Payments Ecosystem Part 4: Making Payments
This is the final part of a 4 part series on the Payments ecosystem. Part 3 to this series is available here.
How Would one go About Creating and Issuing their own Debit or Credit Card?
Emmet had been watching his dad’s donut business grow by leaps and bounds on the sidelines. Donuts have been on his mind all day — classic crullers, glazed, and his all-time favor- ite, the Boston creme. He’s just so busy working at his startup in Oakland and wishes that someone could just drive to his dad’s donut shop in San Francisco and pick one up for him. Immediately, a fl ash of inspiration hits him! What if he can build a donut delivery business? He will call it DonutDash! He does a quick search, and there are plenty of people out there who would love to get paid as a driver to pick up and deliver donuts. He also knows that plenty of people are just like him and would love a donut but don’t have the time to go out and get it. From his dad’s experience, he knows how to accept payments on a website or mobile app by using a Payments Facilitator. But how will he pay the individual donut shops?
Does the driver pay with his own credit card and then submit the receipt to DonutDash to reimburse? Does he carry around a prepaid card from DonutDash with a bunch of money on it that he could potentially go and use for other things like a soda for himself or something even larger like a TV at Best Buy?
Considering that these are contractors, can Emmet trust these drivers to only go and pick up the donuts? The margins on the donut delivery are so razor-thin, even if the driver added a soda to the order, Emmet would be underwater.
DonutDash Gets its Own Debit Card
Emmet knew that his new business, DonutDash, would need to issue its own debit card through an Issuer Processor and Program Manager around the block from him in Oakland, Marqeta. He knew that he would need very finite controls on the spend on this debit card. To run a successful donut delivery operation, Emmet would need:
The ability to link the original order from the DonutDash customer to the actual spend that happens at the restaurant by the driver.
The ability of the driver to do as many pickups as possible without having to worry about carrying receipts and submitting for reimbursement.
Prevent fraudulent charges from drivers by controlling the amount that can be spent and when the card can be used.
The solution was a custom DonutDash Mastercard debit card that would be given to each one of its drivers when they started working with DonutDash. But to do that, how can a company whose focus is in delivering donuts for the masses going to build a payments product?
In this chapter, we’ll learn about all of the parties involved in Issuing a debit card and the types of responsibilities that each party has.
Card Program Construct
In this case, DonutDash would not have an issue distributing these cards. They would have plenty of drivers who could use the card to simplify their donut delivery process. In this example, we will start with DonutDash as the Co-Brand Partner. You can think of them much like when Delta airlines issues an American Express card.
DonutDash Driver is the cardholder
DonutDash is the Co-Brand Partner
Mastercard is the Card Network
Moneybin Bank is the Issuing Bank
Marqeta is the Program Manager
Marqeta is the Issuer/Processor
Key Term: Co-Brand Partner
This is typically a brand or company that is marketing the card. This is the brand shown on the card in addition to the card network brand. In some cases, this brand will appear on the front of the card without the Issuing Bank, and in other cases, it may appear on the front with the Issuing Bank.
Card Network: Mastercard
To understand this better, we will start with the Card Network, Mastercard. Mastercard is effectively working to link the Merchant, the local donut shop, to the cardholder, the DonutDash driver. They will route the transactions appropriately, so when the driver swipes his DonutDash Mastercard at Mufasa’s Donut Shop, Mastercard will take the information from that swipe at Mufasa’s Donut Shop and pass that information to the Issuer Processor, Marqeta, so that an authorization decision can be made. All of this data transmission is done on the Mastercard platform. The card network also facilitates the movement of real money from one bank to another. Essentially, it will take money from DonutDash’s Issuing Bank, Moneybin Bank, and move it to Mufasa’s Donut Shop’s bank to pay for the donut order.
Issuing Bank: Moneybin Bank
The Issuing Bank, Moneybin Bank, takes a license from Mastercard to use its brand on the cards. The cards are technically “Issued by Moneybin Bank.” You can think of this as if you have a bank account with Bank of America, your Visa debit card is issued by Bank of America, but since the Bank of America branding is on the card, Bank of America is also the Co-Brand Partner. In the case of Moneybin Bank, it is serving as just the Issuing Bank. Its role is to ensure that money is being moved appropriately, it is maintaining the connection with its processors and networks. Additionally, Moneybin Bank will provide compliance oversight to all of the programs it issues. For example, it will be the one applying fraud rules to protect cardholders.
Program Manager: Marqeta
Key Term: Program Manager
The program manager is the one who is managing the day-to-day operations of the card program including settlement, fraud management, and maintaining the relationship with the Issuing Bank, card manufacturer, card network, and the cardholder.
