Understanding payments in South Africa: How do card payments work?

We’ve written a lot about the rise of e-commerce and growth in digital payments across South Africa in recent months, looking at how this is reshaping the economy and driving new consumer behaviours.

While it’s true that cash remains a large part of the overall picture, and new forms of payment such as Pay by bank are carving out a niche for themselves, enterprises cannot afford to ignore card payments. When it comes to buying anything, from groceries to insurance, many South Africans rely on card payments for their convenience, speed and security.

Here, we examine exactly what card payments are and how card payments work in South Africa specifically. Explore more on card payments and how they work in European markets in Flow.

Introduction to card payments

Card payments are transactions paid for using a credit, debit or prepaid card. Most people will think of inserting their card into a chip and pin machine in a store, or entering their card number into a website’s payment gateway to check out. However, a card payment is technically any payment that is made using the card networks’ payment ‘rails’, or the infrastructure that companies like Visa and Mastercard have built to allow their users to transact safely and easily around the world.

This means that card payments can technically take place even when no card is physically present, such as when a buyer uses smartphone-based payments like Apple Pay or Samsung Pay, or when a consumer has saved their card details on a site or platform to authorise recurring payments or charges.

Card payments have seen a steady increase in usage in South Africa in recent years, driven by both increasing bank account ownership and the growing adoption of smartphone-based contactless payments, not to mention card payments’ dominance in e-commerce.

Our recent series of research reports looked into South African consumers’ attitudes toward digital payments across sectors and showed that card payments are by far the most preferred payment method for a wide range of online transactions - including in e-commerce and travel booking.

In South Africa, as in many countries around the world, the vast majority of cards run on the Visa or Mastercard networks and are provided through retail banks such as Capitec, FNB, Standard Bank, Absa, Nedbank and many more. The American Express payment network is also available, though research from Statista indicates that it only accounts for around 1% of the entire market.

Different types of cards

Cards come in three primary types, each with their own benefits and drawbacks. These are credit cards, debit cards and prepaid cards.

Credit cards: A credit card offers users a line of credit, supplied by their bank, to be repaid at a future date (typically monthly). This can offer advantages when it comes to managing cash, as customers can make purchases knowing they won’t have to settle the charge until later. In addition, many banks offer rewards to credit card users, allowing them to earn points for purchases made on their card. These can be redeemed at a later date.

Credit cards also enable people to build their credit history, by demonstrating to the bank that they can be trusted to manage a line of credit. This can enable them to borrow at a lower interest rate in future.

Credit cards charge an interest rate on balances carried on the card, though consumers are not charged interest if they pay the balance off in full each month.

Debit cards: A debit card is linked directly to the user’s bank account, allowing them to spend their own money directly. This can make it easier to manage spending and is safer for users than carrying cash. Debit cards also allow cardholders to withdraw cash at automated teller machines, or ATMs.

Our recent research into digital payments in South Africa found that card payments - both credit and debit cards - are the most preferred payment method for e-commerce purchases, favoured by 71.8% of online shoppers.

Prepaid cards: Prepaid cards are similar to debit cards but are not linked directly to a bank account and must be pre-loaded with funds prior to use. This offers the same convenience and protection as a debit card, but allows for greater accessibility, as those without access to a bank account can use them to reap the benefits of card payments.

How card payments work

Part of the reason card payments are so popular is the seamless, easy experience they offer for customers. However, when a card transaction takes place, there is a sophisticated and multi-pronged exchange that happens behind the scenes.

• When a customer initiates a payment with their card, the retailer’s payment machine (or the e-commerce store’s payment gateway) scans their card or views their details and communicates with the retailer’s bank (known as the merchant acquirer or acquiring bank), who then contacts the ‘issuer’ - the bank that issued the card - via card networks
• The acquirer then contacts the issuer to check the account balance and confirm the amount to be charged
• An approval message is then sent to the acquirer. The issuer places a hold on the customer’s funds for later
• Later, often at the end of the business day, all approved payments are transferred in batch to the merchant account. This is known as settlement, and it is at this point that the card network, the issuer and the acquirer charge transaction fees

The first few steps typically take no more than a few seconds. This process is usually referred to as the “four party model”, with the four parties being the customer, the issuer, the acquirer and the merchant.

A version of this model plays out in various different forms for different types of transactions, for example whether the transaction took place via an e-commerce platform’s ’guest checkout’ functionality, or whether customers want to save their card details in a digital wallet to be used later. This means companies must construct their own payment flows to accommodate different types of customer journeys, depending on what they offer.

Even small tweaks to the customer journey can have a huge impact on customer behaviour, so it is important to maximise flexibility. For this reason, Stitch users have the ability to create custom payment flows that use multiple payment methods, for example enabling users to make an initial payment using Pay by bank, while also setting up recurring subscription payments in the same flow.

Card payments are much more complex for larger businesses

The card payment process is fairly simple in theory, but can quickly become complex in practice - especially for mid-sized or large companies. Enterprise businesses often have multiple merchant IDs or accounts that transactions are settled into. This can create complexities, as the merchant ID needs to sit at the bank that the payment service provider (PSP) is integrated into.

More accounts, merchant IDs and PSPs means more potential points of failure that can lead to more declined transactions. This in turn impacts the customer experience, causing many to get frustrated and likely to look elsewhere, resulting in lower conversion and retention, and less revenue for the business.

While card payments are a well-established technology, it’s critically important for larger companies to build a payment stack that has enough flexibility and redundancy to maintain high acceptance rates.

It is for this reason that Stitch prioritises integrations with all major banks in South Africa, which means we can process transactions and settle into whichever merchant ID or account a client wants. We have also developed smart routing functionality that automatically funnels customers towards alternative payment methods when a transaction fails, maintaining high levels of conversion. Our payments team works closely with clients to help them understand where they can make changes to continually optimise their payments stack.

Card processing fees

Enterprises pay a small fee on each transaction to cover the cost of chargebacks (transactions that are later reversed or recalled) and maintaining the payment network. However, typically, the cost of accepting card payments is dwarfed by the increase in revenues they experience when they offer customers their preferred way to pay. Depending on the service a business gets from their provider, these fees serve to also ensure high performance, quick support and additional services.

Card fees come in a number of forms:

• Transaction fees are typically charged as a percentage of each sale, plus a small standard fee. This includes a fee paid to the issuer, which is known as interchange
• However, some payment processors also charge a fee on any transactions that are later reversed, which is known as a chargeback fee
• In addition, some processors charge a monthly fee

Start accepting card payments

Offering card payments with Stitch is simple. As long as your business has a merchant ID, our internal team requires a few pieces of information and can get you started with your integration. With one integration, you can access a range of payment methods, from card and cash, to Pay by bank and Capitec Pay, manual transfer, debits for recurring payments and even Pay with crypto. Your payment options continually update as new methods become available.

Card payments offer a fast, safe and easy way for businesses to begin accepting money online. Our research shows that customers seek a range of payment options online, but that card payments remain preferred.

Stitch offers reliable, secure card payment processing with a wide range of functionality, such as programmatic chargeback management to reduce admin and one-click checkout for returning users.