Understanding Card Acquisition 💳 from its “Unitary Economy”
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A few weeks ago we published a great article on this same blog where we explained the different roles in the value chain of card payments. But after sharing the different actors, their roles and responsibilities, we are left with these big questions: How is this ecosystem economically sustained? What are your “unit economics”? And why are they key to the development of the financial ecosystem?
First, the business model of large global networks (Mastercard and Visa) can only be described as “magical”. They managed to interconnect the world through what we know as the “four-party model”, a task that began just over 70 years ago and that is still as current as ever, despite the development of alternative payment methods such as RTP (Real-Time Payments), APM (Alternative Payment Methods) and even the predominance of cash in regions such as Latin America, Africa or Southeast Asia.
Thus, in the four-party model, the following actors interact:
• Cardholder : Basically, people like you and me, or companies, who have a payment card or credential in their name with which they make a payment in any physical or digital store.
• Issuer : In simple terms, it is the company that, in compliance with local regulations, can issue the payment method and that also has an issuance license with Mastercard/Visa. In other words, it is the entity authorized to provide cards or payment credentials to cardholders.
• Acquirer : Similar to the issuer, it is the company that holds the license to link businesses to the quadripartite franchise model, allowing them to accept card payments with their brand.
• Merchant : Finally, this is the company or individual that needs to accept simple, fast, convenient and profitable payments in exchange for their goods or services.
However, in this quadripartite model, a key actor is often missing: the franchises themselves, Visa and Mastercard. In addition to being the owners of the “model” or scheme itself, they play a fundamentally basic role. In short, they act as guarantors of trust between issuers, purchasers and the various actors in the system. As part of their role as generators of trust, they define standards, rules and protocols, and ensure the balance between the sending world and the acquiring world.
Few people know this, but franchises have a crucial tool for managing this balance, called Exchange rate . We will leave the detailed definition for another time, but suffice it to say that it is a concept/tool that gives economic reason to the quadripartite model.
So, to get to the point, to understand how the “Unitary Economy” of the acquiring business works, let's establish two key definitions:
1. Visa and Mastercard , as owners of the “model” or “scheme”, generate their income by charging their direct customers, who are the entities with issuance and acquisition licenses. With this in mind, it is easy to understand that neither the cardholder nor the merchant are direct customers of Visa and Mastercard, although they are a fundamental part of the quadripartite model. That is, it is a B2B2B business (in most cases of acquisition) and B2B2C (in most cases of issuance).
2. The issuer's customer is usually the cardholder, while the purchaser's customer is the merchant, the payment aggregator or the ISO (Independent Sales Organization), among others. Therefore, it is the licensees (issuer and acquirer), not Visa and Mastercard, who decide how much and how to charge the merchant/cardholder.
Now that we understand the relationships and dependencies of the four-part model, we can re-analyze the definition of exchange fee . At Akua, we have a very simple definition after years of working in this industry:
“The exchange rate is typically a percentage value defined unilaterally (in most cases) by franchises for purchase transactions within their scheme, which the acquirer must assume and transfer as a benefit to the issuer. How is it defined? Generally depending on the type of business or 'category' of the store where the purchase began and the type of issuer product, card or credential used for the transaction (debit, credit, prepaid and their color or fake metal variants 😅).” — Akua Team
One-sided? Yes, and far from being negative (as it might seem in an open and competitive market), it is actually what gives balance to the “model” or “scheme” led by Mastercard and Visa. As we have already mentioned, it helps to promote the growth of the payment business, and we can go deeper into this in another post.
Now that we have enough information, we can finally talk about the purchaser's unit economy . The easiest way to show this is through a cost-income diagram of the purchaser, with example data:
Costs - Revenue
Exchange rate = (1%)
Franchise Fees (Visa and Mastercard) = (0.20%)
Infrastructure, Technology, Product and Operation = (0.50%)
Merchant discount rate = 2%
Total result of the acquisition = 0.30%
To close this chapter, let's talk about Merchant Discount Rate (MDR) , which is simply the fee a merchant pays for accepting card payments 💰. From the table above, we can see that if an acquirer charges their merchant 2%, the final profit for the acquirer is much lower than the income received. Usually, this final profit increases or decreases depending on how much and how well the acquirer can support merchants with more and better technology, products and operations, making our business highly competitive.
As can be seen, the acquirer economy is quite tight, and it becomes even tighter when faced with chargebacks, fraud, returns and low transaction authorization rates. For this reason, it is crucial for purchasers to have a technological partner that allows fast, simple operations with high standards of security, versatility and support. This allows them to make the most of the “model” and be more profitable. These market needs are what gave rise to Akua, building the new standard in acquirer processing in Latin America, impacting organizations with 100% cloud-based infrastructure, flexibility, reliability and innovation, all in a single integration for the entire continent.