Understanding International and Domestic Payment Card Networks

Understanding International and Domestic Payment Card Networks

The payment card industry, which was traditionally dominated by the likes of Visa and MasterCard, is currently experiencing a significant transformation due to the increasing popularity of domestic processing initiatives. The domestic payment card networks promote competition, safeguard national interests, guarantee data security, and maintain jurisdictional control over payment systems. These initiatives work in partnership with local financial institutions and merchants to establish reliable and inclusive payment ecosystems that take into account regional economics, language, and cultural preferences. With 26 EMEA countries already having developed their Domestic Card Schemes, the industry is witnessing a surge in growth along with associated challenges and opportunities.

What is a Card Processing Network?

A card processing network, also known as a credit card processing network, is a financial organization that enables card-based payments. The most commonly used card processing networks include Mastercard, Visa, Discover, American Express (AmEx), and UnionPay. These networks offer digital payment infrastructure and create the rules and patterns that make it possible to accept, authorize, verify, and approve card transactions. There is an increasing trend of co-branding or converting domestic schemes with global players around the world. For example, the Norwegian domestic debit card scheme, BankAxept, is usually co-branded with Visa and Mastercard, which allows international payments to be processed through these card schemes. 

Open and closed credit card processing networks handle card issuing differently. Open credit card networks allow other financial institutions to issue their credit cards to customers. Visa and Mastercard are the two largest open credit card networks. In closed credit card networks like American Express and Discover, the credit card company exclusively issues the cards. The credit card network also acts as the acquirer and sends the funds directly to businesses’ banks, minus transaction fees.

The Dynamics of the Global Payment Card Industry

According to a recent report by Nilson, the payment industry is growing. Over 90 domestic-market-only brands are expected to reach 2.1 billion cards and 7.5% market share by 2027. In some countries, domestic payment network cards are becoming increasingly popular. This trend is enabling merchants to attract customers with more payment options. 

One of the reasons domestic schemes are successful is that they understand their target customers well. They also understand the financial difficulties that their customers might face, particularly in countries with a significant number of unbanked populations. In some countries, domestic schemes have a more comprehensive acceptance network than international schemes. Germany and Portugal are examples of where this is the case. 

Card schemes like Troy in Turkey, Elo in Brazil, RuPay in India, Meeza in Egypt, and digital instant payment solutions such as iDEAL in the Netherlands, Swish in Sweden, PromptPay in Thailand, UPI in India, and the newly launched IPP in the UAE are gaining prominence. In some cases, cards and instant payments are combined under an integrated platform, as seen with InstaPay in Egypt.

Several countries have mandated the creation of domestic payment schemes. This move is to foster competition, defend national interests, ensure data security, and maintain control of the payment system within their jurisdictions. This decision was taken due to concerns about domestic payment sovereignty, potential US sanctions, and increasing the fees of International Card Schemes.

European Initiatives and Schemes

The European Payments Initiative (EPI) is a project that aims to transform instant payments across Europe. The initiative plans to launch commercially in 2024, and it aims to unify payments through SEPA Instant Credit Transfer. This will provide consumers and merchants with a comprehensive payment solution. The European Union is committed to achieving strategic autonomy in financial services by reducing reliance on U.S. Mastercard and Visa for cross-border card payments.

The SEPA Instant Credit Transfer scheme allows for almost real-time cross-border payments within the SEPA zone, promoting payment integration and harmonisation throughout the European Union. At the same time, the SEPA Payment Account Access (SPAA) scheme aims to standardize data exchange, enabling merchants to accept payments beyond traditional card rails and providing consumers with value-added financial services.

Fintechs and new players promoted by initiatives such as PSD2 in Europe are expected to gain market share by offering a better customer experience and reducing friction in the existing payment rails.

Local Payment Methods in a Global Market

Payment methods and options have evolved over time, providing consumers with numerous choices, such as buy-now-pay-later and e-wallets. However, while established global players may be more visible and have a larger user base, it is important to consider local payment methods, especially in regions where they are essential to meet local payment needs. One such example is the domestic card network, which can be crucial for a merchant or bank’s international payment method portfolio. Domestic scheme-branded cards have lower processing costs for issuers and acquirers, making them a more cost-effective option. RuPay, India’s domestic card network, has grown significantly and now accounts for a quarter of all domestic scheme cards worldwide.

Initiatives such as those in China, India, and Europe’s EPI are also challenging the historical dominance of ICSs such as Visa and MasterCard. By disrupting the status quo, these initiatives aim to link up and facilitate cross-border payments, providing innovative solutions that drive economic growth and financial inclusion worldwide.

Domestic Payment Networks: The Future of the Payment Card Industry

The payment card industry is always changing, and there will always be new initiatives. Instead of wondering if new payment card networks will launch, we should focus on when they will launch. China is currently ahead in implementing its payment networks, while other countries such as India and Malaysia are at different stages of the process.

Despite the challenges that exist, the payment card industry can benefit greatly from collaborative efforts and innovative solutions from domestic networks. Such efforts can help redefine cross-border transactions and ultimately lead to increased competition and innovation, shaping the future of payment card networks. In summary, the global payment card industry is currently at a crossroads, and the emergence of domestic initiatives serves as a significant shift and revolution. As the industry prepares for this transformative journey, it’s crucial to understand the challenges and opportunities ahead and optimize your global and local payment strategies.

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