The genius of Direct Card Routing: the secret sauce behind payment giants’ success

When you enter the supermarket to pay for your weekly groceries or withdraw money from a POS agent, you kickstart a complex procedure that takes seconds but involves many different financial institutions. To complete that payment, the POS device sends your card information through a payment processor to a payment switch or card scheme (often Visa and Mastercard). The card scheme or switch then asks your bank for permission for that transaction. After the switch or card scheme gets permission for the transaction, your bank charges your account and (within 24hrs) sends the money to the supermarket’s account. 

But while that process takes only seconds, this complex centralized system of processing payments has many steps that could easily lead to customers experiencing a failed transaction or long processing time due to multiple technical dependencies. For instance, POS transactions in Nigeria are required to pass through the central switch operated by the Nigerian Inter-Bank Settlement System (NIBBS), a CBN-approved payment terminals service aggregator bank-owned central payment switch that suffers multiple outages yearly.

Also, a large percentage of banks and other financial institutions have now taken POS-based Agent banking services as one of their money-making ventures due to the unregulated fees applied to cash-out/cash-in transactions initiated at agent locations. On the other hand, merchants are charged MSC (merchant service charge), though regulated for offering to accept payment from customers using the POS terminal. every financial institution adds a fee for processing that transaction, and this drives up the final cost of each transaction. 

A possible solution to bypass this centralised system is for payment companies to connect directly to issuer banks for authorization, rather than routing transactions through NIBSS. This bypassing can be likened to blockchain technology, where nodes are connected to each other directly without the need for a central intermediary. This ensures faster response times and reduces the risk of failed transactions while enabling instant reconciliation and eliminating bottlenecks associated with chargebacks.

Some Nigerian fintechs, like Opay and Moniepoint, have used direct card routing to achieve this decentralised method of sending payment card transactions directly to issuer Banks.  This process gives them control and visibility over the payment process and allows their transactions to be processed faster and with reduced chances of failure. 

For these fintech startups, the extra dependability that direct card routing offers has paid off handsomely. In 2023, OPay started the year with 19 million accounts, and according to a regulatory filing by Opera, an early OPay investor, the fintech quadrupled its user base in 2023 and grew revenue by 60%. That same year, Moniepoint grew the number of transactions it processed by 205% from 2022 as it processed 5.2 billion transactions worth over $150 billion. 

However, establishing direct card routing is costly, as most fintechs do not possess the costly switching license that will allow them to bypass the centralized infrastructure, NIBSS. Direct card routing also requires massive scale and technical capacity, something that Moniepoint and OPay could afford, compared to other Nigerian fintechs who may not. It also requires added infrastructure and strict compliance with the PCI Data Security Standard (PCI-DSS) and other rules and regulations set by issuer banks.

Enabling direct card routing

Enter Zone, a payment infrastructure company that has created Africa’s first regulated blockchain network for payment. The company is building a use case for its blockchain technology that will leverage its payment switching license in Nigeria to allow POS terminals to send transactions directly to banks and card issuers without going through an intermediary or requiring separate integrations to each bank.

This comes after Zone successfully improved the reliability, speed, and reconciliation process for ATM transactions with its regulated blockchain network. After just three months of rolling out its ATM infrastructure, the company was already processing over $1 million daily and has now processed transactions for more than 10 million cardholders.

“We’re launching and rolling out some new use cases this year. The ATM use case didn’t incorporate fintechs because they don’t deploy ATMs. But with the POS, that brings a use case that fintechs are very familiar with—and for that, we are also integrating some of the big fintechs in the country,” Obi Emetarom, the CEO of Zone, told TechCrunch.

While Zone does not have any competitors in Africa, its blockchain-powered solution is similar to RippleNet, a Web3 company that uses blockchain technology to offer a decentralised global network that allows banks to move money around internationally in just a few seconds at a cheaper rate than traditional methods. The company’s solution is supported in more than 50 countries and pairs with over 120 fiat currencies. 

With Zone’s blockchain payment network, which has been licensed by the Central Bank of Nigeria licenses, fintechs can connect directly with each other and process transactions that can be verified immediately. This will ensure improved reliability, security, and speed. The extra dependability and speed that OPay and Moniepoint have been known for are linked to direct card routing, but not every fintech has the scale to integrate direct card routing. 

For fintechs that process card payments, this could be the next step to achieving scale in Nigeria’s large market.

See also: CBN sets limit for contactless payment to N15,000 per transaction, N50,000 a day