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Pricing in real-time payments
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Real-time payments are spreading rapidly around the world. The economics of retail payments are proving to be more complex. Traditionally, the financial models for card payments have included merchant fees and their distribution among participating financial institutions (interchange). However, the approach to pricing for instant payments is significantly different. Markets and regulators are revisiting the main scenarios, phasing out interchange (e.g., in Brazil and Singapore), imposing limits (in Jordan), or even eliminating fees (in India and Mexico).
- 25.11.2023
Interchange crisis: trends
Since its inception, the economics of card payments have been based on the model that customers often choose the merchant that offers the most convenient payment method. The merchant gains a competitive advantage by providing the customer with the option of cashless card payments.
For this reason, most financial models of card payments involve incentivising customers through merchant charging. The costs of loyalty programs and card servicing are partially offset by interchange fees, which are a key component of the merchant’s service cost.
The development of the banking market, increased financial inclusion, and legislative requirements have made card payments mandatory. This is especially important for retailers, which have the largest market share and, at the same time, are most interested in reducing service costs.
Retailers’ loyalty programs and marketing tools are becoming more relevant and effective, and the acquiring segment is moving into the category of less “pleasant” transaction costs.
Trend #1: Decreasing importance of acquiring for merchants
Interchange now acts as a tool for competition between payment systems for the percentage of cards issued and creating customer loyalty to banks, but this is at the merchants’ expense.
The uncontrolled and unpredictable growth of interchange has increased costs for merchants and, objectively speaking, has led to legislative restrictions on interchange. This has prompted the search for alternative payment methods around the world.
Trend #2: Market concentration in the acquiring segment
New payment services, such as smartphones and tablets with NFC, are aimed at small and medium-sized enterprises with limited market coverage. However, they do not create objective prerequisites for redistributing the primary market.
A high share of domestic cards (the share of on-us transactions) reduces the burden on interchange and keeps most of the profit in the bank. However, it is important to consider three key aspects:
- The bank should provide customers with bonuses and cashback at the market level.
- This advantage is conditional for most merchants, as many banks do not distinguish between “own” and “third-party” traffic.
- To monetise this advantage, a bank needs to have a market share of at least 30% in card issuance. Otherwise, it will not achieve a significant effect.
Trend #3: Golden Age for PSPs and payment aggregators
In the US and Europe, 78% of e-commerce businesses recognise payment system providers (PSPs) as their main financial partners rather than banks.
PSPs and payment aggregators in e-commerce gain a competitive advantage by “bulk purchasing,” acquiring services from different banks at the same time, and providing merchants with more favourable terms through payment management (routing) and the use of the “on-us effect”.
Trend #4: Transaction business is becoming a complementary service to more profitable banking services
In this regard, certain retail sectors in Ukraine, such as food retail, transport, fast food, and others, which account for more than 50% of the retail market, are facing a decline in profitability.
One of the most important items is the cash replenishment of credit cards. The cost of maintaining and paying for infrastructure services typically ranges from 0.4% to 1%, and the additional costs of payment system services in this context are becoming excessive.
Trend #5: Direct top-up protocols between banks and payment providers
Most retail banks are now actively using direct deposit protocols, especially where the issuing bank bears the cost of depositing an account. Various alternative payment methods are a natural market response to global challenges and trends in payment systems. This mechanism works worldwide, and best practices can be successfully implemented in Ukraine.
How open networks change the payments economy
The cost of operations within an open distributed network is kept to a minimum, as the network is maintained by its participants and therefore has no operational costs or organisations intent on commercialising or monetising it.
This also means that there are no issue costs. Transaction costs associated with joining, opening, and maintaining accounts are limited to the ongoing costs of creating an account on the bank’s business day and supporting digital channels (mobile apps, internet banking, KYC).
All that remains is to pay for the services of an operator that provides and develops interfaces to exchange financial messages.
The absence of fixed costs per transaction reduces the direct costs of micro-payments to banks.
Transparent Network pricing
The Transparent Network is based on direct payments between participants (banks, merchants, and customers) without creating a traditional payment system. An open distributed network plays an important role, which a processing center usually performs. It stores up-to-date information on customer account balances and processes transactions in real-time. It also provides a service for the online exchange of standardised financial messages between the network and bank accounting systems. Based on these messages, instant withdrawals and deposits are made to customers’ accounts, and regular settlements are made between participating banks.
No processing fees
The goal of Transparent Network is to ensure maximum savings in transaction costs for merchants in order to motivate end customers (buyers) further to open and use Transparent Network accounts.
The program lasts 12 months from the launch of the Transparent Network project.
For the duration of the unique conditions, DCM, the technology operator, is exempted from payment for processing financial messages when conducting trade transactions between TPN participants.
Pricing policy in Transparent Network
| Issuing bank | Acquiring bank | Operator | |
| Transactions within TPN | |||
| Create account in TPN private & business clients | none | none | none |
| Trade transactions within TPN POS/e-com | 0% | 0.5%1 merchant fee | 0.2% acquirer fee |
| Money transfers within TPN private (р2р)/business clients (b2b) | 0%2 | 0% | 0% |
| Regular reconciliation files files & reporting to carry out settlements | — | — | none |
| Transactions beyond TPN | |||
| Account top-up traditional channels, excl. TPN transfers | 3 | bank’s tariffs | 0% |
| Payment cards operations card issuance/acquiring | bank’s tariffs | bank’s tariffs | none |
| Payments to other accounts IBAN transfers | bank’s tariffs | bank’s tariffs | none |
| Credit schemes, interests, reward programs | bank's policies | none |
1* – the maximum price for the merchant is capped and set by the Project participants
2* – recommended rate
3* – the tariff is not set by TPN partner banks
Why there is no interchange in the Transparent Network
Technically, the absence of interchange is a typical characteristic of any real-time system.
The refusal of interchange is a reasonable reaction of the financial market: acquiring is no longer a competitive advantage. Real-time interchange is becoming a limitation for new business models, especially when the merchant motivates customers independently (through loyalty programs and discounts) or customers do not need additional incentives (for example, in transport, vending machines, self-service, and other industries).
The absence of interchange opens opportunities for competition and innovation in payments and collection for all market participants, regardless of the issue. The new business models that can be developed in cooperation between banks and customers have great potential compared to the highly volatile (unstable) margins under the conventional model.
The key principles of the Transparent Network are transparency in pricing, cost-effectiveness, and high merchant and customer loyalty, which are the basic conditions for developing the customer base.
The instant payments market is growing rapidly worldwide and has not yet become a “must-have”. Transparent Network gives payments a competitive advantage, where merchants and banks form a new business model based on mutual loyalty.
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