April 1, 2022 • Technology
Skaleet: the first Core Banking provider to enter the metaverse! 🔥
We believe that blockchain-based payments and providers will dominate the metaverse.
April 21, 2022 • Payments
Both card-based payment processing and financial institution account-to-account payment processing have come a long way over the past decade. What was once an arguably commoditized landscape of providers with a clear delineation, payment card issuing, and account-to-account (A2A) payments have undergone significant changes in technology and business models whilst witnessing a rise in new market entrants.
Changing patterns of supply and demand are shaping the payments landscape. On the supply side:
On the demand side, buyers are seeking:
These changes have created a landscape of technology providers that offer buyers significantly more options than were available five or ten years ago. Where there used to be two or three provider options per category, often with geographic limitations, there are now more providers with broader geographic coverage, support for a wider range of business models, and the capacity to support both card-based payment and A2A payment processing.
We can broadly classify the provider landscape into "Traditional" and "Next Generation" providers. Traditional providers primarily target financial institutions, while Next-Generation providers successfully realize strong growth and high valuations by focusing on previously underserved categories such as debit and prepaid cards, virtual cards, B2B payments and Open Banking. Next-Generation providers target fintechs and corporates, often using "as-a-service" business models, but are likely to target financial institutions to seek cost savings.
Source: Flagship Advisory Partners - "The Processing Landscape for Card Issuing and A2A Payments"
Client needs and buying behaviors vary considerably from one segment to another. While banks often seek well-established brands and have long and idiosyncratic buying behaviors, fintechs and corporates place a premium on speed and ease of integration. As many financial institutions digitize and seek to reduce technical and business silos while increasing agility, traditional vendors have adapted and next-generation vendors are seeing opportunities for entry.
There are a variety of different players involved in payment card processing: We have the payment cardholder at an issuing bank (the bank that issues the card used by the customer) to pay for goods and services, the merchant who can be any type of business that is required to be able to accept card payments, the merchant bank to manage accounts and accept deposits generated by card payments, payment processors who process the transaction and connects all the parties involved to make the payment possible, and the card networks who set the payment rails and interchange rates.
Card processing can be broken down into three distinct processes: authorization, settlement, and funding.
As part of the authorization process, the cardholder presents their card to a merchant (e-commerce or point of sale) in exchange for goods or services. The merchant sends a request for payment authorization to their payment processor. The payment processor then passes the transaction to the appropriate card network, which communicates with the cardholder's issuing bank. Next, the authorization request is made to the issuing bank (CVV, AVS validation, and expiration date), which must approve or decline the transaction. The issuing bank then sends the approved (or declined) status back to the card network, merchant bank, and eventually to the merchant. This card authorization process takes only a few seconds.
In terms of the settlement and funding process, merchants send batches of authorized transactions to their payment processor. The payment processor passes the transaction details to the card networks, communicating the appropriate debits with the issuing banks. The issuing bank charges the cardholder's account for the transaction amount and transfers the funds to the merchant bank, minus interchange fees***. The merchant bank deposits funds into the merchant account. Settlement and funding processes that used to take days can now invariably be completed overnight, enabling merchants to get paid quickly.
***Interchange fees Even if you know a lot about payments, the chances are you've misused the term "interchange." The fact is, interchange is just one of three components of the total cost of the card payment process called the merchant discount rate (MDR). Each component represents a financial institution or technology provider that handles the processing of a transaction. Of these, we see the MarkUp (or processing fee) which is the fee charged by the payment service provider or processor/acquirer (fixed, variable, and negotiable fees). The second component is the assessment fee (or dues/assessments) paid directly to the card networks (non-negotiable and reviewed twice a year). The final component is the interchange (issuing bank fee), which is ultimately paid by the merchant to the issuing bank and then shared with the issuer's processor and the card program manager. Interchange rates are set by the card networks and only reviewed twice a year. Understanding processing fees is the first step toward demystifying payments for your business.
Payments are an essential part of today’s global economy. As a result, issuers, card networks, payment processors, and merchant acquirers are investing heavily in revamping their payment systems, capitalizing on several technological advances to better align with customer preferences and sector-specific business requirements.
Recognizing that disruptions and new challenges exist, banks and payment processors are modernizing their three payment layers: infrastructure and deployments (e.g., data, switching, system of record, and tokenization), middleware ecosystem (e.g., routing, analytics, risk and authorization management), and front-end channels and execution systems (e.g., customer/user experience, new point-of-sale solutions, etc.).
