Page 179 - The Digital Financial Services (DFS) Ecosystem

ITU-T Focus Group Digital Financial Services
Ecosystem

• Rich/Poor Cross Subsidies – a merchant services provider may be able to accrue sufficient revenue from
its larger and more affluent merchants to cover the cost of providing merchant acceptance services
to smaller or poorer merchants at essentially no cost to them. Implicit in a strategy to use this kind of
subsidization is a belief that it is hard to identify those smaller/poorer merchants who are likely to turn
into larger or more affluent merchants over time. A related idea is to have more revenue come from
high-value, rather than low value transactions.

• Account Balances – in a high interest rate environment, merchant services providers may be able to
obtain sufficient revenue from holding merchant funds for a period of time prior to making the funds
available to the merchant.
• Government Subsidies – governments looking to quickly enable large numbers of merchants for payments
acceptance may choose to subsidize some costs: this could come in the form of tax incentives of various
kinds.

• Provider Bundling – the cost of payments may be absorbed by a commerce platform as part of its costs
in supplying the platform. This is emerging as a very significant factor for merchant providers of goods
and services in all segments, and is discussed further in a section below.
• Trading and arbitrage – a merchant services provider may, either directly or through partnership with
another provider, realize trading profits on currency sufficient to offset the costs of merchant payments.
The most obvious example of this is with cross-border (cross-currency) transactions, particularly remote
(eCommerce, mCommerce) transactions, where foreign exchange arbitrage opportunities may be
considerable. In another example, trading in currency vs. airtime may create arbitrage opportunities.

The various revenue sources may or may not be tightly coupled with a particular payment product or payment
system. Interchange, for example, is commonly used in card payments, and is specified as a rule in the private
operating rules of many card networks. Other revenue sources may be used or not by individual merchant
services providers as a part of their business model. The chart below shows how these revenue sources
intersect with payments systems:

Table 1 – Type of Payment System

Type of Payment System
Cards Digital Wallet
Open Closed Closed Open Bill to Credit Transfer
Loop Loop Loop Loop 1 Carrier
Merchant Discount Fee 2      
Merchant cash-out fees  

Buyer surcharge     

Buyer transfer fees  

Airtime Subsidy  
Merchant Lending    

Consumer Lending  

Rich/Poor Subsidy    
Account Balances  

Government Subsidies

Provider Bundling      

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