Evaluating Risk Management Strategies for Third Party Payment Networks

Evaluating Risk Management Strategies for Third Party Payment Networks

Van Driel, J.W.

Van Eeten, M.J.G. (mentor)
Gan?a?n, C.H. (mentor)
De Reuver, G.A. (mentor)
Pieters, W. (mentor)
Lobbezoo, L.W.M. (mentor)

Technology, Policy and Management

Economics of Cybersecurity

2015-12-07

Like most consumers, you probably take the payment process when checking out at your favorite webshop, for granted. Regardless of which payment method you select, chances are big that the schemes of one of the few players within the payment industry - i.e. MasterCard or Visa - are used. We refer to this part of the industry as the card network. In order to create more competition for the card network, the European Commission is working on Payment Service Directive II (PSDII) which introduces the third party payment (TPP) network. Although there seems to be quite some potential for the TPP network, challenges are present. The new TPP network is less mature than the established card network that has dominated the payment industry for decades. Whereas one of the main challenges in the card network is the cost effective management of chargebacks, a similar challenge is present in the TPP network. Practice has shown that merchants that make use of payment methods in the TPP network are confronted with reversed payments - i.e. the TPP has provided an authorization, however no settlement has been received. We refer to these transactions as non-payments. There is a lack of knowledge about the reasons of the occurrence of the non-payments. In our research we have aimed to understand how big the financial risk of the occurrence of non-payments is and what could be strategies a payment service provider (PSP) can use to manage this risk. With our research, we have made four contributions. First, we described the payment process as it is organized in the TPP network and contrasted it with the card network. Second, we identified patterns in transaction data from the TPP network, that let us distinguish payments from non-payments. Third, we designed and evaluated risk management strategies that can be used to manage the non-payment risk. And fourth, we compared the merchant's transaction costs in the card and TPP networks to verify if the TPP network can become a cost competitor of the card network. The results of our research show that the TPP network is a cost competitor of the card network when considering the merchant's transaction costs.

Third Party Payment Network
Risk Management
Non-payment
Payment Service Provider

http://resolver.tudelft.nl/uuid:10302e8a-5bba-4bd1-a8a5-8491cae7d0ad

2018-12-01

Student theses

master thesis

(c) 2015 Van Driel, J.W.