Author: Tey ElRjula

Let’s play a game of guessing…
Open your wallet and take out your debit or credit card.
It has either a Visa or Master card logo, unless you live in China. Then it’s a Union Pay!
The game is stupid I know.
In fact, these logos represent the very few large firms that operate credit/debit card networks in the payment network market. Hence by definition its structure is oligopolical. i
From the billions of payment cards in circulation very few card holders understand how its payment networks operate, yet billions of transactions worth trillions of dollars are processed and settled against goods and services exchanged with merchants.

Visanet

Figure 1 (https://usa.visa.com/dam/VCOM/download/merchants/mdex-fact-sheet.pdf)

 

 

 

 

As Figure 1 shows (based on 2013 figures)
VisaNet the payment network of Visa:
– managed $4.3 trillion in payments volume.
– Processed 87.5 billion transactions.
– Average of 47 thousand transactions per second.
– 100% authorization availability and on time settlement.
In his blog Richard G. Brown explains the Issuer/Acquirer relation in payment networks through scheme and switch theme and what he said to be, the minor miracle.ii

 

 

 

 

 

 

 

 

Payment Card industry (Visa, Master etc.) was able to set standards through arrangements made for participating members in the ecosystem from overall bundle of services, rules, brand, marketing, technical infrastructure, contracts etc. including the rails or pieces of infrastructure that routes messages and transactions.iii
So the role of the most popular brand Visa (as an example), is not to lend money, but to process payments on a domestic and global level in a fast, secure, reliable, flexible, and scalable method – connecting Governments, Consumers, Businesses, and Financial Institutions.iv
Visa processes payments between two sides of the market. The Consumer who likes to pay with plastic and the Merchant who accepts payments by plastic – on a global level / in physical and online shops – regardless of the merchant and consumer’s bank.
So rather than every bank investing in the technology and infrastructure to connect to different participants creating a mess, delays, and inconvenience to both merchants and consumers. Few companies stepped out to build a cross-border, nationwide, global payment network.
The benefits are reaped by all participants in the model (cardholders and their issuers, merchants and their banks, and the provider of payment network like MasterCard, Visa or Discover).

Card industry

Figure 2 (http://www.lansholdings.com/r_d/Challenges___Opportunities_for_Merchant_Acquirers.pdf)

Figure 2 illustrated the Payment Card Industry and how it works with its various participants.
It’s a very simple proposal for the two sides of the market instantaneously.
Merchants benefit from fast, convenient and secure form of payment. Itself the payment is guaranteed as long as secure procedures are followed. In addition to, adding convenience of extra spending that credit cards bring (Merchant’s customers will spend more with cards which means higher sales), minimizing risk associated with handling cash, eliminating bounced checks, implementing innovations, improving marketing, processing multiple type of cards at one terminal, and many more.
Not to forget the critical growth in e-commerce, travel industry, hotels, and other service sectors that benefited from establishment of payment networks as Visa, Master, Amex, etc.
For these valuable benefits, merchants/retailers pay a fee – swipe fee.
On the other side the payment networks made cards available for consumers from all socio-economic ranks. Cardholders use them often free unless credit is wanted, and freedom to choose among merchants even globally, with frequent rewards, and charge back options. Cardholders have zero liability for fraud or loss, and they avoid carrying a lot of cash.
With the convenience of access to money any time, any place, and managing finances online.
“When you step back and think about it, the modern payment card industry is a marvel – an underappreciated, underrated miracle of contemporary commerce: you can travel to any corner of the earth, armed only with a piece of plastic bearing the Visa or MasterCard logo. It’s a minor miracle.”
Richard Gendal Brown, Head of technology R3CEV.
So is it a win-win situation with no Cons?
As great as the present structure may seem it also has several disadvantages.
Numerous complaints come from merchants rallying against less swipe-fees and more transparency in pricing, and it often ends in lawsuits and lobbying to keep business running.
The Durbin Amendmentv (relevant to the U.S. only) is a good example on outcomes unfolding from increasing the transparency in swipe process. The Amendment was a leading light for regulatory authorities to follow in other countries.
Lack of transparency in pricing is a disadvantage, but there are more concerns that if solved, would justify this indiscretion.
The centralized structure of the payment networks makes it Master to its members. The merchant, consumer, their respective banks, and other different participants feed on the Visa/MasterCard network.
Hence the Master-Feedervi structure presents many single points of failure were the flow in the network can be disrupted, and comprised cards and data breaches are growing concern as a consequence.vii

 

Browser Man

Figure 3 http://securityaffairs.co/wordpress/17538/cyber-crime/man-browser-attacks-scare-banking.html

 

 

Many financial institutions in numerous reports has considered “Man in The Browser” as the greatest threat to online banking. It is the classic scheme for the “Man in the Middle” attack, but the attacker (malware) lies in the browser routing the payments to a different account.viii

 

 

 

 

 

Ten years after the development of The PCI Security Council founded by American Express, Discover Financial Services, JCB, MasterCard Worldwide, and Visa International in September 2006 to “develop, enhance, disseminate and assist with implementation of security standards for payment account security organizations.”ix
The results are not promising. Skimming, phishing, cloning cards, and other card-not-present fraudulent activities have losses incurred by card issuers, merchants, and acquirers reached $16.31 billion in 2014, up by 19%.

Figure 4 (https://www.nilsonreport.com/publication_chart_and_graphs_archive.php?1=1&year=2015)

Figure 4 (https://www.nilsonreport.com/publication_chart_and_graphs_archive.php?1=1&year=2015)

Payment Networks are indeed superior, with all the complexity, yet their performance is magical.
VisaNet capable of handling more than 65,000 transaction messages a second operating one of the world’s most advanced processing networks, with fraud protection for consumers and assured payment for merchantsx.
With all this power, the payment card industry is still researching methods to advance using technology as a tool and innovation as an engine.
Visa Europe has already started exploring the under hood of Bitcoin’s network, with testing a proof of concept related to European remittances.xi
Visa and MasterCard could learn from the authentication and verification protocols used in Bitcoin. They can offer their members services such, multi-signature, escrow, and zero-time confirmation transactions. Such services can reduce fraud in online shopping with credit cards, reduce middle men between transactions, and minimize the risk of identity theft.
Until half of the world’s population wave their phones instead of swiping their cards, the rails of payment networks will be centralized in the hands of the few, and the relation between the members will stay Master-Feeder. For now, it’s the cost to pay for more than billion consumer having a payment card, a global system processing thousands of transactions per second, ensuring that merchants can make sales and consumers can pay using the method of payment they so choose.

 

i Source http://www.investopedia.com/terms/o/oligopoly.asp
ii In his blog Richard Gendal Brown describes the Payment Card Industry as a minor miracle

Why the payment card system works the way it does – and why Bitcoin isn’t going to replace it any time soon

iii In his blog Richard Gendal Brown explains the Issuer/Acquirer relation in a scheme and switch theme

Why the payment card system works the way it does – and why Bitcoin isn’t going to replace it any time soon

iv
v https://www.nerdwallet.com/blog/banking/durbin-amendment-explained/
vi The Master-Feeder structure is generally known as Spoke and Hub structure.
http://www.investopedia.com/terms/h/hub_and_spoke_structure.asp
vii http://www.bankrate.com/financing/identity-protection/
viii http://securityaffairs.co/wordpress/17538/cyber-crime/man-browser-attacks-scare-banking.html
ix https://www.pcisecuritystandards.org/pci_security/
xi http://vision.visaeurope.com/why-2015-was-the-year-for-payments/