Nebo Djurdjevic figures recent developments affecting the cost of doing business in the U.S. payments industry have opened a door for his software company.
That door could be fairly wide open, considering the software is designed to ease the pain of transaction-processing costs when consumers initiate purchases costing less than $20.
Cardis Enterprises International made its name a little better known in Europe last month when it signed an agreement with Raiffeisen Bank in Vienna to include the company’s LVP, or low-value payment, software on the issuer’s EMV smart cards (see story).
Now, Djurdjevic, CEO of Amsterdam-based Cardis, is setting his sights on the U.S. as it prepares for the conversion to EMV technology.
Cardis applies the software to the EMV chips in consumers’ payment cards and in merchants’ point-of-sale terminals, and within the acquirer and issuer processor systems, Djurdjevic explains. The software supports deposit loads at merchant terminals ranging from $30 to $100, represented as “value units,” from the debit account after the cardholder approves the transfer by entering his PIN in the terminal.
Consumers may use the chip’s Cardis function for low-cost purchases that otherwise would result in an average processing cost for issuers and acquirers of 15 cents per transaction (not related to interchange), Djurdjevic says. On the issuing side, these marginal costs result from authorization, clearing, settlement, statement production and reporting.
Instead, only one transaction cost occurs–when the bank moves funds from the consumer’s checking or credit card account as value units to use through the Cardis software on the debit card chip, Djurdjevic adds. The merchant terminal uses the low-value payment software to communicate with the chip in the debit card and the issuing bank for fund, or value-unit, transfers.
“When the Durbin amendment capped the interchange rate on higher-end purchases, the low-value transactions became something that merchants couldn’t absorb,” Djurdjevic tells PaymentsSource (see story).
As the U.S. makes the move to EMV in the coming years, the Cardis software enables issuers to overcome low-value transaction fears stemming from processing costs that offset potential interchange earnings, he adds.
Moreover, the merchant can report numerous low-value transactions made with the Cardis low-value payment account without paying transaction costs because the “value unit” payments do not enter the traditional payment system. Instead, they back a “float” fund the issuer establishes for all accountholders for settling with the merchant, Djurdjevic explains. The bank replenishes its float by taking funds from the consumer debit card account corresponding to the number of value units used for a purchase.
“If the transaction is below $20, it automatically goes ‘offline’ using a balance of value units on the card for low-value payments,” Djurdjevic says.
Ideally, after the issuer and acquirer see processing costs lowered through the payment aggregation, they would pass along lower fees to the merchant, Djurdjevic suggests.
Issuers pay Cardis a licensing fee for the software and add the software to their payment infrastructure, and the acquirer plugs the software into its client merchants’ POS terminals.
Issuers alert cardholders that a Cardis low-value payment upgrade is possible for their cards, giving them two months to opt out of the service if they so choose before the bank issues them a new card, Djurdjevic notes.
Cardis works strictly with payment networks, issuers, acquirers and independent sales organizations, but the software provides benefits for the consumer, Djurdjevic says. Accepting the card would assure the cardholder can use his card for purchase as low as $5, which some merchants do not allow with regular debit cards, he adds.
The merchant terminal and transaction receipt provide the consumer an update on the value-unit balance after each transaction, Djurdjevic says.
When adding the various costs associated with processing a payment, on top of interchange-rate caps, federal regulators essentially created the need for transaction aggregation on low-cost purchases, Gil Luria, analyst with Los Angeles-based Wedbush Securities, tells PaymentsSource.
“It’s an interesting side effect of the Durbin legislation that brought up the cost of processing smaller transactions, so there is definitely a place for this type of service,” Luria contends.
The Starbucks Corp. branded prepaid card serves as a good example of how Cardis’ software essentially works, Luria suggests.
“You are really consolidating numerous transactions into one transaction when you upload $25 from your bank account to the Starbucks card and then use it to purchase several cups of coffee,” he adds.
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