King Cash: Time To Dethrone?
Nebo Djurdjevic is CEO at Cardis International, a payments company based in the Netherlands that’s hoping to disrupt low-value payments. At its core, Cardis attempts to reduce per-transaction costs for low-value payments by aggregating them together into one transfer — but there’s much more to the story than that. We invited Djurdjevic to participate in a Q&A for PYMNTS.com to explain his young company’s technology, its potential impact on the market, and what the near future might hold for Cardis.
PYMNTS.com: Let’s start with this core concept of low-value payments. Why is it important for payments companies to distinguish between low-value payments and all others?
Nebo Djurdjevic, CEO, Cardis International: One of the largest opportunities for growth in electronic payments is in replacing cash. But cash purchases are largely low-value payments (LVPs) – transactions below $20, typically for things like a cup of coffee or a sandwich on the run. About 80 percent of retail purchases are low value payments made in cash, with an average transaction value of $5. The challenge lies in a payment system architecture that was designed in the 1970s for credit card transactions averaging $100 – a system that requires each transaction to be processed individually through the payment system (i.e. through authorization, clearing, etc.). The resulting variable costs of processing each individual transaction are independent of the transaction amount and too high for LVPs – there is either a loss for the issuer/acquirer, or fees are too high for the merchant. The same issue exists in the online world, where a lack of cost-effective micropayment solutions for processing transactions below $5 impedes the growth of e/m-commerce.
Where does Cardis come into the LVP conversation?
Cardis provides a software solution that enables payment companies, including card issuers, acquirers and payment schemes, to extend existing payment products and infrastructures into the processing of low-value payments at significantly lower cost -- approximately ten times lower. It uniquely aligns the interests of all stakeholders, including retailers, in the move toward cashless payments, with significant economic benefit to their businesses.
How does Cardis solve the low-value payment problem?
First, it should be noted that low-value payments represent the cost issue across the entire value chain: the cost of processing individual transactions is felt across the spectrum of issuer, acquirer, and merchant. So in the broadest terms, Cardis takes the cost of processing these transactions out of the system on an end-to end basis.
How the Cardis low-value payment solution works is by aggregating cash transactions, in the form of auditable stored value on a card or mobile phone via a larger-value debit/credit card load transaction (e.g. $50) that can be cost effectively processed through the existing payment infrastructure. The aggregated load value is then amortized over a multitude of low-value transactions. This way, an individual transaction carries only a portion of the processing cost of the original load transaction. Each purchase doesn't have to be electronically processed individually, lowering costs for issuers and fees for merchants.
A unique feature of the Cardis solution that allows for game-changing cost reduction is its stored value balance, represented by auditable digital stored value units (invisible to the users). This uniquely eliminates the need for per-transaction reconciliation to detect fraud, as is the case with shadow accounting, which is a very costly alternative.
Why have other companies that have tried to innovate in this space failed? Or, are there others out there competing with you?
A4: Historical attempts to overcome the cost barrier of transaction-based card systems include a multitude of electronic purse solutions (e.g. Visa Cash, Proton, Chipknip, Geldkarte, CEPS). These solutions typically use stored value in a chip on the card, allowing offline payments. They didn’t succeed because of two major issues:
- They present an unattractive consumer proposition – a maintenance effort is required to reload electronic cash the same way as with physical cash, including the risk of having the transaction declined if there’s insufficient value in the e-purse.
- The economic model does not provide the necessary cost savings, due to the costly shadow accounting systems required to address risk/fraud management and regulatory mandates on the audit trail.
As a result, most of these e-purse solutions have either disappeared or are about to be phased out while banks are actively looking for alternative solutions.
Current attempts to address the LVP challenge for debit/credit cards have been relying on the convenience of new form factors (e.g. contactless cards, mobile NFC phones) without addressing the underlying economic issues of processing each individual transaction through the payment system. Based solely on a new form factor, these fail to deliver a win-win business case for all stakeholders in the four-party card payment system --, which is needed necessary to achieve broad adoption by retailers and consumers alike.
Right now, we are not aware of any other solution that addresses the fundamental economic issues in processing low value payments.
Who would the Cardis customer be -- The issuer? Processor? Acquirer?
Cardis’s customers are the existing payment service providers, including card issuers, acquirers, payment schemes, mobile operators and online payment service providers. Cardis technology is provided as a software plug-in, which enables them to extend their existing products and infrastructures to allow for convenient and cost-effective processing of low value payments while leveraging existing brands and operating models. It supports all chip-enabled form factors, including contact and contactless cards, virtual cards and mobile phones, and all payment channels including physical point of sale, online and mobile commerce.
How does this work for the consumer?
A6: Let’s explain it by using the example of a debit card with the Cardis LVP plug-in. Consumers are informed by their bank that their card now has a new function: in addition to using its debit card function for payments in supermarkets, stores, gas stations, etc., they can also use it for small purchases (under $20) usually made in cash, using the electronic balance stored on the card.
Here are some of the benefits to the consumer:
- Checkout will be faster than with cash or other cards
- The payment format has wide merchant acceptance, including many typically cash-only merchants
- You’ll never be caught not being able to buy something because you don’t have cash on you
- There’s no need to run to an ATM machine for cash -- another convenience of having it on your card
- You’ll only need one card for all payments (higher value as well as small cash purchases)
How it works for purchases under $20:
- If you have enough electronic balance on the card to pay for the purchase, the purchase amount is deducted from your electronic balance quickly, without having to use your PIN.
- If you do not have enough electronic balance on the card to pay for your purchase, you will automatically be prompted to load $50, using the same PIN as you have for your debit card. This occurs conveniently in one simple transaction at the merchant terminal, while making your purchase. The purchase amount is deducted from your new electronic balance.
- After each transaction, the electronic balance will be displayed on the PIN pad. If you wish, you can request a transaction record showing the purchase amount, the electronic balance on the card, and the $50 electronic transfer, if applicable.
- Your current account statement will include a $50 electronic transfer each time your electronic balance is replenished.
- You can see your low-value payment transaction history/details online.
What kinds of changes or adaptations will the different players (merchants, acquirers, etc.), have to make in order for the Cardis solution to work? What kind of investment is required of the merchant?
Issuers need to load and personalize the Cardis LVP application next to the debit/credit payment application on the consumer device. This can be done as part of regular card issuance or reissuance, remotely for the mobile phone form factor, or through post-issuance card management.
The acquirers and/or merchants will need to integrate Cardis LVP plug-in software into their POS payment application. This is a software update only – there is no hardware intervention at the point of sale.
An interbank processor (or payment scheme) operates the Cardis LVP Accumulation & Settlement plug-in, which inserts issuer and acquirer settlement totals into the standard settlement process. The payment scheme also oversees the Cardis LVP Fraud & Audit Management plug-in, which manages and audits the digital stored value units.
The implementation cost is negligible compared with the benefits.
Where is Cardis being used? Where is Cardis going next?
Cardis is currently being used in Austria, with further implementations underway in Europe and Asia. We’re also in active conversations with financial institutions in the U.S.
Chief Executive Officer, Cardis
Nebo has 18 years of experience in senior business and technology management roles in electronic payments having developed and marketed advanced electronic payment solutions based on chip card and mobile technology. Nebo has experience with international payments technologies companies and with founding and building start-ups. He was previously a member of the executive management team at Intellect Group where he was instrumental in providing payment solutions to financial institutions around the world.