We encounter payment networks nearly every day. Whether buying lunch with a credit card or withdrawing cash from an ATM, we rely on payment networks to complete our transactions securely and accurately. But while they are an essential cog in the world’s economic machine, we generally know very little about payment networks and how they operate.
We spoke with Rob Rankin, senior vice president at Worldpay, who helps us breakdown the complicated world of payment networks and discusses what financial institutions should know about payment networks to maximize their investments.
First things first – What is a payment network?
A payment network is the intermediary between all of the various elements that comprise a transaction, from the cardholder all the way through to the settling of transaction funds. In other words, whenever cardholders use their credit or debit card at a point-of-sale terminal or ATM, that transaction is routed through a payment network.
What is the purpose of a network?
Networks provide connectivity between the financial institution/issuer and the merchant/ATM. As the intermediary, a network makes sure that, regardless of whether the card is used at a merchant or an ATM, the authorization and funds movement are properly directed to ensure money is appropriately distributed. The merchant and merchant processor determines how a point of sale (POS) purchase payment will be routed. ATM transactions are typically routed through the financial institution’s designated preferred ATM network.
To clarify, can you discuss the different types of transactions covered by payment networks?
There are a number of transactions types supported by payment networks. They include transactions at ATMs – such as cash withdrawals, transfers and deposits, – and at POS terminals where a cardholder swipes, taps or inserts the card or payment device. So, anytime a transaction is made and money needs to be transferred, a payment network is behind the scenes. Payment networks also support peer-to-peer payments and bill payments.
What elements make up a payments network? Are there different kinds of payments networks?
Typically, a network will support two primary transaction sets – ATM transactions and POS transactions. Each network has its own set of operating standards that govern how it authorizes, settles, and supports transactions. This is where you’ll start to see differences among networks – additionally some of the networks’ economics may be more favorable to merchants while others tend to favor the issuer. This preference can be seen in the structure and rates of a network’s fees.
Why should an issuer care about what network they are using?
For a financial institution – as with any business – it all comes down to maximizing the return on its investment. It’s important for issuers to understand its customers purchasing habits and the economics behind their chosen payment network. There could be financial ramifications and missed revenue opportunities if the institution chooses a network whose economics do not appropriately align with how and where cardholders are using its cards. This point underlines the importance for institutions to understand its customers buying habits and align its networks to maximize revenue from those buying habits.
What advice would you give to issuers when considering the financial implications of using one network over another?
The financial implications that come with network choices are centered on interchange and switch fees. Interchange is the amount that gets paid to the issuer for a POS transaction, while a switch fee (sometimes called assessments) is paid by the issuer to the network. Generally speaking, it is usually in the issuers’ best interest to gravitate toward higher interchange fees with low switch fees.
How have EMV and Tokenization affected payment networks?
EMV and Tokenization have made payments safer and more secure. The shift to EMV has forced each payment network to invest in infrastructure upgrades to support more complex transactions. All participants in the transaction flow will benefit from the advancements in transaction security.
Any last words?
Payment networks are complicated to understand, but we need to remember that they only make up one component of a larger payments strategy. I can’t stress enough how important it is that institutions look at – and understand – each component of the holistic payments strategy to ensure they are not missing out on revenue opportunities.
For more information on payment networks and how Worldpay creates personalized and secure solutions for financial institutions, click here.