The Anatomy of the Swipe

Ahmed Siddiqui
Wharton FinTech
Published in
8 min readMar 9, 2021

Wharton Fintech recently hosted a payments industry primer with Ahmed Siddiqui — currently VP Product Management at Branch, formerly VP Product Management at Marqeta, and author of The Anatomy of the Swipe.

In this guest post, Ahmed explains how the payments industry works by breaking down everything that happens behind the scenes when you buy your morning coffee.

Every major tech company at some point will need to interact with the payments ecosystem, and I wrote The Anatomy of the Swipe as your guide to understanding and implementing payments systems at your company.

I stumbled into the world of fintech and payments when I got an opportunity to work with an old high school friend and travel to Dubai over 6 years ago. Payments may seem complicated from the outset, but when you dig in and unpack it, you will discover that by understanding the basics you can build a billion dollar business.

My goal is to give you an easy to understand guide into payments and fintech, so you can think about ways in which you can innovate in this space and build the next payments and fintech unicorn.

The players

The primary players in a card transaction are: the consumer, the merchant, the issuing and acquiring banks, the issuing and acquiring processors, and the network.

The card network sits in the middle, helping to move data between the merchant terminal and the buyer’s issuer processor. Examples of networks include: Visa, Mastercard, Discover, and American Express.

The buyer is issued a card through an issuing bank. If you pull out your favorite debit or credit card, usually the issuing bank is listed on the front or back of the card.

The issuer processor is the technology layer that speaks to the card networks to make some decisions on behalf of the buyer.

The merchant is on the left side. We’re going to use a coffee shop as an example: Bucks of Star coffee.

Bucks of Star coffee will have a payment terminal that will allow it to accept card based payments and that communicates with the acquirer processor.

The acquirer processor is the tech layer that communicates with the network on behalf of the merchant.

The transaction

Let’s walk through a real life example. This is Emmet, basically a younger, better looking version of me… Emmet loves getting a mocha from Bucks of Star coffee.

Emmet walks in and orders his mocha, and the barista tells him it is $4.75.

Emmet pulls out his debit card from Moneybin bank and inserts it into the card reader.

This is referred to as “dipping” his card and the card’s chip is used to authenticate Emmet. He could have alternatively swiped his debit card using the magnetic stripe.

Data from the payment terminal is sent to the acquirer processor.

The acquirer processor notices that the card number starts with a 5 which means it is a Mastercard.

By looking at the first 6 digits of the card, the acquirer processor determines that this card is issued by Moneybin bank.

The acquirer processor calls up Mastercard to relay this information.

All the while, Emmet sees a screen that says “Authorizing…”

The payment terminal and the acquirer processor are trying to learn a few things about Emmet such as:

Does Emmet bank with Moneybin bank?

Is his card active?

Does he have enough money to pay for this mocha?

Is he allowed to spend at this location?

Any reason to think this transaction is fraudulent?

Mastercard relays this data over to Moneybin Bank’s issuer processor asking the same questions.

The issuer processor performs some checks and everything checks out, Emmet does have enough money for this transaction and his card is active…

The Issuer processor sends an approval message to Mastercard.

Mastercard then passes the approval message to the acquirer processor.

Finally, the acquirer processor sends the approval to the payment terminal.

Emmet sees the approval message and is presented with a screen to add a tip.

Emmet goes ahead and adds a tip for $1.

The barista then gives Emmet his mocha.

Emmet then gets his mocha and takes his first sip. Yup, he deserves it.

For most of us, this process seems pretty mundane — waiting there for a transaction to approve — but there is a lot going on while you wait. The amazing thing is that all of this happens in less than 3 seconds!

The motivations

Emmet doesn’t like carrying around cash, so he prefers to pay with his debit card. For this reason, he may not go to a coffee shop that doesn’t accept a card.

The merchant — Bucks of Star — wants to ensure that they can service customers like Emmet who don’t like transacting in cash, and are willing to pay to get paid this way.

Further, merchants don’t need to take piles of cash and deposit it into a bank the next day, or have to worry about counterfeit money. Money is deposited electronically into their bank account — usually the next business day.

Let;s break down how each of the parties get paid.

The total cost of the mocha was $5.75. This includes $4.75 for the coffee, plus a $1 tip.

For sake of making things easy, let’s just use 1% as the network assessment would be for the network. This is taken out at the time of settlement. This can be thought of as the froth.

The other 1% is reserved for the issuer of the card — this is referred to as interchange — and could be referred to as the chocolate of the mocha.

This leaves the merchant with $4.63, which is the milk in the mocha

The espresso is the $1 tip that goes to the barista.

The merchant is willing to pay these fees so that the the transaction can happen. But what about the acquirer or the card reader?

Well that is referred to as the acquirer fee. It is typically billed separately and could range in price depending on the transaction volume of the merchant.

You can think about it as the merchant taking a sip of the mocha afterwards.

The companies

Let’s talk about some players in the value chain, starting with the issuer processors.

In most cases, these are super under the hood, and most consumers will never interact with them directly. Examples include: Marqeta, Galileo, I2c, and (more recently) Stripe Issuing.

Issuing banks are those that most consumers are familiar with such as: Wells Fargo, Chase, Citibank, and Bank of America.

These are very large issuing banks and are considered “regulated”. This means that the amount of money they can earn via interchange is capped due to the Durbin Amendment.

These banks do enough volume that they can sustain lower interchange. Durbin Amendment interchange caps apply to banks with over $10 billion in assets.

There are lesser known regional banks that are considered as “unregulated”. This means that they can charge higher interchange rates because their transaction volume is lower. They qualify for this by staying below $10 billion in assets.

Examples of these include: Bancorp, Sutton Bank, and Evolve Bank & Trust.

These are typically the banks under the hood of newer “neo-banks” such as: Chime, Branch, Moneylion, and (historically) Varo, but now Varo now has their own banking charter.

These neo-banks are also referred to as “program managers”, and they are responsible for marketing these products to consumers and servicing them.

If we look on the left side of the diagram, we will see the card terminal which could be from Square. If the transaction is online, most people are familiar with Stripe, and more recently we have players like Finix. These players aren’t acquirer processors but rather considered as “payments facilitators”.

In many instances they provide a service layer on top of core processing, such as the hardware, inventory management, seller financing, etc.

The acquirer processors have a direct connection with the card networks and route data from the payment facilitators to the networks.

Examples of acquirer processors include: Worldpay, Chase Paymentech, Wells Fargo, and a more modern acquirer processor called Tabapay.

There are a lot of opportunities to participate in the payments ecosystem — lots of innovation is happening and lots of places are hiring!

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Ahmed Siddiqui
Wharton FinTech

Product Guy. Data Nerd. Author of the Anatomy of the Swipe: Making Money Move