Opportunities and Challenges of Payment Card Market

Opportunities and Challenges of Payment Card Market

Today, there is a huge opportunities and challenges for banks in payments card market.

Credit cards or Debit Cards are the fastest-growing means of non-cash payments, and accounted for approximately 60% of all such payments worldwide.

Among the top 10 countries, which together accounted for 80% of global card purchase transactions in the world, China was responsible for about 20% of issued cards, placing it in second position in the world card market behind the United States of America (USA or US).

Of all existing payment cards, general-purpose cards are the most popular and most commonly used.

The 4-Party Model

The 4-party model (Cardholders, card issuers, Merchants, and Merchant acquirers) business model appears to cause faster and broader market development, because issuing and acquiring are done through large multi-member networks.

The 4-party model also allows participants to specialise according to their expertise, and in this way brings greater efficiency and broader reach.

Cards in the spotlight of all Payment

Cards are the fastest-growing global non-cash payment instrument, and in recent years cards have been pivotal to the growth of retail financial services.

Cards linked to current accounts provide a means of cementing the various capabilities of such accounts.

Credit cards offer a convenient form of unsecured retail lending that acts as a regular communications channel between consumer and issuer, facilitating the development of customer relationships.

As a means of payment, cards are the primary alternative to cash and cheques, offering convenience for consumers and merchants alike, and making the payments system more efficient and secure.

Interchange Rates

The economics of cards have also been under scrutiny, especially the level and structure of interchange rates.

For example, the European Commission (EC) investigation into Visa's cross-border interchange arrangements in the EU and its investigation into MasterCard's crossborder interchange rates in the EU.

Another example, in United Kingdom (UK), ongoing: The Office of Fair Trading has been investigating Visa and MasterCard's interchange arrangements for UK domestic interchange rates for a number of years.

Interchange rates is the fee usually paid from the acquirer to the issuer for each point of sale transaction.

The level of interchange rate is determined by many different factors according to the way the transaction is acquired and the type of payment card used.

Interchange rate, helps issuers cover the costs of security, fraud, credit losses, technological development, developing new payment innovations (e.g. contactless payment), and billing and administering millions of card accounts.

Interchange make sure that the payment card market scheme is economically viable on an ongoing, long-term basis, benefiting every participant in the system cardholders, financial institutions, and merchants.

Main Actors in the Card Market

The main actors in the opportunities and challenges of card market are the card issuer, transaction acquirer, payment scheme, and end user (cardholder and merchant).

The card scheme (payment application and brand owner) sets the rules, including acceptance and transaction processing standards for a given set of card products, and provides a forum in which members (issuers and acquirers) may exchange views.

It establishes expectations and processes for the operational integrity and security of its scheme, and ensures that members adopt appropriate operational behaviours and methodologies to limit losses that might otherwise undermine the system.

As a result, it achieve the aim of establishing a common set of standards for the multiple card schemes operating in the region and any other participating countries and, in doing so, enable a more level playing field for the actors to expand or otherwise improve the efficiency of their businesses.

The US remains by far the largest single market, accounting for almost one-third of all cards issued worldwide, and approximately 40% of the number and value of card-based transactions.

Spending per inhabitant, which grew steadily in volume and value in the last decade.

The amount spent using cards rose in all countries, mostly by increasing the number of transactions rather than the average value of a transaction.

However, there is a strong disparity between similar economies, for example between Germany and the US.

The relationship between the number of transactions per card and the average number of cards per inhabitant. Overall, the number of card transactions per inhabitant rose in the last few years, but high top-line growth was achieved in one of two ways:

  • By offering more cards. For example, in Japan and the US, the consumers need to hold multiple cards from competing schemes to have the ability to use cards as an alternative to cash.

  • By creating network interoperability. Interoperability increases the utility of individual schemes, and therefore a single card tends to be used for every transaction, especially in replacing cash and cheques for lower-value purchases, as is the case in Canada, Denmark, Finland and Sweden.

Banks have stake in both issuing and acquiring cards

If 4-party models are the most conducive to vigorous card-market development, the next question is:

Who are the most appropriate players for issuing and acquiring? Certainly, both banks and non-banks have a significant role to play in almost all developed card markets.

However, there are several good reasons specifically for banks to be and remain key players in the card market, in both issuing and acquiring. The key issues are:

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