A few weeks ago, we published a great article on this same blog where we explained the different roles in the card payment value chain. But after sharing the various players, their roles, and responsibilities, we are left with these big questions: How does this ecosystem sustain itself economically? What are its “unit economics”? And why are they key to the development of the financial ecosystem?
First things first, the business model of the major 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 they started a little over 70 years ago and which remains as relevant as ever, despite the development of alternative payment methods such as RTP (Real-Time Payments), APM (Alternative Payment Methods), and even the dominance of cash in regions like Latin America, Africa, or Southeast Asia.
So, in the four-party model, the following players interact:
• Cardholder: Basically, individuals like you and me, or businesses, who hold a card or payment credential in their name with which they make a payment at any physical or digital merchant.
• Issuer: Simply put, this is the company that, in compliance with local regulations, can issue the payment method and also holds an issuing 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, this is the company that holds the license to link merchants to the four-party model of the franchises, allowing them to accept payments from cards with their brand.
• Merchant: Finally, this is the business or individual that needs to accept simple, fast, convenient, and cost-efficient payments in exchange for their goods or services.
Now, in this four-party model, there’s often a key missing player: the franchises themselves, Visa and Mastercard. Besides being the owners of the “model” or scheme itself, they play a fundamentally basic role. In a nutshell, they act as guarantors of trust between issuers, acquirers, and the various actors in the system. As part of their role as trust builders, they define standards, rules, and protocols, and ensure balance between the issuing world and the acquiring world.
Few people know this, but the franchises have a crucial tool for managing this balance, called the interchange fee. We’ll leave the detailed definition for another time, but suffice to say that it is a concept/tool that gives economic rationale to the four-party model.
So, getting to the point, to understand how the “Unit Economics” of the acquiring business work, let’s establish two key definitions:
1. Visa and Mastercard, as the owners of the “model” or “scheme,” generate their income by charging their direct customers, who are the entities with issuing and acquiring licenses. With this in mind, it’s easy to understand that neither the cardholder nor the merchant are direct clients of Visa and Mastercard, though they are a fundamental piece of the four-party model. In other words, it’s a B2B2B business (in most acquiring cases) and B2B2C (in most issuing cases).
2. The issuer’s customer is typically the cardholder, while the acquirer’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-party model, we can revisit the definition of the interchange fee. At Akua, we have a very simple definition after years of working in this industry:
“The interchange fee is typically a percentage value unilaterally defined (in most cases) by the franchises for purchase transactions within their scheme, which the acquirer must assume and transfer as a benefit to the issuer. How is it defined? Usually based on the type of business or ‘category’ of the merchant where the purchase is initiated and the type of issuing product, card, or credential used for the transaction (debit, credit, prepaid, and their color or fake metal variants 😅).” — Akua team
Unilateral? Yes, and far from being negative (as it might seem in an open and competitive market), this is actually what gives balance to the “model” or “scheme” led by Mastercard and Visa. As we mentioned earlier, it helps foster the growth of the payments business, and we can dive into this in another post.
Now that we have enough information, we can finally talk about acquirer Unit Economics. The easiest way to show this is through a cost-revenue diagram for the acquirer, with example data:
Costs - Income |
Interchange rate = (1%) |
Franchise Fees (Visa and Mastercard) = (0.20%) |
Infra, Tech, Product and Operation = (0.50%) |
Merchant Discount Rate = 2% |
Total acquiring result = 0.30% |
To wrap up this chapter, let’s talk about the Merchant Discount Rate (MDR), which is simply the fee a merchant pays to accept card payments 💰. From the previous table, we can see that if an acquirer charges their merchant 2%, the final profit for the acquirer is much lower than the income received. Typically, this final profit increases or decreases depending on how much and how well the acquirer can support merchants with more and better technology, product, and operations, making our business highly competitive.
As you can see, acquirer economics are quite tight, and they become even tighter when faced with chargebacks, fraud, returns, and low authorization rates for transactions. Therefore, it is crucial for acquirers to have a technological partner that enables fast, simple operations with high standards of security, versatility, and support. This allows acquirers 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 acquiring processing in Latin America, impacting organizations with 100% cloud-based infrastructure, flexibility, reliability, and innovation, all in a single integration for the entire continent.
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