Russia has been living without Visa and Mastercard for more than a year. During this time, we all managed to clearly understand that payment systems are not just logos on bank cards. In this article, we analyze how payment systems work, what exactly they do, and why you should not underestimate their importance for the economy.
A few years ago, many people laughed at the MIR payment system. Why do you need it at all, when there is a Visa and Mastercard? Today, such questions do not arise. If money is the "blood of the economy", the banking system is its heart, then the payment system is the heart valves. It is scary to imagine what would have happened if at the time of the departure of Visa and Mastercard, the Russian Federation did not have its own replacement.
More recently, another landmark event occurred in the payment industry - China's UnionPay overtook Visa and Mastercard in terms of the volume of processed transactions. It is clear that the lion's share of them fell on China itself, but still a few years ago it was difficult to imagine this.
Итак, сегодня мы разберем, что такое платежная система, как она работает и что делает. А еще - почему без исправно работающей платежной системы целые сектора экономики могут перестать функционировать.
Payment systems work like this, thank you for your attention. Okay, okay, we'll look at it in a little more detail below.
I worked for Mastercard for several years, so I know firsthand how it works. In this article, I will tell you the main thing-without platitudes and boring technical paragraphs. And in the next section, we will analyze the payment systems of different countries and regions (in addition to Visa, Mastercard, UnionPay and MIR on Earth, there are many more interesting instances).
I'll tell you right away, what follows is exactly about classic card payment systems. All sorts of electronic Qiwi wallets and payment services within ecosystems (like the WeChat payment service) are only partially payment systems. And in general, this is a completely different story.
At the same time, in fact, any payment system is primarily a data exchange system. In fact, a large and sophisticated messenger. Which, however, has several important features. Through the analysis of these features, the essence will be clear.
But first, compare a few life situations:
This is how I imagine our lyrical hero. Purely so that the image is imprinted.
So, now take and multiply examples 2 and 3 (and 4-where possible) by hundreds of thousands and millions of similar transactions. Something tells me that banks all over the world would be depressed by this scenario.
Moreover, banks would not only have to establish a mutual exchange of information, but also learn how to do it, firstly, instantly, and secondly, as securely as possible. After all, no one wants to wait weeks or months for money to be credited from the buyer, as well as discover their personal and financial data on the darknet (however, with the latter, banks are not all smooth even with payment systems, heh).
In short, payment systems solve just the problem described above. They take care of data exchange between the buyer's bank and the seller's. And they do it instantly, securely, ubiquitously and in large volumes. There is a fifth bonus feature - the payment system glues together all the participants in the chain - the bank, the store and the person with the card.
Now let's look at what exactly the payment system does, focusing on each characteristic.
Two points. First, at the time of purchase, the buyer and seller need to be instantly identified. Secondly, banks should be able to make a request for a transaction at lightning speed and receive its confirmation.
To solve the first problem, we came up with flashcards. The plastic ones.
This is what the great-great-grandmother of a modern bank card from American Express looked like. In terms of functionality, it was more
like a promissory note, although it already contained some personal identification data (it was unlikely to connect to Apple Pay).
In addition to the bank and payment system logos, as well as information in the format "card number-full name - date of issue-CVV/CVC code", the card also has a magnetic stripe. It contains all the data necessary for identification - personal data of the cardholder (much more than indicated on the card itself), account number, terms of service, etc.
By the way, do you remember that earlier the card had to be "rolled" around the terminal, and not inserted or attached? This was done because at first the machine had to read only data from the lane.
However, cunning crooks quickly learned to steal data from magnetic strips. For example, using special devices-skimmers.
The picture shows a typical skimmer in a vacuum. The fraudster attaches his scanner on top of the card reader and a fake field for entering a pincode on top of the real one. A grandfather who withdraws a pension from the card has no chance.
As a result, a chip was also inserted into the cards. It has taken over most of the functions of the magnetic stripe, becoming the main element of the map. And he also began to be able to authorize a transaction (in fact, to answer a special question from the terminal, the answer to which only this particular chip knows). Due to this, transactions have become much more secure.
