Summary of "Adyen and Offline Debit/Credit Card Transactions"
I’ve been subscribing to Ryan Reeves’ business breakdowns newsletter for a while now and I have found it to be exceptional at doing what Ryan designed it to do – break down businesses.
Ryan does lots of great research to better understand a business and then he summarizes it in a very concise way that makes it very easy to understand.
My summary for this post is on Adyen but it is behind a paywall so I will only be brief.
What I’ve done in this summary is mostly just focus on what goes on behind the scenes of an offline credit/debit card transaction.
I then briefly mentioned Adyen’s role but to get a more detailed understanding of Adyen I highly suggest subscribing to Ryan’s newsletter “Business Breakdowns” by following this link:
https://businessbreakdowns.substack.com/
If you already are a subscriber then you can read the full post by clicking below:
https://businessbreakdowns.substack.com/p/adyen
Here is my summary:
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There are 6 different parties (sometimes 5) involved in a credit card transaction that is made offline.
Those 6 different parties are:
1. The consumer swiping his credit card to buy the product
2. Issuing bank (the consumer’s bank)
3. Credit Card Network (Visa and Mastercard)
4. Merchant (the business where you bought something from)
5. Acquiring bank (Merchant’s bank)
6. The payment processor
Sometimes the merchant bank (#5 above) and the payment processor (#6 above) are the same company and that is why I mentioned at the beginning that sometimes there are only 5 parties.
Because when the merchant’s bank (#5) and the payment processor (#6) are the same company, they are then referred to as the acquirer.
That is what Adyen is, they are an acquirer or in other words, they are both the merchant’s bank and the payment processor.
Well technically Adyen is only a payment processor in the US since they act under Wells Fargo and Deutsche bank so it’s a little bit more complicated and I think the reason for this is because Adyen is a fintech and getting a banking license can be cumbersome for fintechs.
The issuing bank (#2 above) makes the most money (around 2%) in an offline credit card transaction because they have the most to lose since they absorb the credit risk if you don’t pay your credit card bill.
In other words, the issuing bank (the consumer’s bank) has to pay the merchant (seller of goods you’re buying from) up front and if you don’t pay them back then your bank (the issuing bank) has to eat the charge.
And credit card fees are so high because your bank isn’t holding collateral against you.
(If you don’t pay your mortgage, the bank that lends you the money to buy your house can take your house because the house acts as collateral. In a credit card transaction, there is no collateral)
Adyen has very high authorization rates* compared to their competitors because their competitors are industry incumbents that have grown through consolidation (numerous acquisitions) going back many decades and they have to merge all of these acquired companies together along with all of the data that comes with the acquisitions.
Adyen isn’t weighed down by merging acquisitions together so they are much better suited to make sure that more payments are processed because of their superior technology and because they’re vertically integrated so this decreases chargeback fees.
Lower chargeback fees are good for merchants since they save them lots of money and that is briefly why Adyen has done so well in terms of having very low churn.
* The authorization rate is the percentage of transactions that you submit and are accepted by the cardholder's bank.