Cutting Costs and Increasing Sales: Where do the Payment Schemes Fit In?

Cash can be costly. According to independent research by the Centre for Retail Research, Nottingham, commissioned by Visa Europe, the total cost of handling cash to UK retailers alone was £2,204m in 2005-6 – 2.75% of their total cash receipts.¹ Cheque usage is on the wane. Not only are cheques time-consuming to write and impractical in a number of modern payment scenarios, they are also costly for businesses to accept.

Against this backdrop, payment cards are becoming an increasingly credible alternative. They help consumers to make purchases and manage their money, and businesses to cut costs, secure sales and manage their cash flow. But how does it all work?

The Payment Process

A normal card payment has two main elements: authorisation, where the accepter of the card gets permission to obtain payment from the card provided to enable the customer to purchase the goods or service; and clearing and settlement, where funds are transferred to ensure everyone is paid.

Payment schemes are typically membership associations, such as VISA Europe, which is owned and governed by 4,600 European member banks and financial institutions. It operates according to the four-party model linking consumers, merchants and their respective banks as follows:

Figure 1: Payments Schemes

Source: Visa

When a consumer presents a Visa card for payment, the merchant requests authorisation from its acquirer (the financial institution with whom it enters into an agreement for acceptance of Visa products and services). The acquirer then sends the request to Visa Europe. We then route this to the issuer (the financial institution that issues the Visa card to a cardholder and maintains the contractual relationship with the cardholder for that purpose). The issuer approves or declines the transaction and then Visa Europe sends a response to the acquirer. The acquirer forwards the response to the merchant, who completes the transaction.

An inter-bank processor can also provide a number of checks to authorisation requests. Visa Europe, for example, can apply checks relating to encryption, transaction velocity checking, fraud screening and risk management.

With Visa Europe processing systems, this whole ‘switching’ process takes 31 milliseconds on average and happens millions of times a day. At peak times, such as in the run-up to Christmas 2007, the systems switched up to 26 million transactions a day, while in 2007, it switched six billion transactions.

Getting Paid

Payments systems also route clearing records between acquirers and issuers, as shown in Figure 2:

Figure 2: Payments Systems Route Clearing Records

Source: Visa

The merchant sends a transaction receipt to its acquirer. In a typical retail sales environment, this happens electronically as part of the end of day procedure when the acquirer dials in to retrieve the transactions taken on an electronic terminal during the day’s trading. The acquirer validates the transaction, credits the merchant and submits the transaction to Visa Europe. We pay the acquirer and debit the issuer. The issuer either directly debits the cardholder’s account or sends a statement to the cardholder; then the cardholder pays its issuer.

In a global scheme, this can happen in a number of currencies.

The Role of the Banks and Payment Schemes

Card schemes operate according to a number of different models. Some are involved in directly acquiring merchant transactions and issuing payment cards themselves. As a membership association operating according to the four-party model, Visa Europe does not engage in either of these activities, nor does it determine merchant or cardholder pricing rates. This is performed by its members, which have issued in excess of 360 million credit or debit cards and contracted with over 8.5 million merchant outlets.

As well as switching payment transactions between member institutions, payment schemes also manage their brands and the scheme rules, which allow everyone who participates in the scheme to understand their rights and responsibilities. Typically, the rules cover how and where merchants can use scheme logos, how to carry out transactions properly, how disputed transactions are handled between member institutions, and the use and storage of cardholder and transaction information.

Cut Costs

While there are costs associated with accepting every method of payment, is your organisation comparing like with like when it evaluates the various costs? Does your organisation know the real cost of cash to your business? It is often thought to be free or of negligible cost, but has your organisation ever calculated it? There’s the cost of counting cash, errors or internal fraud, non-acceptance of counterfeit notes, and having it collected, as well as banking charges. Payment card acceptance can help businesses lower their overheads and break their cash dependence.

Secure Sales

In a retail environment, card acceptance enables on-the-spot purchases and, in the retail industry, can help retailers convert window shoppers into customers with the potential for fewer lost sales and bigger purchases. It also supports regular or ongoing payments, such as insurance premiums.

Card payments are also suitable for a variety of channels, for example face-to-face in store or remotely over the Internet, telephone or post. This enables merchants to develop their businesses across multiple channels, which is becoming increasingly important. It also allows merchants to respond to consumer demand for speed, convenience and a choice of payment options plus attract Visa cardholders from all around the world.

Harness Innovation and Gain Greater Efficiencies

Card transactions are processed in seconds. Payments can be deposited directly to a merchant’s account by an acquiring bank, allowing merchants to benefit from easy processing and timely payment.

Those who accept payment cards have seen EMV chip and PIN advancements, while developments in contactless payments and prepaid cards are ongoing, as well as greater use of unattended payment terminals and mobile payments. The continued expansion of the use of the Internet presents other opportunities to secure consumers’ online shopping requirements.