The seller's data is also sent to the payment system from the acquiring terminal, also instantly.
Now learn more about security. We partially covered it above when we talked about cards, chips, and skimmers. But it is not enough to ensure security when authorizing a transaction, you also need to maintain confidentiality when exchanging data between participants in the payment chain. So how is this achieved?
First, about 20 years ago, a consortium of six of the world's largest payment systems developed a special standard for working with payment card data - PCI DSS (Payment Card Industry Data Security Standard). I promise that this will be the first and last such abbreviation in this article.
I won't go into details now (this is a topic for a separate article, but it will be difficult to make it interesting), but in short, this is a standard that includes about 12 points on how to encrypt, store and transfer payment data.
Participants in the payment industry in different countries have come to the conclusion that all serious participants in this market should meet it. And banks and all sorts of operators of loyalty card programs-even more so. Compliance with this standard is confirmed during certification, where the PCI DSS operator will check everything in detail. If the check is not passed, then the company will not see the reputation of a strong and reputable payment player.
It is assumed that if a company complies with PCI DSS, then it already meets the minimum necessary requirements in the field of payment data security. However, this is not enough for the payment systems themselves, and they additionally encrypt data using their own algorithms.
To be honest, despite my work in the payment system, I have no idea how exactly this is done. And if I had known and told them, they would have obviously come for me. But believe me, this case is taken very seriously, because payment systems are really paranoid in the field of security. And how else, when there is a risk of leaking the data of almost all people in a country, region, or on the planet Earth. Especially now, when they will quickly learn some next LLM model.
By the way, the numbers on the map are not random. For example, the first 6 digits are the BIN number , which can be used to understand the payment system (the first digit).: 2-MIR, 5-Mastercard, etc.), issuing bank, country of issue, and card type (debit/ credit).
The next stop is the ubiquity of payment systems. As with any other large consumer structure, the payment system needs a network effect. In other words, the more terminals in different retail outlets accept your cards, the more people will be ready to issue them in banks. And vice versa.
I think you may have noticed that in some countries (other than the Russian Federation), where Visa and Mastercard seem to work, not all points accept them. For example, I recently visited Uzbekistan, which has its own payment systems (Uzcard and Humo), but you can't pay with a visa or a Master card anywhere. For the latter, this is a big problem, as the attractiveness of issuing their cards for a significant segment of the Uzbek population is sharply declining.
Therefore, the payment system always strives to make sure that every dog (or rather, every acquiring terminal) can speak their language.
By the way, several times I even came across stores that accepted Visa, but did not take Mastercard (or vice versa). Although it seems that these things are definitely included in the package.
Next - the ability to cope with large (very large!)problems. transaction volumes. I think everything is clear enough here. Payment systems need to have a huge processing capacity, which should work like a Swiss watch-fast, accurate and without interruptions. Perhaps it is this point that largely explains why banks can not cope on their own. The only alternative market participant that can pull such a strap is the Central Bank (but, perhaps, only on the scale of one country-see SBP).
We will remember about the fifth (bonus) trait later.
It is no secret that all sellers (in the slang of payment systems, they are called "merchants") pay a commission for non-cash card payments. In Russia, this is about 1.5-2% of the transaction amount, in the US it is about the same, in Europe it is less - in general, it is different everywhere. There may also be differences in the type of card (debit, credit, etc.).
The acquiring commission is divided as follows. A part - about 10-15% - is taken by the acquiring bank, whose terminal is located at the seller. The acquiring bank sends the rest to the issuing bank that issued the card. This is interchain. A part of this interchain (as far as I know, about 10%) is taken by the payment system.
There is not much money earned per transaction, but you need to remember that payment systems serve a large number of banks in a country, region, or even around the world. So, on the scale it turns out a serious amount.
Interchain depends on many factors - both the regulation in a particular country and the policy of the payment system in that country. In almost all countries, interchain varies by MCI.
