Most Merchant Acquirers are also Acquirer Processors, meaning that they have a direct connection with the card networks such as Visa and Mastercard. An Acquirer Processor has hardware from Visa and Mastercard in its data centers to process the transactions. This hardware needs to be connected to a very fast network connection so that transactions can be relayed from the point- of- sale terminal to the card Networks and then to the card Issuer and back in less than three seconds. For this processing capability, the Merchant Acquirer is able to charge the Merchant an Acquirer fee, which is typically a flat fee or a percentage for every transaction. They may also assess fees when cards are declined or when a chargeback happens. The Merchant Acquirer takes the Interchange from the transaction and sends it to the Issuer, and sends the network assessment to the network, so this is not considered revenue for them.
Buy Now Pay Later Instead of traditional invoicing with“net 30” terms, he looks at“buy now pay later” options offered through companies like Affirm and Klarna. In this model, the buyer can opt to pay later, but the Merchant is paid right away. For example, a large grocery store places an order for $ 10,000 and wants to pay in thirty days. On Mufasa’s website, instead of entering a credit card, they choose the“Buy Now Pay Later” option. When this happens, the“Buy Now Pay Later” provider sends money to Mufasa’s bank account typically the next day and then collects from the grocery store on whatever cadence they requested. For this service, the“Buy Now Pay Later” company typically charges Mufasa a percentage of the transaction, which is typically higher than what Mufasa would pay for credit card processing. However, this fee may be worth it in the interim to help manage Mufasa’s cash flow.
The“Buy Now Pay Later” company is considered a Payment Service Provider(PSP). They are able to offer the“Buy Now Pay Later” service in addition to accepting credit and debit cards, and they are also able to offer payments through Mobile Wallets like PayPal, Venmo, and Alipay. Key Term: Payment Service Provider(PSP) A PSP is an aggregator of payment methods. It allows a website operator to get paid via debit cards, mobile wallets, and financing schemes.
An additional benefit to a Payment Service Provider is that under the hood, their payment gateway may connect to multiple Merchant Acquirers, offering Mufasa’s business redundancy and also the ability to operate internationally without him having to change anything on his website.
Song learned about payments not by just reading manuals but rather seeing where there were points in the customer experience that were breaking. He also saw how the lives of his customers were so deeply impacted by payments.
Key Takeaways• Merchants can start accepting card- based payments quickly if they go through Payments Facilitators(PayFacs).• As Merchants grow their transaction volume for card- based payments, they may want to establish an account directly with a Merchant Acquirer.• Depending on their stage of growth, different pricing strategies for Merchants do exist.• Payment Service Providers(PSPs) offer Merchants a multitude of ways of getting paid, including traditional card- based payments, digital wallet payments, and also“Buy Now Pay Later” payment options.
Merchants can start accepting or“taking” card- based payments through Merchant Acquirers, Payment Facilitators(PayFacs), and Payment Service Providers(PSPs).• Merchants pay an Interchange fee to the banks Issuing debit and credit cards.
Key Term: Co- Brand Partner This is typically a brand or company that is marketing the card. This is the brand shown on the card in addition to the card network brand. In some cases, this brand will appear on the front of the card without the Issuing Bank, and in other cases, it may appear on the front with the Issuing Bank.
Key Term: Program Manager The program manager is the one who is managing the day- to- day operations of the card program including settlement, fraud management, and maintaining the relationship with the Issuing Bank, card manufacturer, card network, and the cardholder.
In many cases, the Program Manager is responsible for marketing the cards. However, since DonutDash is the Co- Brand Partner, the marketing aspects go to DonutDash, and it applies some compliance rules that come from Moneybin Bank, the Issuing Bank, to make sure that the cardholders are being communicated with appropriately. Additionally, the Program Manager is responsible for making sure that settlement is happening appropriately and that fraud is being managed. If cardholders find fraudulent charges and request a chargeback, they will go to the Program Manager to process the chargeback.
The Program Manager also maintains the relationship with the Card Network and the Issuing Bank to ensure that the program is operating correctly. It will also place orders for cards and manage the relationship with the card manufacturer. A bulk of the day- to- day operations falls on the Program Manager. The Program Manager also ensures that it is doing adequate background checks on its cardholders by performing Know Your Customer(KYC) checks in accordance with the Issuing Bank’s requirements.
