Cards and Finance: Economics of a non-cash transaction

Economics of a non-cash transaction

Posted by Jas at 3:31 PM

You would have seen these notices outside shops

All Major credit cards accepted, Conditions apply
Condition: Bill should be atleast Rs.200

No return, No Exchange
2% extra on credit cards

This makes us wonder about the business model of a credit card and how the economies of a credit card transaction are placed between various entities involved in a transaction.

Ideally in a transaction, you would see two parties - an entity who pays and an entity who accepts; but to complete a credit card transaction you will need five entities to come and work in unison. (It may happen that some of these entities are same and not different)

Lets go through the last transaction you did when you bought that book for yourself. Say the book was of Rs. 100 and you paid through your ICICI Visa card and signed on the slip, showing HDFC name, which was kept by the merchant. Now as per the illustration below, Merchant would get back only Rs. 98.10 from Acquirer out of 100 and is paid 1.9% less. This 1.9% will now feed the rest of the three entities. And you will pay back full Rs. 100 to your credit card issuer, ICICI bank, at end of your billing period. But ICICI will give Acquirer (HDFC here), the one who placed the card reader in the shop, Rs 98.60 keeping Rs 1.40 to itself. So by now HDFC has already made Rs 0.50 (98.6-98.1). Now HDFC will give Rs. 0.07 to VISA while ICICI will give Rs. 0.08 to VISA.

Now above numbers are for transaction of Rs. 100 so use these numbers in percentage points and you get an idea of money interchanged per transaction in percentage. The numbers here are just illustrative and would change according to network, merchant type etc. But they do give a fair idea.

But then there are many ways of doing a non cash transaction these days: Credit card, Debit Card, Prepaid Card, PayPal/Google Checkout or Mobile payments...

The snapshot below lists the approximate processing fees charged by each major player in various payment instruments (ranging from Cash/Check to Credt & Debit Cards and Mobile Payments).