On first inspection, the card payments industry appears to be a mismatch of service providers covering similar functions. However, each firm has an important role in the card payment process. From customer sales to transaction bookings, this article examines a wide array of processes that are crucial for the seamless operation of card payments and provides insights into the industry’s operational challenges and opportunities for optimisation.
The crucial first step in the value chain is the customer solicitation process. Traditionally managed solely by banks, it has evolved to include a diverse range of client acquisition parties. It entails developing product offerings, marketing, and sales efforts. Once committed, customers undergo regulatory-driven onboarding, including Know Your Customer KYC risk checks and sanction screenings, culminating in a contractual agreement between the customer and issuer.
Customers are required to have a physical or virtual card to make payments. While historically, physical cards sufficed, contemporary issuance practices supplement physical cards with token creation to enable virtual cards, such as those utilised in GooglePay or ApplePay.
To issue cards, a bank or an issuer must hold a licence from a card scheme to participate in the network and use their branding. Once a licensee, the issuer must comply with the network mandates and requirements to maintain the licence (known as the scheme compliance process).
Once customers pay at a shop or online, two messages are transmitted from the merchant’s acquirer to the issuer: an authorisation message followed by a clearing message. The authorisation message initiates a risk management process focused on fraud prevention, including transaction history analysis, card/token validation and credit line/account fund checks. Upon successful verification, the payment is approved. However, the actual movement of funds occurs after the issuer receives transaction details from the merchant (clearing message), prompting an automated process within the issuer’s core banking system to associate transactions with cardholder accounts and initiate billing.
If the cardholder has trouble making payments or has questions about their accounts or bills, they can contact customer service. The issuer facilitates any customer questions through its customer service, which call centres usually handle. Customer service is a core part of the payment value chain, with the potential for cost-saving using solutions that enable customer self-servicing.
The card payments industry is undergoing significant transformations. These changes not only reflect the industry’s commitment to enhancing user experiences but also signal a deeper need to address operational challenges within the card payments value chain and how they can optimise it.
Traditionally, banks have viewed payments as a commodity, heavily relying on Third Party Providers TPPs) to enable payment for their customers. This reliance on outsourcing has created a complex and elongated value chain, leading to higher costs per transaction, extended implementation timelines due to multiple parties’ involvement, and reduced flexibility for banks to innovate and quickly deploy new features to cardholders.
In the past decade, payments have become a strategic success factor for banks to acquire and retain customers, leading banks to shift focus towards differentiating their payment product offerings. Concurrently, TPPs aim to standardise and streamline their services to maximise economies of scale. Therefore, in the last few years, the market observed several consolidations among TPPs.
Previously, a more competitive environment among TPPs afforded banks greater leverage in negotiations and influence over technological developments. However, the recent consolidation of TPPs has narrowed the options for issuing banks, diminishing their bargaining power.
Another important point to consider is that issuing banks typically offer a large range of payment products, such as debit, credit, and prepaid cards, under various payment schemes (e.g., Visa, Mastercard). Interestingly, it is uncommon for an issuing bank to streamline the processes for different payment products by having one value chain used across all payment product offerings. Rather, they maintain distinct value chains for each type of payment product, which complicates the management of costs and services across their offerings and the value chain as a whole.
To understand an optimised card payments value chain, consider a challenger bank that builds its value chain from scratch to meet customer needs effectively. This requires having substantial in-house technical infrastructure and expertise, primarily focusing on payment processing. This independence from TPPs, coupled with streamlined processes across their payment products, grants such players cost advantages, accelerates innovation and allows them to introduce new features and services to their customers in a shorter time frame than other banks can.
Technological advancements over the last decade have enabled significant shifts in the card payments value chain, with many challenger and incumbent banks in-housing large parts of their technical infrastructure. Cloud technologies, in particular, are allowing banks to in-source large segments of their value chain – and also significantly reduce costs associated with data centres. In addition, the rise of API architectures has made it easier to build in-house technical infrastructure at a low cost.
Today, card payment value chains are often fragmented, with many technical and operational processes outsourced. However, more issuing banks looking to optimise their value chains are insourcing key processes, such as payment processing and operations, leveraging modern technologies to reduce costs and speed up innovation while enhancing cardholder services.
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