For some categories - for example, for socially significant goods - the state can set a preferential interchain, well, to make life easier for people. Alternatively, interchainge can be reduced for individual industries in order to further stimulate their development (or because of a good lobby, here it is variable). For example, in the Russian Federation for a long time there was a preferential interchain for online trading, which Wildberries with Ozons willingly used.
A coincidence? I don't think so. Although seriously, in 2022 they simply reduced the previously existing benefits, so nothing terrible.
In the vast majority of cases, MCC codes for Visa, Mastercard, and other payment systems are the same. However, the grouping of sellers by them may differ. An illustrative example is when the same cafe will be treated as "Public Catering" when paying with a Visa card, and as "Restaurants"when paying with a Mastercard card. Accordingly, if you have an increased cashback on "Restaurants", but a Visa card, then you will have an unpleasant surprise.
The point here is that the MCC categories are distributed by acquiring banks, and what they put there in their databases - go figure it out.
Personally, I had such a case:
Why? We recall the fifth (bonus) characteristic of the payment system - the ability to start a process with the participation of all actors in the chain. And SWIFT only serves banks.
So, if we draw analogies with instant messengers, then the payment system is Telegram, where all participants can communicate and receive messages in a simple and understandable format, and SWIFT is a highly specialized program for communicating with a certain group of professionals, with an incomprehensible UX to a mere mortal and all sorts of professional quirks.
In addition, in the case of SWIFT, there is no instant identification mechanism (you need to enter bank account details for a long time), and money is not credited immediately.
That is why it is technically much easier to replace SWIFT than a Visa or Mastercard - there would be a desire to reduce the risks.
In short, the pig looks like a hedgehog, but the bristles are not the same (sorry).
In addition to geographical coverage, the key differences are in the nuances of conversion, loyalty programs, and specific chips and features.
The conversion rate is the rate at which the currency is exchanged within the payment. Well, let's say you bought coffee in Germany, paying for it with a Georgian card with an account in GEL. The owner of the coffee shop will receive euros to his account, which means that in the process it must be recalculated at some rate. So, each payment system determines this rate with a specific acquiring bank, so it can be very different.
By the way, in Russia at one time there was a myth that Visa works better in America, and Mastercard in Europe. In fact, this is certainly not the case. Just because of the different conversion rates, the terms may be a little more profitable (and even that is not a fact).
You can also write a separate article about features, or even several. I will give a couple of examples just to illustrate their diversity.
For example, Mastercard recently launched a card that is linked to a crypto account. With this card, you can pay directly in stores with Beethovens and stables, and Mastercard itself converts everything into regular money. Visa also has something to respond to, just like other major players. But more on that some other time.
Payment systems are also measured by the form factor. For example, a few years ago, Visa made a good hype by releasing a payment ring. Alfa-Bank issued it for us.
In the next article, we will dissect different payment systems that our planet is rich in (I will say right away, there will be surprises). And so that I have more motivation to write it faster - put a plus sign under this one. Then I will understand that you are interested in the topic, and I will get down to business with even more zeal.
If your friends or acquaintances are interested in banking, fintech, and payments, then don't forget to send them this article.
A few years ago, many people laughed at the MIR payment system. Why do you need it at all, when there is a Visa and Mastercard? Today, such questions do not arise. If money is the "blood of the economy", the banking system is its heart, then the payment system is the heart valves. It is scary to imagine what would have happened if at the time of the departure of Visa and Mastercard, the Russian Federation did not have its own replacement.
More recently, another landmark event occurred in the payment industry - China's UnionPay overtook Visa and Mastercard in terms of the volume of processed transactions. It is clear that the lion's share of them fell on China itself, but still a few years ago it was difficult to imagine this.
Итак, сегодня мы разберем, что такое платежная система, как она работает и что делает. А еще - почему без исправно работающей платежной системы целые сектора экономики могут перестать функционировать.
Payment systems work like this, thank you for your attention. Okay, okay, we'll look at it in a little more detail below.
I worked for Mastercard for several years, so I know firsthand how it works. In this article, I will tell you the main thing-without platitudes and boring technical paragraphs. And in the next section, we will analyze the payment systems of different countries and regions (in addition to Visa, Mastercard, UnionPay and MIR on Earth, there are many more interesting instances).
