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Payment Cards and Interchange. Banking Enquiry, South Africa Competition Commission. Agenda. Payment Systems and Role of Interchange Carl Munson, Associate General Counsel, MasterCard Economic Function of Interchange Christian Koboldt, DotEcon Competition in the MasterCard Scheme

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payment cards and interchange

Payment Cards and Interchange

Banking Enquiry,

South Africa Competition Commission

agenda
Agenda
  • Payment Systems and Role of Interchange
    • Carl Munson, Associate General Counsel, MasterCard
  • Economic Function of Interchange
    • Christian Koboldt, DotEcon
  • Competition in the MasterCard Scheme
    • Webber Wentzel Bowens
  • MasterCard in South Africa
    • Eddie Grobler, General Manager, Africa, MasterCard
  • Setting Interchange in South Africa: Status Update
    • Caleb Raywood, SAMEA Region Counsel, MasterCard
  • Concluding Remarks
presentation outline
Presentation Outline
  • Proprietary Payment Card Systems
  • Three Party Payment Card Systems
  • Four Party Payment Card Systems
  • “3 1/2” Party Payment Card Systems
proprietary payment card systems
Store Card

Cardholder

Proprietary Payment Card Systems

(i.e., Store Cards)

Merchant

Acquirer

Issuer

Payment

Transaction

proprietary payment card systems1
Proprietary Payment Card Systems
  • Merchant-Acquirer-Issuer bears all costs of and makes all decision about its system
  • Much more expensive for merchants
  • Limited utility for cardholders
  • Explains why proprietary programs have been replaced in many cases by co-branded MasterCard and other four party programs
three party payment card systems
Merchant

Welcome

AmEx

Cardholder

Three Party Payment Card Systems

(e.g., AmEx)

Transaction

Payment

Acquirer

Issuer

Payment

Transaction

three party payment card systems1
Three Party Payment Card Systems
  • Acquirer-Issuer bears all costs of and makes all decision about its system
  • Less expensive for merchants but . . .
  • Greater utility for cardholders but . . .
  • Explains why three party payment cards are not as widely accepted or used as often as MasterCard and other four party cards
three party payment card systems2
Three Party Payment Card Systems
  • Three-party payment card system is a single firm offering
  • System operator:
    • Provides services to both cardholders and merchants under its brand
    • Sets prices to both cardholders and merchants
    • Uses revenue from merchants to partially fund issuing activities in order to the maximize size of its business
four party payment card systems
WelcomeFour Party Payment Card Systems

(e.g., Maestro)

Merchant

Acquirer

Acquirer

Acquirer

Transaction

Payment (less MSF)

Transaction

Payment (less IC Fee)

Issuer

Payment

Issuer

Issuer

Transaction

Cardholder

four party payment card systems1
Four Party Payment Card Systems
  • Systems costs shared among issuers, acquirers and scheme owner/operator
  • Least expensive for merchants
  • Greatest utility for cardholders
  • Introduces competition in all parts of the value chain
  • Introduces no new costs
four party payment card systems2
Four Party Payment Card Systems
  • Four-party payment card system is a joint service:
    • Issuers and acquirers jointly provide the service to cardholders and merchants under a common brand
    • Issuers and acquirers set cardholder and merchant prices in competition with one another (intrasystem competition) and other payment systems (intersystem competition)
    • System operator needs to allocate revenue between acquirers and issuers to cover part of issuers’ costs in order to maximize size of business
3 1 2 party payment card systems
Welcome“3 1/2” Party Payment Card Systems

(e.g., Mister Cash)

Merchant

Acquirer

Transaction

Payment (less MSF)

Transaction

Payment

Issuer

Payment

Issuer

Issuer

Transaction

Cardholder

3 1 2 party payment card systems1
“3 1/2” Party Payment Card Systems
  • Issuers typically own and operate the single acquirer and collectively make all decisions about their “3 1/2” party system
  • Less expensive for merchants?
  • Greater local utility for cardholders
  • Increasingly subject to regulatory scrutiny
the necessity of interchange
The Necessity of Interchange
  • Interoperability
  • Honour All Cards Rule
  • Need for default terms and conditions
    • Timing of payments
    • What constitutes properly presented transaction
    • Financial terms of settlement
  • There is no such thing as a four party system without interchange (or a comparable balancing mechanism)
role of interchange fees
Role of Interchange Fees
  • Interchange fees are the mechanism by which issuers and acquirers share the cost of offering a joint service
  • Without interchange fees, issuers’ revenues would often be insufficient to justify their providing services necessary to the joint offering
  • Issuers’ and acquirers’ respective services benefit both cardholders and merchants (two-sided supply and demand)
  • MasterCard sets interchange fees with the goal to maximise cardholder and merchant usage and thereby Scheme output
potential risks of regulation
Potential Risks of Regulation
  • Favoring one four-party system over another
  • Favoring three-party systems over four-party systems
  • Favoring one form of payment (e.g., cash) over another (e.g., credit cards)
  • Favoring large merchants or banks over smaller ones
  • Discouraging investment in new payment products, services and/or technologies
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