The Issuer Processor licenses a piece of hardware from the Card Network that it keeps in its data centers. This piece of hardware provided by the Card Network is commonly referred to as a Mastercard Interface Processor(MIP) for Mastercard and a VisaNet Integrated Processing(VIP) for Visa. The MIP and the VIP are critical components that an Issuer Processor must have to enable near real- time communication with the Card Networks. The Card Networks typically do not give out too many MIPs or VIPs, which is why the actual number of Issuer Processors is limited.
Additionally, the role of the Issuer Processor is to provide ways for the Co- Brand Partner to integrate with it. So, for example, when swipes occur, the Co- Brand Partner, DonutDash, may want to be alerted in real- time of the swipe, the amount, location, and maybe some other bits of information. Alternatively, the Co- Brand Partner, DonutDash, may want the ability to turn on and off cards through their app or even order cards from their own app. The Issuer Processor, Marqeta, will provide this via Application Program Interfaces(APIs). The Co- Brand Partner, DonutDash, would get documentation from the Issuer Processor, Marqeta, on how to integrate in with its APIs and bake these features into their applications.
Marqeta: JIT Funding Marqeta’s modern issuing platform is capable of offering its Co- Brand Partners like DonutDash the ability to authorize their own transactions, which is exactly what Emmet needed to prevent card fraud from its drivers. This technology can send the details from the card swipe to DonutDash in near real- time and request that DonutDash approve or decline the transaction. This is referred to as Just- in- Time(JIT) funding, where the DonutDash cards will always have $ 0 balance on them. Based on certain business rules such as geolocation of the driver and the donut price, DonutDash would: 1. Send an approval message to Marqeta. 2. At that very instant, Marqeta will fund the transaction for the exact amount of the swipe. 3. The transaction will be approved. 4. The swipe will take that exact money off, leaving the driver with a $ 0 debit card balance at the end of the transaction. 5. All of this happens in less than three seconds. 6. The DonutDash driver would get a receipt and he is off with his delivery. If for example, a DonutDash driver was to swipe for an amount that is greater than the expected amount of the swipe, that is, he added a bottled water for himself to the order, DonutDash could decline the transaction.
Issuer Processor Provides Reporting to the Issuing Bank The Issuer Processor, Marqeta, is also responsible for providing reporting to Moneybin Bank, the Issuing Bank, for all of the swipes that occurred in a day, and when funds are loaded and unloaded from cards. It will also tell Moneybin Bank, the Issuing Bank, who the users of these cards are. Settlement data from Mastercard, the Card Network, will be sent to Marqeta, the Program Manager, so that settlement can happen via Marqeta, the Issuer Processor.
Economics One of the key benefits of creating a card is that the card Issuer enjoys revenue coming in the form of Interchange. The Merchant, Dad’s Donut Shop, essentially is paying three fees to accept payment from a debit or credit card. Mufasa, the Merchant, agrees to this because he knows that he can increase his sales by accepting cards. At the time of the card swipe, Mufasa’s Donut Shop will pay these fees: Acquirer Fee Usually, a flat fee that is paid per transaction to the Merchant Acquirer, Payments Facilitator, or Payment Gateway. This is essentially the supplier of the card terminal or online payment gateway. Network Assessment Fee This is a small percentage of the transaction value that is sent directly to the Card Network to manage the flow of data transmission. So, this fee would go to Mastercard. Interchange This is a small percentage of the transaction that is sent to the Issuer of the card.
How Does the Network Make Money? Mastercard gets paid in multiple ways. It collects the Network Assessment from the Merchant at the time of swipe. Additionally, it will charge the Issuer for reporting fees and other licensing fees. Because the Card Network is in the middle, it is able to extract revenue from both the Acquiring and Issuing sides, but the amounts per transaction are rather low because they want to encourage higher transaction volumes. The Card Network doesn’t directly touch the Interchange, it is simply passed from the Merchant to the Card Issuer.