I'll tell you right away, what follows is exactly about classic card payment systems. All sorts of electronic Qiwi wallets and payment services within ecosystems (like the WeChat payment service) are only partially payment systems. And in general, this is a completely different story.
Why do we need payment systems at all? Can't the banks handle it on their own?
The payment system is a very peculiar thing. The average person hardly encounters her directly - of course, until she stops working in the country. The consumer will only see the logo on their card, and some especially clever friends are also interested in the terms of the loyalty program (not the bank one, but the one offered by the payment system).At the same time, in fact, any payment system is primarily a data exchange system. In fact, a large and sophisticated messenger. Which, however, has several important features. Through the analysis of these features, the essence will be clear.
But first, compare a few life situations:
- Situation one. Imagine that relocant Ivan has become a happy owner of a Georgian Bank X card. He decided to celebrate this event with craft apple cider, which Irakli sells in his shop in Old Tbilisi (in addition to wine and chacha, of course). It so happened that Irakli opened a business account for his store in the same bank. So when Ivan made the purchase, the money just flowed from Ivan's account to Irakli's account inside the same bank. Easy.
This is how I imagine our lyrical hero. Purely so that the image is imprinted.
- Situation two. Ivan doesn't drink alcohol, so instead of buying cider from Irakli, he decided to buy flat white from Laura's coffee shop. The coffee shop's account is opened in another Georgian bank-say, Bank Y. In this case, after Ivan brings the card to the terminal, Bank Y (it is called the "acquirer") will have to tell Bank X (it is called the "issuer", i.e. the one who issued the card) something like: "Hey, here your Vanya bought coffee from my Laura, right please transfer GEL 5 from his account to Laura's " (something like this, only politely and formally). Agree, this is already more difficult.
- Finally, situation three. Artyom, a friend of Vanya's, opened a card at Bank Z in the sunny Republic of Uzbekistan, and then flew to meet his sidekick in Tbilisi. I decided to get some cider, too. In this case, the Georgian acquiring bank will have to settle issues with the Uzbek issuing bank. This is already, as they say, a problem with an asterisk.
So, now take and multiply examples 2 and 3 (and 4-where possible) by hundreds of thousands and millions of similar transactions. Something tells me that banks all over the world would be depressed by this scenario.
Moreover, banks would not only have to establish a mutual exchange of information, but also learn how to do it, firstly, instantly, and secondly, as securely as possible. After all, no one wants to wait weeks or months for money to be credited from the buyer, as well as discover their personal and financial data on the darknet (however, with the latter, banks are not all smooth even with payment systems, heh).
In short, payment systems solve just the problem described above. They take care of data exchange between the buyer's bank and the seller's. And they do it instantly, securely, ubiquitously and in large volumes. There is a fifth bonus feature - the payment system glues together all the participants in the chain - the bank, the store and the person with the card.
Now let's look at what exactly the payment system does, focusing on each characteristic.
Rich inner world of payment systems
So, let's start with the fact that transactions should take place instantly. What does this mean in practice?Two points. First, at the time of purchase, the buyer and seller need to be instantly identified. Secondly, banks should be able to make a request for a transaction at lightning speed and receive its confirmation.
To solve the first problem, we came up with flashcards. The plastic ones.
This is what the great-great-grandmother of a modern bank card from American Express looked like. In terms of functionality, it was more
like a promissory note, although it already contained some personal identification data (it was unlikely to connect to Apple Pay).
In addition to the bank and payment system logos, as well as information in the format "card number-full name - date of issue-CVV/CVC code", the card also has a magnetic stripe. It contains all the data necessary for identification - personal data of the cardholder (much more than indicated on the card itself), account number, terms of service, etc.
By the way, do you remember that earlier the card had to be "rolled" around the terminal, and not inserted or attached? This was done because at first the machine had to read only data from the lane.
However, cunning crooks quickly learned to steal data from magnetic strips. For example, using special devices-skimmers.
