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Card and Interchange Hearings with the Competition Commission

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Card and Interchange Hearings with the Competition Commission. 19 April 2007. There are significant benefits to universally accepted cards. Benefits to Merchants:. Benefits to Consumers:. Network Effects. Guaranteed payment / risk management.

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there are significant benefits to universally accepted cards
There are significant benefits to universally accepted cards

Benefits to Merchants:

Benefits to Consumers:

Network Effects

Guaranteed payment / risk management

Lower cost / risk alternative to cash and cheques

Outsourced systems / processing

Ease of use and convenience

Likely to generate higher retail sales

Access credit

Less cash management

Records of expenditure

issuing and acquiring are growing rapidly and are subject to vigorous competition
Issuing and acquiring are growing rapidly and are subject to vigorous competition

Issuing

Acquiring

  • > 10 issuers
  • Proliferation of credit card offerings
  • Market share changes of up to 4% p.a. in credit card advances (DI900s)
  • Continuously pressure to review merchant pricing
  • Falling margins

CAGR 2002-2006. Source: FRB

fnb has competitive simple pricing on pos mini atm purchases and cash back @ pos
FNB has competitive, simple pricing on POS, Mini ATM purchases and Cash Back @ POS

FNB has low, flat fees compared to our competitors, driving the growth in debit card transactions

this highly competitive market has resulted in impressive card growth
This highly competitive market has resulted in impressive card growth

Volume Growth of Payment Streams 2002-2006 (CAGR)

129%

High take up of cards

Cash is the largest volume

+20%

+11%

-11%

Cheques

Cash

Credit Cards

Debit Cards

Source: FRB Data

but there are significant costs and unbalanced demand
But there are significant costs and unbalanced demand
  • In order to offer cards as a payment mechanism, banks incur huge costs
  • Either merchants or cardholders need to pay these costs
  • Benefits enjoyed by both consumers and merchants, but retailers’ willingness to pay is greater than consumers’
  • Demand imbalances will remain even when maturity is reached
  • Incentives differ for the four parties. How should optimal pricing be achieved?
slide7

Interchange needs to reflect the dynamic nature of the market

Drives interoperability

Balances the two sided market

The four party model and the use of interchange are key contributors to solving the imbalances, supporting uptake and driving competition

The current model has contributed to these positive outcomes

Interchange

No better alternative that is more competitive and has the same incentives for uptake

Where interchange is not present, uptake is slow and incomplete

and is likely to lead to continued success as dynamics continue to change
And is likely to lead to continued success as dynamics continue to change…

For Example:

  • Introduction of EMV
  • Growing cash back @ POS
  • Continued growth of debit cards
  • Fuel interchange
  • Continued shift away from cash
  • New product and service innovation

The setting of the interchange has a big impact on the incentives for further improvement

FRB favours the past approach, i.e. periodic reviews by a third party as an input into a multilateral setting of the interchange rate at an appropriate level

are there viable alternatives to interchange issuer merchant set interchange directly
Are there viable alternatives to interchange?Issuer & merchant set interchange directly

Impractical due to difficulty of bilateral negotiations

Banks need to negotiate with 120,000+ merchants

Large retailers benefit due to their market power

Small retailers may be prejudiced  someone needs to cover the costs

the four party model credit card

Purchase goods / services using card payment instrument

Cardholder

Merchant

Card Payment Facility

Settlement & Payment Services

Convenience & Credit

Merchant Service Charge

Card Fees

Issuer

Acquirer

Settlement & Credit Risk Bearing

Interchange Fee

The Four Party Model (Credit Card)
the four party model debit card

Purchase goods / services using card payment instrument

Cardholder

Merchant

Card Payment Facility

Convenience & payment instrument

Settlement & Payment Services

Merchant Service Charge

TransactionFees

Issuer

Acquirer

Settlement & RiskBearing

Interchange Fee

The Four Party Model (Debit Card)
the three party model

Cardholder

Merchant

Purchase goods / services using card payment instrument

Card Payment Facility

Card and transaction fees

Authorisation and settlement services

Processor

Convenience & payment instrument & credit risk, where applicable

Merchant service change

Issuer / Acquirer

Carriage Fee

The Three Party Model
merchant service charge associated benefits
Merchant Service Charge & Associated Benefits
  • Highly competitive market
  • Benefits acquirers give to merchants include:
    • Access to a Global Payment System, interoperability
    • Multiple products, channels and value-adds
    • Safe and convenient payment mechanism to transact with their customers
    • Guaranteed payment for goods and services
    • Specialised front and back-end support services
    • Education
    • Compliance with local and international standards
  • Other functions of the acquirer include:
    • Settlement, merchant acquisition, transaction retention, managing risk, data security, maintain standards, performing investigations, authorise processing, clearing, connectivity, manage disputes, merchant assessment and management, processing costs
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