How Does the Program Manager Make Money? The Program Manager is typically managing the day- to- day operations of the program and thus takes the bulk of the Interchange. Depending on the arrangements it has with its Issuing Bank and Issuer Processor, the Program Manager may decide to give a certain portion of the Interchange to the Co- Brand Partner. The Program Manager could also provide the end cardholder with“cash back,” which in most cases is limited to certain categories.
How Does the Issuing Bank Make Money? The Issuing Bank will have an arrangement with the Program Manager in most cases. It may charge the Program Manager fees for setting up bank accounts, performing compliance audits, and general oversight. This could be flat monthly fees, transaction- based fees, or a percentage of the Interchange revenue earned. The Issuing Bank is also sponsoring the Bank Identification Number(BIN, which represents the first six digits on the card) that the DonutDash Mastercard goes under. Mastercard will license this number to the Issuing Bank, and thus will charge the bank for this license. Note, Mastercard will not provide a license to a non- bank entity, and thus, every card program requires an Issuing Bank. The Issuing Bank has the option to just pass this cost on to the Program Manager or even add a markup on these items. Furthermore, the Issuing Bank gets deposits from the Co- Brand Partner for use in spend transactions and may choose to earn interest on these deposits.
How Does the Issuer Processor Make Money? The Issuer Processor typically makes money as a utility. It will charge money based on the number of cards shipped out or the number of accounts it needs to maintain in its system. It may also make money on each transaction. There may be arrangements in which it participates in a percentage of the Interchange earning that the Program Manager is making. In the example we are using, where DonutDash is the Co- Brand partner, Marqeta is the Issuer Processor and Program Manager, Marqeta will typically provide a portion of the Interchange revenue to the Co- Brand Partner and also pay fees to the Issuing Bank, Moneybin Bank, for sponsoring the program. In the industry, this is typically referred to as revenue share or Interchange share.
How Does the Co- Brand Partner Make Money? The Co- Brand Partner may have an arrangement with the Program Manager to get a cut of the Interchange Revenue. In most cases, this is on a sliding scale, so as transaction volume grows, the percentage of the Interchange Revenue increases. This revenue share could go into offsetting the cost of card production and also aid in paying for chargebacks or fraud. In the case where the Co- Brand Partner is offering a credit card, it could take on the burden of calculating interest, underwriting, and collections. This could be done by the Co- Brand Partner or sent to a credit card servicer to manage. Revenue for the Co- Brand Partner can be made on interest charged to credit card holders for nonpayment or if they need to delay payment.
Key Takeaways• Businesses can create their own debit or credit cards as a Co- Brand Partner.• Cards are issued through Issuing Banks.• Co- Brand Partners can earn Interchange revenue from a Merchant every time their card is swiped.• The Issuer Processor approves or declines transactions and can also provide APIs for Co- Brand Partners to leverage in their applications.

Digging Deeper

Rick’s key learning was, don’t leave a user hanging; if they fail the first time, give them a few different options or tries to pass. Furthermore, it is better to step up the authentication progressively, instead of asking for everything upfront.
Key Takeaways• Millennials are preferring debit cards over credit cards.• You can get a credit card if you are deemed as“creditworthy.”• Some industries prefer accepting credit cards because the funds are guaranteed by the Issuing Bank.• Merchants will pay higher Interchange on credit cards versus debit cards.
Key Term: Interchange Interchange is a fee that is sent from the Merchant to the Issuing Bank of the card being swiped.
When Emmet buys his mocha from Bucks of Star Coffee, then Bucks of Star Coffee is paying an Interchange fee to Emmet’s Issuing Bank, Moneybin Bank. This is calculated based on a fairly complex rate table set by Visa and Mastercard. Interchange, in addition to the Network Assessment and the Acquirer fee, is charged to the Merchant. However, only the Interchange portion of the transaction is sent to the Card Issuer. In most cases, the Acquirer fee is a flat fee per transaction that is charged at the end of the month by the Merchant Acquirer or the provider of the payment terminal or payment gateway. A small Network Assessment that the Merchant is paying to Mastercard is required, which can be thought of as the toll to use the Mastercard rails.