By the early 2010s, the startup PayPal was already processing over $350 billion in payments annually. Advances in open-source, decentralization, and the cloud have since enabled flexibility and on-demand capacity provisioning. Fintechs like Adyen, Stripe, and Square have disrupted the payments industry in this way. In this new era, these fintechs are able to provide "as-a-service" payment functions while relying on flexible and fully automated payment systems. With the benefit of open source technology, it is also easier to apply deep learning to simplify credit decisions, reduce churn rates, and optimize authorization rates while lowering declines.
We expect the card-based payment processing landscape to transform into an automated and optimized payments-as-a-service (PaaS) future state, in which we will see a variety of separate, assembled and extended payment functions such as tokenization, routing and a choice of intelligent payment service providers that offer a superior customer experience. In addition, the PaaS model supports a personalized end-to-end experience, including CVVs, token swapping and backward compatibility. By adapting quickly and making investments In payment infrastructures, card providers can rise to the challenge and launch new products/services faster.
Account-to-account (A2A) payments facilitate money movement from one account to another, removing the need for intermediaries at the time of the transaction as with payment cards. There are two types of account-to-account payments:
These new payment rails are networks that facilitate the movement of money from one bank account to another. However, there is no single global, standardized payment rail; each country or regional organization is responsible for building and configuring their own account-to-account (A2A) payments. In recent years, a number of central banks have launched innovative projects to build A2A payment rails. Some countries, such as Mexico, Australia and the Netherlands, have developed regulatory sandboxes to encourage the creation of new and innovative offerings to promote the use and interest of these new payment rails. Here are a few specific examples:
The possibilities and benefits of A2A payment rails are very real and will continue to transform the payment landscape in the coming years.
Open Banking facilitates the exchange between software and technology platforms. These APIs can create a link between different banking, fintech or technology platforms, enabling direct money transfer between payer and seller accounts. This means that account-to-account payments can now be made at the point of sale instead of using a payment card. This new payment rail offers speed and convenience, without the need to re-enter banking information or charge merchants transaction fees. As new payment alternatives such as e-wallets are making everyday transactions easier, they are becoming increasingly popular, and Open Banking is the catalyst for this estimated 78% annual growth in the European Union
The payments industry is preparing itself for a "cardless" world. There is a natural reluctance on the part of card issuers and networks to encourage consumers to adopt new alternative payment methods because of the commercial interest in maintaining payment card revenues. However, change seems inevitable, based on catalysts like Open Banking, which banks, merchants and consumers will embrace over time. As a result, card networks have already taken the threat of A2A payments seriously, attempting to diversify their product portfolio with a series of strategic acquisitions such as Mastercard with the buyouts of Vocalink and Nets, or American Express launching Pay By Bank Transfer to allow consumers to make real-time payments from their bank accounts.
Banks, for their part, are seeking to better control the payment rails so that they no longer have to rely solely on the Visa/Mastercard duopoly. They have also launched the EPI (European Payments Initiative) project to create a new payment infrastructure capable of managing and processing account-to-account payments. Thanks to the growth of Open Banking, new companies have begun to participate in the A2A payment ecosystem, including Trustly, Fintecture and Token. A2A payments provide a payment infrastructure that will enable new payment methods such as QR codes, payment wallets, buy now pay later (BNPL), crypto-currencies and stablecoins to gain in importance.
Skaleet's SaaS banking platform facilitates card and A2A payments not only for issuers, but for processors/purchasers too, while also rethinking existing IT infrastructures and fee structures in order to generate more revenue.
Skaleet’s solution allows you to (1) orchestrate merchant payments by managing the integration of the payment players of your choice to distribute a wide range of payment methods to marketplaces and POS providers, (2) create a payments-as-a-service (PaaS) platform to facilitate the distribution of payment instruments or third-party collection solutions to financial and non-financial institutions (Embedded Finance), and (3) launch new financial institutions (digital banks or neo-banks) with the capacity to manage a payment card program (card creation, authorization management or payment processing) to speed up time-to-market, reduce technological resources and costs associated with launching the program.
Innovation. FinTech. Digital Banking. Neobanks. Open Banking. Core Banking. Cloud.
April 1, 2022 • Technology
We believe that blockchain-based payments and providers will dominate the metaverse.
Would you like to learn more about Skaleet and its solution?