For decades, the “classic” four-party model dominated card payments — where the quartet was comprised of the cardholder, the merchant, the acquirer and an issuing bank. Acquirers process the payment for merchants while issuing banks issue the card to the holder.
Thredd CEO Jim McCarthy told Karen Webster in an interview that the lines are blurring, and merchant acquirers are expanding into issuing — chiefly because the digital age demands specialized payment solutions.
The evolution is a natural one as more merchants want to accept card payments but may not know how to go about doing so, McCarthy said. Savvy providers can turn the payment into an actual account through virtual card issuance, deepening the relationship between merchants and end customers. In doing so, they are not simply acting as acquirers but are supporting various client firms’ cash flow needs.
“The four-party model was kind of rigid — about where you had to ‘sit’ in a transaction … and you never crossed those lines,” McCarthy said.
Merchant acquirers stuck to their knitting, so to speak, and never went beyond their defined functions — and their technology stacks would not have handled any shift, either.
But with the advent of PayPal and Payfacs, with platforms and payouts, the importance of facilitating money movement was highlighted where money actually underpins a relationship — and embedded finance has become a hallmark of the post-pandemic age. Consumers are meeting merchants where the money flows are occurring. As for examples of how the evolution can occur, Square started as a pure merchant play more than a decade ago, using a dongle on a phone to accept swipe payments. But the eventuality was that the company offered Square Cash, operating as a mobile payment service facilitating fund flows while absorbing the cost of that money movement.
“They created a great flywheel,” said McCarthy, who added that Square Cash was a “great proposition that consumers had compared to any other way, or cost, to move money conveniently versus any other type of money transfer, done almost instantaneously.
“All of a sudden, they built the largest neobank in the United States,” McCarthy said. “…They came up with a dongle, and they took this classic Silicon Valley approach to innovating quickly and saying, ‘We’ll be a merchant of record with a point-of-sale device,” taking a very different risk point of view than a bank would.”
The advantage has been tied to using the payment rails that have existed for a while — using the installed, already extant base of card users. The only trick was showing those card users that there were different ways to use the card they already had in their wallets to pay the local merchants digitally.
Banks can take a cue from the Squares of the world, where financial institutions have sought to service small businesses but lacked the tech to do so.
Against that backdrop, by striking the right partnerships — with firms such as Thredd, which offers the ingredients to move into issuance through its APIs — banks can effectively “take the pieces they need to build some of those capabilities,” McCarthy said. This is a whole ecosystem of different product propositions that take into account the ISO 8583 messaging, an international standard for card transactions. Japan is a key example here, where Thredd enabled a buy now, pay later (BNPL)-like product in the wake of PayPal’s acquisition of Paidy that helps merchants offer credit to consumers in that country.
“They take our messaging [based on the standard], and they are able to provide this product,” McCarthy said.
The unbundling of the banking relationship enables the bank to offload some of the advanced tech requirements and the user experience, while keeping its compliance and data expertise in place — in effect acquiring a front end while the FinTechs outsource the compliance function, he said.
Looking ahead, Thredd sees a “ton of demand in 2025 in B2B” as virtual cards are used more frequently, McCarthy said. Elsewhere, remittances and BNPL continue to be strong growth areas.
“You’ve got to think broadly about where all this is headed,” said McCarthy, who added that merchants’ payments needs will move beyond cards toward pay-by-bank options.
“If you’re not prepared for this, you will be disrupted,” he told Webster.
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