The two major factors that define the Interchange rate is the type of card and the type of Merchant.
Type of Merchant Each Merchant is classified with a Merchant Category Code or MCC. This code is used depending on the products/ services they offer and what industry they belong in. Certain industries have a larger quantity of transactions than others while other industries yield higher dollar amounts than others and, thus, the card Networks have come up with pricing procedures to factor this in. Additionally, there are types of Merchants that attract customers that may be considered higher risk, because a higher risk of chargebacks or fraud can exist. These are things that are part of very complex logic that the networks have put together over decades. Type of Card The card networks also have different categories of cards. The three main types of cards are debit, credit, and prepaid. Prepaid and debit are very similar because they are based on a“good funds model” meaning that these cards need real money behind them to work. Credit, on the other hand, relies on another entity that is underwriting the credit for these people.
The mode or the message type matters because of the Interchange charged to the Merchant. When you take a Visa debit card and run it as a“Credit” transaction, this will be routed along the Visa Dual- Message rails and will, for the sake of simplicity, charge the Merchant around 1 percent to 2 percent of the transaction value for the Interchange. In contrast, if you used the“Debit” mode or Single- Message, this Interchange drops to something typically below 0.5 percent.
For Merchants, this difference can be significant, and while most Merchants offer both, they are getting more clever in routing transactions to reduce the Interchange as much as possible. Walmart has programmed its terminals to route all debit card- based transactions on Debit Mode and not requiring the user to enter a PIN, which is referred to as“PIN- less debit.” While this mechanism increases the risk for the Merchant because the consumer didn’t enter in this PIN as a confirmation that this is their card, the Merchant could incur a higher- volume chargeback that it won’t win. In the case of Walmart, it is fine with this level of risk considering that as a percentage of transactions, the vast majority of the transactions will go through just fine, and this 0.5 percent difference could save the retailer millions.
Commercial Debit Cards— Higher Interchange A debit card that is funded by a company is being used for expenses and will command a higher Interchange rate(on the higher end of the 1 to 2 percent spectrum).
Credit Cards Credit cards typically command higher Interchange rates(between 2 to 3 percent of the transaction value) because there are more costs to offering credit to customers for the Issuer, because in essence, the Issuer is offering a thirty- day loan to the buyer and, thus, incurs the cost of capital. Furthermore, Merchants are charged more for this because it is known statistically that those who use credit cards spend more frequently and have a higher capacity to spend. Furthermore, since the funds are backed by the Issuer, the Merchant will have a lower risk of chargeback.
The networks also offer different levels of credit cards like Visa Signature or Mastercard World. These are credit cards only offered to users with a higher credit profile, good examples of this is the Chase Sapphire line of cards(Visa Signature) or the Citi Prestige Card(Mastercard World). These cards typically command the highest Interchange rates. So, for example, a basic Visa credit card would command approximately 2 percent of the transaction value as Interchange, a premium Visa card could command up to 3 percent of the transaction value as Interchange.
Durbin Considering that most cards are issued by Chase, Citi, Wells Fargo, and Bank of America, and all of these banks have assets greater than $ 10 billion, they fall into the“regulated” Interchange category as defined by the Durbin Amendment. The Durbin Amendment to the Dodd- Frank rule basically regulates Interchange that can be earned by large Issuers. An Issuer who has $ 10 billion in assets or more falls into the“regulated” Interchange category. Regulated Issuers get 21 cents plus 0.05 percent of the transaction amount, with another penny for approved fraud controls. This means that the Chase Sapphire Preferred card, which is a Visa Signature credit card, actually receives much lower Interchange than a premium Visa card offered through a bank with assets less than $ 10 billion. However, because of the volume of cards issued via Chase, it can make up for this in total volume.
Clearing Time Merchants who clear transactions faster can also qualify for better Interchange rates and this is factored into their Interchange rate table.
Track 3 Data Some Merchants are actually able to provide receipt level detail to the networks. This means that they can actually send to the network and the Issuer the actual items they bought in the purchase. This is referred to as Track 3 data. When Merchants provide this data, then the card networks will allow the Merchant to pay lower Interchange on the transactions where they provided this Track 3 data. For example, if Emmet had bought a mocha and a croissant from Bucks of Star Coffee, the Track 3 data will show both the mocha and the croissant, instead of just showing the total dollar amount of the swipe.
