[Music] in 1947 in brooklyn new york john c biggins of flatbush national bank created a new system called charge it customers could use charge it cards to pay for goods and flatbush national bank would reimburse the retailer and then collect payment from the customer later on merchants had to leave sales slips with the bank directly so the reach of this scheme was small but it meant that locals could use a single card at multiple businesses in the area by the late 1960s however this concept had evolved and bank card networks began to form led by interbank later mastercharge and today we know it as mastercard and bankimericart which is now visa international these remain the leading credit card networks and their reach is spread across the globe [Music] when you use a card in a transaction two banks have to communicate with each other your bank and the merchants bank the card network operates as the payment trail allowing the banks to communicate passing data to each other in order to facilitate your purchase our whole network is based on three things off clear and settle authorization is it me can i afford it that authorization comes to a bank and it and the bank says yes or no the second stage is called clearing and that is basically just an exchange of data that defines different ledger positions for everybody in other words take 10 pounds from scott abraham's and give it to sainsbury's supermarkets and then the final piece the third piece of the jigsaw is the actual money changing hands of course very little actual money does change hands because there's lots of flows going either way so the the net of all that of course is what's actually changed hands the card schemes have several players so on one side you have the banks who issue cards to individuals are you the cards that you and i have those are known as the issuing banks their job is to make sure that the person who is spending on the card is good for the money if that person isn't good for the money the issuing bank has to pick up the debt on the other side you have the merchants they need banks to be able to facilitate into the network because people have to make sure that the goods they have bought are going to be delivered they need someone who can stand in for them and there are a set of banks on that side of the market called acquiring banks they effectively acquire the merchants so what will happen in a credit card trade is that i will get a card from an issuing bank i will use my card on a merchant who will send it to their acquiring bank who will send it through the network to the issuing bank who will authorize it and back out through the network so although i can walk out with the goods here and now that cycle will probably take 24 hours to be netted out banks in the modern day card networks are providing a central point of trust if you can trust the bank then you can trust that the money will be moved and the goods will be delivered but until the 1950s there was no central point of trust between merchants and customers it was built entirely on trust of individuals before credit cards were invented you had a problem if you were a shopkeeper if somebody wanted to buy something and they didn't have the money what did you do either you didn't sell it to them or you gave them credit you would only really give credit to people who you knew and even then you weren't really sure how good they were for the money so you didn't give them that much credit your primary job was not to offer credit your primary job was to sell something so trade was actually relatively restricted and if you went to a different town with a new merchant there was no way you could buy anything if you didn't have the cash in the late 1940s this was a problem that a man named frank x mcnamara found himself in went out to dinner with friends he'd forgotten his wallet and was unable to pay after this incident frank and his close business associates founded something called the diners club in early 1950. diners club issued a membership card that allowed its members to dine for free at a number of participating merchants in the area and then would charge them at the end of every month like john biggins and charge it before them one of the most novel ideas diners club had was the implementation of the middleman with a middleman acting as a guarantor for the money the merchant wasn't responsible for holding the debt and the customer wouldn't have to worry about paying right there and then and once the idea was out there and more players were coming into the space the banks wanted in on the action i guess in the 1950s uh the bank of america realized that actually it was the job of the banks to be able to work out credit and if they could find some way of of effectively offering out their credit capabilities to merchants maybe they could make that credit problem easier what transpired effectively was a mechanism by which they gave people a card and they said to the merchants we have effectively credits called this person and so if they spend on this card this debt will be backed up by the bank of america so that's why you got a card that had credit on it a credit card now from a merchant's perspective this was great all they had to do was basically work out whether the bank of america was trustworthy if they were they were happy to accept that debt the bank of america then basically puts himself in the middle of all these trades and it facilitates the debt on either side because he's credit worthy to both sides the merchant is willing to accept that trade therefore the amount of trade massively exploded and as trade exploded so did the technology helping to facilitate it a host of new physical devices including plastic carts magnetic strips and point of sales terminals combined with new back-end technologies