The Program Manager is Marqeta. In many cases, the Program Manager is responsible for marketing the cards. However, since DonutDash is the Co-Brand Partner, the marketing aspects go to DonutDash, and it applies some compliance rules that come from Moneybin Bank, the Issuing Bank, to make sure that the cardholders are being communicated with appropriately.
Additionally, the Program Manager is responsible for making sure that settlement is happening appropriately and that fraud is being managed. If cardholders find fraudulent charges and request a chargeback, they will go to the Program Manager to process the chargeback.
The Program Manager also maintains the relationship with the Card Network and the Issuing Bank to ensure that the program is operating correctly. It will also place orders for cards and manage the relationship with the card manufacturer. A bulk of the day-to-day operations falls on the Program Manager.
The Program Manager also ensures that it is doing adequate background checks on its cardholders by performing Know Your Customer (KYC) checks in accordance with the Issuing Bank’s requirements.
Issuer Processor: Marqeta
The Issuer Processor is the underlying technology that is integrated in with Mastercard, the Card Network. It needs to be able to parse an ISO8583 message (a standard transmission protocol that all Card Networks have agreed on using) from Mastercard in real-time and give a response in less than three seconds. The Issuer Processor licenses a piece of hardware from the Card Network that it keeps in its data centers. This piece of hardware provided by the Card Network is commonly referred to as a Mastercard Interface Processor (MIP) for Mastercard and a VisaNet Integrated Processing (VIP) for Visa. The MIP and the VIP are critical components that an Issuer Processor must have to enable near real-time communication with the Card Networks. The Card Networks typically do not give out too many MIPs or VIPs, which is why the actual number of Issuer Processors is limited.
Issuer Processor Approves or Declines Transactions
When the driver swipes the DonutDash co-branded card at Mufasa’s Donut Shop, the Issuer Processor, Marqeta, will receive an amount and location of the swipe and then it will make a decision to approve (authorize) or decline the transaction. It can do this by looking at various spending limits, the balance on the card, and any Merchant category-based restrictions. If everything looks good, the Issuer Processor, Marqeta, can send a message to Mastercard, the Card Network, to approve the transaction.
Issuer Processor Enables Ways for Co-BrandPartners to Integrate with it
Additionally, the role of the Issuer Processor is to provide ways for the Co-Brand Partner to integrate with it. So, for example, when swipes occur, the Co-Brand Partner, DonutDash, may want to be alerted in real-time of the swipe, the amount, location, and maybe some other bits of information. Alternatively, the Co-Brand Partner, DonutDash, may want the ability to turn on and off cards through their app or even order cards from their own app. The Issuer Processor, Marqeta, will provide this via Application Program Interfaces (APIs). The Co-Brand Partner, DonutDash, would get documentation from the Issuer Processor, Marqeta, on how to integrate in with its APIs and bake these features into their applications.
Marqeta: JIT Funding
Marqeta’s modern issuing platform is capable of offering its Co-Brand Partners like DonutDash the ability to authorize their own transactions, which is exactly what Emmet needed to prevent card fraud from its drivers. This technology can send the details from the card swipe to DonutDash in near real-time and request that DonutDash approve or decline the transaction. This is referred to as Just-in-Time (JIT) funding, where the DonutDash cards will always have $0 balance on them. Based on certain business rules such as geolocation of the driver and the donut price, DonutDash would:
- Send an approval message to Marqeta.
- At that very instant, Marqeta will fund the transaction for the exact amount of the swipe.
- The transaction will be approved.
- The swipe will take that exact money off, leaving the driver with a $0 debit card balance at the end of the transaction.
- All of this happens in less than three seconds.
- The DonutDash driver would get a receipt and he is off with his delivery.
If for example, a DonutDash driver was to swipe for an amount that is greater than the expected amount of the swipe, that is, he added a bottled water for himself to the order, DonutDash could decline the transaction. Alternatively, if the DonutDash driver is at a location that he should not be at and tries to spend using the card, DonutDash can also decline the transaction.
Issuer Processor Provides Reporting to the Issuing Bank
The Issuer Processor, Marqeta, is also responsible for providing reporting to Moneybin Bank, the Issuing Bank, for all of the swipes that occurred in a day, and when funds are loaded and unloaded from cards. It will also tell Moneybin Bank, the Issuing Bank, who the users of these cards are.
Settlement data from Mastercard, the Card Network, will be sent to Marqeta, the Program Manager, so that settlement can happen via Marqeta, the Issuer Processor.