Private Label Cards While some large retailers have taken the approach of reducing Interchange costs by forcing all of its debit card customers to transact via the PIN- less Debit method, some retailers have taken a different approach by offering their own private label cards. Macys, Target, Gap, and many more retailers offer a private label credit card. These cards don’t have any network affiliation and can only work at the stores that issue these cards. Since no network affiliation exists, the terminal will speak directly to the Issuing Bank(which may be the same as the Acquiring Bank in this case). When customers use a private label card, the retailer offering the private label card gains in a few ways:• It has direct access to the customer’s spending data• It reserves a spot in the customer’s wallet, having the retailer’s brand top of mind• No Interchange paid to the Issuer(instant savings of anywhere between 0.5 percent and 3 percent)• Little or no fees paid to the Acquirer because, most likely, the Acquiring Bank and Issuing Bank are the same• Brand loyalty In many cases, the retailer is able to offer cashback to users of its private- label card because it is avoiding the Interchange costs. This is able to create incredible value for its customers who opt into this card.
Co- Brand Cards Best Buy and Amazon, on the other hand, took a different approach. Instead of offering a private label Best Buy card or private label Amazon card, Best Buy partnered with Mastercard and Citi to offer the Best Buy Mastercard, and Amazon partnered with Visa and Chase to offer the Amazon Prime Rewards Visa Card. In this model, these retailers are using the Mastercard and Visa rails to complete the transaction. Just like any other credit card, Best Buy and Amazon are paying Interchange to the Issuer, which is Citi for Best Buy and Chase for Amazon. It is paying a network assessment to Mastercard and Visa. However, since the arrangement is directly with Mastercard and Visa, the networks, and Citi and Chase, the Issuing Banks, it is likely that Best Buy and Amazon are getting rebates from Mastercard and Visa to reduce or potentially wash the network assessment, and also getting rebates from Citi and Chase to reduce or wash the Interchange fees. Best Buy and Amazon then use these rebates to offer rewards points to their customers that can be converted to rewards certificates or cashback. Since this card can also be used as a regular credit card outside of Best Buy and Amazon, Citi and Chase can make revenue by earning Interchange on transactions outside of Best Buy and Amazon. This is why sometimes you will receive emails from Citi or Chase to spend outside of Best Buy and Amazon to earn extra rewards. These retailers and Issuing Banks want this to be your primary credit card, earn rewards for any kind of spend, and redeem these rewards at that retailer, thus bringing you back into Best Buy or Amazon to purchase more from them.
Key Takeaways• Interchange is a fee that the Merchant pays to the Card Issuer.• Merchant type, card type, and a number of other factors determine how much Interchange the Issuer will receive per transaction.• Credit cards command higher Interchange than debit cards.• Debit card modes can also change the amount a Merchant pays in Interchange.• Merchants create private label cards or co- brand cards to help reduce Interchange costs.
ACH Over 82 percent of all electronic payments in the US are run today via Automated Clearing House(ACH) according to Plaid. 11 These traditionally are bank- to- bank transfers and require users to supply their bank account and routing numbers.
Key Term: ACH ACH or Automated Clearing House is a technology that is offered by the“Clearing House,” which is a nonprofit organization. It is a network of banks that have come together to enable the movement of money interbank through the use of bank account and routing numbers. This is a batch process.
On the sixteenth, Emmet will receive a $ 35 overdraft charge from his bank, Moneybin Bank. 9. Moneybin Bank will then process an ACH return to PG& E of $ 73.05. Note: Moneybin Bank has up to three business days from the effective date of the original ACH Debit transaction to process a return, or the return may be rejected by PG& E’s bank. 10. Moneybin Bank will send a NACHA file to the Fed. 11. Moneybin Bank will credit Emmet the $ 73.05 back to his account, bringing him back positive, but he still will have the $ 35 overdraft charge from his bank. 12. The Fed will then send the return NACHA file to PG& E’s bank. 13. PG& E will see a debit on their bank account for $ 73.05. 14. PG& E will then send Emmet an email informing him that his payment was returned.