The picture shows a typical skimmer in a vacuum. The fraudster attaches his scanner on top of the card reader and a fake field for entering a pincode on top of the real one. A grandfather who withdraws a pension from the card has no chance.
As a result, a chip was also inserted into the cards. It has taken over most of the functions of the magnetic stripe, becoming the main element of the map. And he also began to be able to authorize a transaction (in fact, to answer a special question from the terminal, the answer to which only this particular chip knows). Due to this, transactions have become much more secure.
The seller's data is also sent to the payment system from the acquiring terminal, also instantly.
Now learn more about security. We partially covered it above when we talked about cards, chips, and skimmers. But it is not enough to ensure security when authorizing a transaction, you also need to maintain confidentiality when exchanging data between participants in the payment chain. So how is this achieved?
First, about 20 years ago, a consortium of six of the world's largest payment systems developed a special standard for working with payment card data - PCI DSS (Payment Card Industry Data Security Standard). I promise that this will be the first and last such abbreviation in this article.
I won't go into details now (this is a topic for a separate article, but it will be difficult to make it interesting), but in short, this is a standard that includes about 12 points on how to encrypt, store and transfer payment data.
Participants in the payment industry in different countries have come to the conclusion that all serious participants in this market should meet it. And banks and all sorts of operators of loyalty card programs-even more so. Compliance with this standard is confirmed during certification, where the PCI DSS operator will check everything in detail. If the check is not passed, then the company will not see the reputation of a strong and reputable payment player.
It is assumed that if a company complies with PCI DSS, then it already meets the minimum necessary requirements in the field of payment data security. However, this is not enough for the payment systems themselves, and they additionally encrypt data using their own algorithms.
To be honest, despite my work in the payment system, I have no idea how exactly this is done. And if I had known and told them, they would have obviously come for me. But believe me, this case is taken very seriously, because payment systems are really paranoid in the field of security. And how else, when there is a risk of leaking the data of almost all people in a country, region, or on the planet Earth. Especially now, when they will quickly learn some next LLM model.
By the way, the numbers on the map are not random. For example, the first 6 digits are the BIN number , which can be used to understand the payment system (the first digit).: 2-MIR, 5-Mastercard, etc.), issuing bank, country of issue, and card type (debit/ credit).
The next stop is the ubiquity of payment systems. As with any other large consumer structure, the payment system needs a network effect. In other words, the more terminals in different retail outlets accept your cards, the more people will be ready to issue them in banks. And vice versa.
I think you may have noticed that in some countries (other than the Russian Federation), where Visa and Mastercard seem to work, not all points accept them. For example, I recently visited Uzbekistan, which has its own payment systems (Uzcard and Humo), but you can't pay with a visa or a Master card anywhere. For the latter, this is a big problem, as the attractiveness of issuing their cards for a significant segment of the Uzbek population is sharply declining.
Therefore, the payment system always strives to make sure that every dog (or rather, every acquiring terminal) can speak their language.
By the way, several times I even came across stores that accepted Visa, but did not take Mastercard (or vice versa). Although it seems that these things are definitely included in the package.
Next - the ability to cope with large (very large!)problems. transaction volumes. I think everything is clear enough here. Payment systems need to have a huge processing capacity, which should work like a Swiss watch-fast, accurate and without interruptions. Perhaps it is this point that largely explains why banks can not cope on their own. The only alternative market participant that can pull such a strap is the Central Bank (but, perhaps, only on the scale of one country-see SBP).
We will remember about the fifth (bonus) trait later.
How the payment system earns money
In short, with the help of one strange word-interchain. Of course, there are other items of income, but this, so to speak, base is the basis.It is no secret that all sellers (in the slang of payment systems, they are called "merchants") pay a commission for non-cash card payments. In Russia, this is about 1.5-2% of the transaction amount, in the US it is about the same, in Europe it is less - in general, it is different everywhere. There may also be differences in the type of card (debit, credit, etc.).