Co-Brand Partner: DonutDash
The card will be branded with the DonutDash logo and DonutDash is responsible for marketing the card. Considering that this is a business card, the distribution of the cards is made simple because they are distributing the cards to all drivers who contract for them. However, for a card that goes to consumers, like the Delta SkyMiles card, Delta is responsible for marketing this card through its existing user base, billboards, magazine ads, online ads, and so on.
Economics
One of the key benefits of creating a card is that the card Issuer enjoys revenue coming in the form of Interchange. The Merchant, Dad’s Donut Shop, essentially is paying three fees to accept payment from a debit or credit card. Mufasa, the Merchant, agrees to this because he knows that he can increase his sales by accepting cards. At the time of the card swipe, Mufasa’s Donut Shop will pay these fees:
Acquirer Fee
Usually, a flat fee that is paid per transaction to the Merchant Acquirer, Payments Facilitator, or Payment Gateway. This is essentially the supplier of the card terminal or online payment gateway.
Network Assessment Fee
This is a small percentage of the transaction value that is sent directly to the Card Network to manage the flow of data transmission. So, this fee would go to Mastercard.
Interchange
This is a small percentage of the transaction that is sent to the Issuer of the card. We will discuss how it is split amongst the Co-Brand Partner, Program Manager, Issuing Bank, and Issuer Processor.
How Does the Network Make Money?
Mastercard gets paid in multiple ways. It collects the Network Assessment from the Merchant at the time of swipe. Additionally, it will charge the Issuer for reporting fees and other licensing fees. Because the Card Network is in the middle, it is able to extract revenue from both the Acquiring and Issuing sides, but the amounts per transaction are rather low because they want to encourage higher transaction volumes. The Card Network doesn’t directly touch the Interchange, it is simply passed from the Merchant to the Card Issuer.
How Does the Program Manager Make Money?
The Program Manager is typically managing the day-to-day operations of the program and thus takes the bulk of the Interchange. Depending on the arrangements it has with its Issuing Bank and Issuer Processor, the Program Manager may decide to give a certain portion of the Interchange to the Co-Brand Partner.
The Program Manager could also provide the end cardholder with “cash back,” which in most cases is limited to certain categories.
How Does the Issuing Bank Make Money?
The Issuing Bank will have an arrangement with the Program Manager in most cases. It may charge the Program Manager fees for setting up bank accounts, performing compliance audits, and general oversight. This could be flat monthly fees, transaction-based fees, or a percentage of the Interchange revenue earned.
The Issuing Bank is also sponsoring the Bank Identification Number (BIN, which represents the first six digits on the card) that the DonutDash Mastercard goes under. Mastercard will license this number to the Issuing Bank, and thus will charge the bank for this license. Note, Mastercard will not provide a license to a non-bank entity, and thus, every card program requires an Issuing Bank. The Issuing Bank has the option to just pass this cost on to the Program Manager or even add a markup on these items.
Furthermore, the Issuing Bank gets deposits from the Co-Brand Partner for use in spend transactions and may choose to earn interest on these deposits.
How Does the Issuer Processor Make Money?
The Issuer Processor typically makes money as a utility. It will charge money based on the number of cards shipped out or the number of accounts it needs to maintain in its system. It may also make money on each transaction. There may be arrangements in which it participates in a percentage of the Interchange earning that the Program Manager is making.
In the example we are using, where DonutDash is the Co-Brand partner, Marqeta is the Issuer Processor and Program Manager, Marqeta will typically provide a portion of the Interchange revenue to the Co-Brand Partner and also pay fees to the Issuing Bank, Moneybin Bank, for sponsoring the program. In the industry, this is typically referred to as revenue share or Interchange share.
How Does the Co-Brand Partner Make Money?
The Co-Brand Partner may have an arrangement with the Program Manager to get a cut of the Interchange Revenue. In most cases, this is on a sliding scale, so as transaction volume grows, the percentage of the Interchange Revenue increases. This revenue share could go into offsetting the cost of card production and also aid in paying for chargebacks or fraud.
In the case where the Co-Brand Partner is offering a credit card, it could take on the burden of calculating interest, underwriting, and collections. This could be done by the Co-Brand Partner or sent to a credit card servicer to manage. Revenue for the Co-Brand Partner can be made on interest charged to credit card holders for nonpayment or if they need to delay payment.
If you would like to learn more about fintech, card based payments, payment networks, banks, and opportunities in payments, you may also purchase my book, “The Anatomy of the Swipe: Making Money Move” on Amazon.