PG& E will pay an ACH fee to its bank toward the end of the month for all ACH’s they“Originated.” 18. PG& E will also pay for the ACH return. 19. PG& E will pay the Interchange fee to Emmet’s bank, and also pay the network assessment fee to the card network, and the Acquirer fee to its Merchant Acquirer, since it ended up getting payment from Emmet’s credit card over the phone. This is a bit different from card- based payments because in most cases, a card- based swipe will return a decline message in real- time if the user does not have enough money to cover the charge. ACH has the ability to overdraft someone, whereas cards in most cases will just decline and not cause an overdraft if the cardholder has insufficient funds.
Paper checks on average cost the employer $ 4, which includes the cost of printing, mailing, and servicing. In many cases, an employee who opts to receive their money via direct deposit can actually get their money faster because they don’t need to wait for their check to be cleared by their bank, which could take several days.
When an employer runs payroll, which could be a few days prior to payday, they submit a NACHA file to their bank to initiate an ACH transfer to their employees. The employer’s bank then sends this file to the Fed as the ODFI, and the Fed breaks up this file and then sends these files to the banks of the employees so that they can credit the employee’s bank accounts. In most cases, this will create an ACH Credit in the employee’s bank account.
Historically, it would take three days for ACH to process; however, with faster ACH being offered by most banks, this could post within a day. For this reason, the employer will have in the NACHA file the actual date of the transfer and the date in which they want the funds to be“effective” and available in their employee’s bank account. For example, if the NACHA file is submitted on Wednesday and the employee’s bank receives this file on Wednesday, theoretically they can post these funds on the same day. However, if there is an effective date of Friday, then the Fed will not move the funds until Friday. This is a nuance that neo- banks such as Chime, Varo, and Branch are taking advantage of. Since funds coming from an employer are fairly reliable, versus an ACH from an individual, these neo- banks are comfortable in offering these funds to these employees on the day they receive the NACHA file, so in this case, on Wednesday versus Friday. This becomes an added benefit to banking with these neo- banks versus a traditional bank like Wells Fargo because these neo- banks make these funds available sooner. Essentially, these neo- banks are floating those funds for two days for the employee while waiting for the actual funds to arrive on Friday.
When making a large purchase such as a home, one of the most secure ways to send money quickly is via Wire Transfer. In the US, Fedwire, through the Federal Reserve is the primary means to wire funds from one bank to another and is supported by just about every bank in the US. Additionally, The Clearing House also provides a wire service called Clearing House Interbank Payments System(CHIPS).
Key Term: Real- Time Payments(RTP) RTP is a way to push money within seconds by sending money directly to a bank account offered by The Clearing House. In 2017, The Clearing House announced the availability of the Real- Time Payments(RTP) protocol. RTP is a push only transaction and can only work when the sender initiates a push payment. However, the cost needed to be significantly cheaper than the $ 25 that Emmet paid for his wire transfer when buying his home. After all, paying $ 25 for even a $ 100 transfer just wouldn’t make sense. So, the cost of RTP is capped for the banks to $ 0.045 per transfer, to open up wider spread adoption. This is the end cost for the banks, but the banks are allowed to add a markup to this for their servicing.
This RTP technology becomes very interesting once it becomes more ubiquitous with all banks in that it can compete with Push- to- Card technologies like Visa Direct and Mastercard Send. It is just as fast and cheaper in most cases. The only major drawback to RTP over Push- to- Card is that it doesn’t provide an immediate confirmation that the transaction went through.
Key Takeaways• Banks are able to move money via a number of methods in addition to card- based payments.• ACH accounts for 82 percent of all electronic payments in the US and is relatively inexpensive.• ACH is getting faster with same- day ACH but still remains batch- based.• Wire transfers are instant but expensive and used primarily for larger dollar amounts.• RTP operates like a wire for smaller dollar amounts.• Money can move from one bank to another through Zelle, which is a way to move money instantly between bank accounts.• Peer- to- Peer technology offered through companies like Venmo moves money from one person to another primarily through ACH but makes it look instant.

