Prepaid debit cards are very different from credit cards and traditional bank accounts, as we explained in Part 1.
These simple but profound changes have a big impact on all 6 players in this ecosystem:
- Consumers. You and me and 7 billion other souls on this planet. We do not pay the payment fees but we do pay egregious interest rates.
- Merchants. These range from giant retail chains and e-commerce players to local shops and restaurants ie all the places where we buy goods and services. In the pandemic, when every penny counts for merchants, the spotlight is on the payment fees.
- Banks. These are both incumbent/legacy banks and new digital challenger neobanks. Plus there are some niche Fintech ventures that want to round out their offerings by adding a branded spending card.
- Card networks. We used to call them Credit Card networks, but as this is about prepaid cards where there is no credit involved, we simply refer to them here as Card networks. This is firms such as Visa, Mastercard, American Express, Discover.
- Card processors. These are lesser known companies who are critical to this market, more information below.
- Merchant Acquirers. These are lesser known companies who are critical to this market, more information below.
Card Processor 101
If you are a bank (legacy or neo) or a niche Fintech that wants to issue a card that is accepted at merchants that take Visa, Mastercard, American Express or Discover, you may want to use a company offering Card Processor services such as:
- Banking Identification Number (BIN) sponsorship. This is an alternative to going direct to the Card networks, which can take a long time and cost a lot.
- eWallet provision.
- Compliance and fraud services.
- Customer service and project management
Merchant Acquirer 101
Merchant Acquirers (often banks) are the interface between merchants and card networks, providing services such as customer authentication, payment authorisation and settlement. The devil as always is in the details of errors, fraud prevention, refunds and cross border transactions.
Where the puck is heading.
– America is different from Europe as it relates to the interchange rates aka swipe fees that merchants pay. In March 2015, the European Parliament voted to cap interchange fees to 0.3% for credit cards and to 0.2% for debit cards. Some US companies have decided against doing business in Europe due to the low interchange rates. During the pandemic when merchants need all the help they can get, this matters. Which way Asia goes will be critical.
- Crypto payment is coming, perhaps via government issued stablecoins aka Central Bank Digital Currencies. This is a hard to predict disruptive force.
- The need to service the underbanked consumers aka poor people in both developing and developed world who do not have access to credit.
Stay tuned for Part 3 next week – what this will do for bank stocks.
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