Payments unit economics: what one transaction earns
Split one card payment between issuer, scheme, and acquirer, then work out the economics of a BNPL order and a remittance.
Industry brief, with a one-minute summary: Payments and fintechKey takeaways
- Payments profit is a small fee times a very large number of transactions.
- When the payment itself earns nothing, as with most UPI payments in India, apps earn elsewhere: lending to users and merchants, selling insurance and investments, charging merchants for devices such as sound boxes that announce payments, and advertising.
- Gross revenue includes fees the processor must pass on. Net revenue, and the take rate on volume, show the money it keeps to cover its own costs.
Key idea
Payments profit is a small fee times a very large number of transactions. Work out the net revenue per transaction, subtract the cost per transaction, then multiply by volume.
Worked case
Who earns what on a USD 100 credit card payment in the US
The prompt
A shopper in the US pays USD 100 with a rewards credit card. The merchant pays a merchant discount rate of 2.5 percent. Interchange is 1.8 percent and scheme fees are 0.15 percent of the sale. The acquirer's processing and support cost is USD 0.20. The issuer gives 1 percent back to the shopper as rewards, loses about USD 0.10 to fraud, and spends USD 0.15 on processing. How much does each party keep?
The structure
- Split the merchant fee
- Merchant fee = sale x MDR
- Acquirer keeps MDR minus interchange minus scheme fees, then pays its costs
- Issuer keeps interchange minus rewards, fraud, and processing
Working it through
1. Merchant fee
2.5 percent of USD 100.
Merchant fee (USD):100 × 0.025 = 2.52. Interchange to the issuer
1.8 percent of USD 100.
Interchange (USD):100 × 0.018 = 1.83. Acquirer net revenue
Merchant fee minus interchange minus scheme fees of USD 0.15.
Acquirer net revenue (USD):2.5 - 1.8 - 0.15 = 0.554. Acquirer contribution
Subtract the processing and support cost.
Acquirer contribution (USD):0.55 - 0.2 = 0.355. Issuer contribution
Interchange minus rewards of USD 1.00, fraud of USD 0.10, and processing of USD 0.15.
Issuer contribution (USD):1.8 - 1 - 0.1 - 0.15 = 0.55
The recommendation
On a USD 100 card payment each party keeps well under 1 percent, so each should compete on volume and cost per transaction. First, of the USD 2.50 the merchant pays, the issuer receives USD 1.80 but gives USD 1 back as rewards and keeps about USD 0.55 after fraud and processing. Second, the acquirer keeps USD 0.55 of net revenue and USD 0.35 after its own costs, while the scheme earns USD 0.15. The risk is regulation: interchange caps, such as those in the EU, would cut the issuer's income sharply. As a next step, track cost per transaction against volume for each party.
Risks: Interchange caps, such as those in the EU, would cut the issuer's income sharply; Large merchants negotiate lower fees; Real-time account payments can replace cards for some purchases.
A BNPL provider in the UK finances a GBP 200 order, repaid over 6 weeks. The merchant pays a 4 percent fee. The provider's funding costs 10.4 percent a year, expected credit losses are 1 percent of the order, and processing costs GBP 0.60. What is the contribution on this order, in GBP? (Use 52 weeks in a year, and assume the full GBP 200 is funded for the 6 weeks.)
A worker in Dubai sends AED 2,000 home to India. The provider charges a fee of AED 20. The market exchange rate is INR 23.00 per AED, but the provider gives INR 22.77 per AED (illustrative rates). What is the total cost of the transfer as a percent of the AED 2,000 sent?
When the payment itself earns nothing, as with most UPI payments in India, apps earn elsewhere: lending to users and merchants, selling insurance and investments, charging merchants for devices such as sound boxes that announce payments, and advertising. A case about a free payment app is really a case about cross-selling to its users.
A payment processor reports USD 1 billion of revenue, but most of it is interchange passed on to issuers. Which number shows what the processor really keeps?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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