Payments in Action

Visa Direct and Mastercard Send work much in the same way, except that this push transaction doesn’t have a related purchase transaction. This is why this Push- to- Card technology is also referred to as an“Original Credit Transaction(OCT).” This is because there wasn’t an associated purchase transaction that goes along with this.
Why should I wait a week to get my pay? The technology is fairly new, developed in the last ten years, but only recently has it been getting attention. The technology really gained notoriety when Uber started using it to pay their drivers daily. Uber and Lyft drivers have the option of getting paid via direct deposit by the end of the week, or they can get paid instantly at the end of their shift. They also have the option to cash out multiple times a day. The fee typically ranges between $ 0.50 to $ 1.00 per cash out to do this. Most Lyft drivers in the US use the instant payout functionality. About 80 percent of these drivers have Visa debit cards through their bank, and 20 percent have Mastercard debit cards through their bank. They love the fact that they can get cash whenever they need it. They may not need the money, but the fact that they can access it provides an added level of comfort for these drivers. The technology is fundamentally changing the way we think about getting paid.
After selling Omney to Mastercard in 2014, Rodney saw the meteoric rise in usage of the Push- to- Card technology amongst 1099 workers like Uber and Lyft Drivers, but he also saw online short- term lenders using the technology to get money into the hands of its users instantly. The only challenge that these short- term lenders had was the ability to collect back from the user using the same debit or credit card. So, Rodney proposed that Mastercard enable both Push and Pull from the same debit or credit card, but the Pull portion meant that Mastercard would need to become a Merchant Acquirer, and, thus, compete against First Data. Both Visa and Mastercard, being that they are the networks in the middle, need to maintain their stance as the rails moving data and money between Merchant Acquirers and Card Issuers. Rodney’s proposition became politically difficult for Mastercard to do in- house, so Rodney decided to co- found his next startup, Tabapay.
The“Taba” in Tabapay stands for“There and Back Again,” and the market that Rodney was trying to build a solution for was for online lenders who were sending money“there” and then eventually needed the funds“back again.” To do this, Rodney built an Acquirer Processor from the ground up, integrating with Visa and Mastercard as the primary networks, but also integrating with secondary networks or regional networks such as Pulse, NYCE, Star, and Accel. The idea was to allow users in need of a loan to receive money to their debit or credit card, and then pay it back using the same debit or credit card. In doing this, Tabapay also can serve as an Acquirer Processor for any eCommerce site as well, but with their unique offering of being able to offer both push and pull from a single card, Tabapay has been able to power most of the leading Earned Wage Access providers.
In addition to this technology, Tabapay also has built a proprietary algorithm to help its Merchants get the lowest possible Interchange. It uses its connections with primary and secondary networks to determine which network will yield the lowest Interchange and route the transaction through there. The reality is that 89 percent of the cost to a Merchant, or in this case, a short- term lender, is the cost of Interchange. It is something that can’t be negotiated down as it is set by the card networks. The remaining 11 percent is the network assessment that goes directly to the card network, which typically cannot be negotiated down either. Finally, the Acquirer fee can get negotiated down based on transaction volume. This is the direct cut that is given to a Merchant Acquirer like Tabapay. However, to be able to lower the total cost of the transaction, you need to be smart about how you route the transaction to get the best possible rate as the rates vary from network to network.
As Rodney continued to work with his lending customers, he also realized the need to offer non- card- based options such as ACH. This becomes important in cases where a user takes a loan from the lender on their debit card and then cancels their debit card or“freezes” it. The lender will not be able to pull back the funds because the card is canceled or frozen. Thus, to reclaim funds, the lender needs an alternative that could be pulled back via ACH, which would require the lender to have the account and routing number of the user’s checking account.
Key Takeaways• Push- to- Card is a fast and reliable way for people to get money sent to their debit cards.• This technology is changing the way people get paid.• There is less reliance on having to know your bank account and routing number to receive money.
Now that you have seen how these payments technologies work, it is going to be hard for you to find a company that isn’t a Payments Company. Every company won’t be providing payments infrastructures like Marqeta, Stripe, Adyen, Tabapay, or Square but rather they will be using payments at its core.