The acquiring commission is divided as follows. A part - about 10-15% - is taken by the acquiring bank, whose terminal is located at the seller. The acquiring bank sends the rest to the issuing bank that issued the card. This is interchain. A part of this interchain (as far as I know, about 10%) is taken by the payment system.
There is not much money earned per transaction, but you need to remember that payment systems serve a large number of banks in a country, region, or even around the world. So, on the scale it turns out a serious amount.
Interchain depends on many factors - both the regulation in a particular country and the policy of the payment system in that country. In almost all countries, interchain varies by MCI.
For some categories - for example, for socially significant goods - the state can set a preferential interchain, well, to make life easier for people. Alternatively, interchainge can be reduced for individual industries in order to further stimulate their development (or because of a good lobby, here it is variable). For example, in the Russian Federation for a long time there was a preferential interchain for online trading, which Wildberries with Ozons willingly used.
A coincidence? I don't think so. Although seriously, in 2022 they simply reduced the previously existing benefits, so nothing terrible.
In the vast majority of cases, MCC codes for Visa, Mastercard, and other payment systems are the same. However, the grouping of sellers by them may differ. An illustrative example is when the same cafe will be treated as "Public Catering" when paying with a Visa card, and as "Restaurants"when paying with a Mastercard card. Accordingly, if you have an increased cashback on "Restaurants", but a Visa card, then you will have an unpleasant surprise.
The point here is that the MCC categories are distributed by acquiring banks, and what they put there in their databases - go figure it out.
Personally, I had such a case:
Is SWIFT a payment system?
Indeed, in many ways SWIFT is similar to a payment system. It allows financial organizations to securely exchange data using a single standard. However, to call SWIFT a payment system in full, the language does not turn.Why? We recall the fifth (bonus) characteristic of the payment system - the ability to start a process with the participation of all actors in the chain. And SWIFT only serves banks.
So, if we draw analogies with instant messengers, then the payment system is Telegram, where all participants can communicate and receive messages in a simple and understandable format, and SWIFT is a highly specialized program for communicating with a certain group of professionals, with an incomprehensible UX to a mere mortal and all sorts of professional quirks.
In addition, in the case of SWIFT, there is no instant identification mechanism (you need to enter bank account details for a long time), and money is not credited immediately.
That is why it is technically much easier to replace SWIFT than a Visa or Mastercard - there would be a desire to reduce the risks.
In short, the pig looks like a hedgehog, but the bristles are not the same (sorry).
What is the difference between payment systems, in addition to different countries of operation? What is the difference between Visa and Mastercard?
All payment systems do the same thing - they provide fast, reliable and convenient transaction execution. Therefore, the differences are not always noticeable to the layman's eye. But they are there.In addition to geographical coverage, the key differences are in the nuances of conversion, loyalty programs, and specific chips and features.
The conversion rate is the rate at which the currency is exchanged within the payment. Well, let's say you bought coffee in Germany, paying for it with a Georgian card with an account in GEL. The owner of the coffee shop will receive euros to his account, which means that in the process it must be recalculated at some rate. So, each payment system determines this rate with a specific acquiring bank, so it can be very different.
By the way, in Russia at one time there was a myth that Visa works better in America, and Mastercard in Europe. In fact, this is certainly not the case. Just because of the different conversion rates, the terms may be a little more profitable (and even that is not a fact).
You can also write a separate article about features, or even several. I will give a couple of examples just to illustrate their diversity.
For example, Mastercard recently launched a card that is linked to a crypto account. With this card, you can pay directly in stores with Beethovens and stables, and Mastercard itself converts everything into regular money. Visa also has something to respond to, just like other major players. But more on that some other time.
Payment systems are also measured by the form factor. For example, a few years ago, Visa made a good hype by releasing a payment ring. Alfa-Bank issued it for us.
In the next article, we will dissect different payment systems that our planet is rich in (I will say right away, there will be surprises). And so that I have more motivation to write it faster - put a plus sign under this one. Then I will understand that you are interested in the topic, and I will get down to business with even more zeal.
If your friends or acquaintances are interested in banking, fintech, and payments, then don't forget to send them this article.
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