What's behind card payments?

What's behind card payments?

Frontier Economics participates in the review of the merchant service charges in a four-party card scheme

There are basically two models of card payment systems today: the three-party (M3P) or closed model, and the four-party (M4P) or open model.

In 2017, Chile decided to migrate its card payment system from a M3P to a M4P. This meant that, in practice, Transbank (the entity that carried out the acquiring processing) would work independently from the banks (although the latter would continue being the owners of Transbank).

After moving from M3P to M4P and Transbank becoming functionally independent of banks, Transbank retained its position as the main acquirer in the card payment market in Chile. As a result, the fees charged by Transbank would continue being regulated. In fact, this regulated fee is the MSC, charged to affiliated merchants and payment service providers (PSP), who act as merchant aggregators.

In this context, Frontier recently chaired a panel of experts, who reviewed the fees applied by Transbank to PSPs. This task included, but was not limited to:

  • reviewing the economic cost model used by Transbank;
  • verifying that the MSC includes only the economic costs incurred by Transbank while carrying out the activities that are required in order to provide the service; and
  • assessing the fee structure used by Transbank based on certain criteria, including economies of scale driven by some of its customers.

M3P vs M4P – the fine details

In a M3P a single player in the market makes it possible for people with a bank account to purchase from a merchant. To do this, this player issues cards and processes the transaction (validating the operation and transferring money from the  buyer's account to the merchant). On the other hand, in an M4P this role is separated in two : the issuance of the card and the processing (or acquiring role). In Europe, approximately 95% of card payments take place in a four-party scheme.

Under both models, the revenue received by the merchant for each card-based payment is the difference between the price paid by the consumer minus an amount called the Merchant Discount (MD). Under the M4P, the separation of the issuance from the acquiring role, also requires an explicit component within this MD (a fee called the merchant service charge or MSC) to compensate for the processing, which is carried out by the acquiring financial institution or bank.

Source: Frontier Economics

Source: PSR MR22/1.1

Frontier Economics regularly advises on issues related to regulation and competition in the card payments market.

For more information please contact media@frontier-economics.com or call +34 (0) 91 343 2350.