accelerated the credit card industry rapidly and with all these leaps forward in tech and processing banks began to establish a network of communication between themselves putting in place rules and processes for car transactions that could be standardized across the board this evolved over time into networks that are now independent of the banks mastercard originally started back in 1966 or the origins i should say of mastercard started in 1966 with a gentleman called carl heinker and he proposed to a number of banks that they could take their systems and put them together to create a bigger network right and then all invest in that network rather than investing in your own individual networks the key problem that mastercard and other networks were and to some extent still are trying to solve is the question of interoperability it isn't particularly a good offer for consumers if you have to have 93 different accounts and cards for the 93 different places you shop the great value that networks payment networks still provide is that interoperability and that consistency of experience wherever you are in the world isn't it amazing that i can go to heathrow and use my card in wh smith there and then you know 15 hours later i can do exactly the same thing on copacabana beach in rio de janeiro and i expect it to work the same way and it does this network is successful because it has benefits for all parties involved the consumers and merchants have a more flexible and trustworthy form of payment method while the banks and card networks charge processing fees on every transaction that goes through the network card network set a rate called interchange fees these fees are charged to the merchant and paid out to the issuing bank to cover handling costs fraud and the inherent risk of a credit transaction up to 2.7 of the transaction the card networks themselves collect a separate fee called the network fee this is usually far smaller averaging around 0.05 of every transaction all these fees differ via network and by type of card used and in today's networks there are three main types of cards used credit debit and prepaid the major difference between credit cards and debit cards is basically when you end up settling what you're paying for so with the debit card you use that and that comes almost always from a current account so your money a credit card comes from a line of credit that you actually then pay back later that's the main difference we we have other types of card as well so prepaid cards where you pay almost in advance but the two main card types that we've had for years and years are debit and credit and whilst the focus tends to be on debit and credit actually it's prepaid that has been responsible for a large part of the innovation that has come through with the fintechs and challenger banks now the reason that that's the case is that there are more stringent rules around the processing and management of prepaid cards because a prepaid card is never allowed to go overdrawn what that means for the processing of prepaid cards is that the technology that sits behind it actually needs to be slightly more advanced and more sophisticated in order to be able to support those rules one of the things that a prepaid processor is able to support was creating a real-time alert for the cardholder at the moment of the transaction so almost before the receipts printed out of the pos terminal an alert can appear on a mobile phone to say you've just spent this amount what we've seen is then those processing capabilities that have started in a prepaid have then rolled out into the debit and credit arena the prepaid space has been leading some of the innovation in card user experience and was a popular method for uk fintechs and challenger banks to initially launch their products why is innovation more challenging for credit and debit card processing now those structures of visa mastercard came out of the 1970s and have evolved over time into what we have today but what we've laid into that is a lot of complexity and unnecessary processes which were related to paper structures and telex structures and old structures of how we transacted and that's been a huge opportunity for the new companies to come in like the stripes and uh decliners and adiens and others to say these old processes although they were very good don't work for today's world of the network that we have now and the opportunity of the technologies that we have now so i think you'll see some quite significant changes occurring in relation to card schemes largely driven i think as well by the brexit issues where interchange rates have changed so that uk merchants are being charged higher rates for transactions originating from the european union which there's no value added for them it's a tax what else might the future hold for the card networks and card payments what i would say is that the core value proposition of card payments is something for the ages it stayed with us and we see no reason why it still won't deliver value way into the future and actually what we're seeing now we are beginning to become more agnostic to those rails and it's more about consumer choice applicability what's the best thing for the type of environment and payment being made the future we think is really exciting because there's a huge amount of opportunity money investment talent coming into fintech overall and payments in particular at the same time of course the the more established players are looking to compete with those new businesses as well the positive tension competitive tension that we see between those businesses is a great place for the likes of mastercard to play it's a real challenge as well we've got to be everything to everybody but that's what a network should be right [Music] you