Jim McCarthy, CEO of Thredd, explained the traditional four-party model—where the cardholder, merchant, acquirer, and issuing bank each played distinct roles—is evolving as merchant acquirers expand into issuing, driven by the need for more specialized payment solutions in the digital age.
McCarthy noted that merchants increasingly want to accept card payments but often lack the know-how. This is where savvy providers step in, converting payments into virtual card accounts, thereby deepening the relationship between merchants and customers. Instead of merely processing payments, these providers are helping firms manage their cash flow.
Beyond the Four-Party Model
Historically, the four-party model kept each player confined to its own role. Acquirers never went beyond their core functions, and their tech stacks weren’t built to support more. However, as companies like PayPal and Payfacs have shown, moving money and enabling financial relationships have become key to succeeding in the post-pandemic world.
Square serves as a prime example of this evolution. Initially, Square’s focus was on providing a tool to accept card payments, but it soon expanded into Square Cash, a mobile payment service that revolutionized money movement. By offering seamless and cost-effective ways to transfer funds, Square built the largest neobank in the U.S., according to McCarthy.
This shift highlights the importance of using existing payment rails creatively. Square demonstrated how consumers could use cards they already had in their wallets to pay merchants digitally, which banks have struggled to do for small businesses due to tech limitations.
The Power of Partnerships
McCarthy explained that banks can learn from companies like Square by forming strategic partnerships with firms like Thredd, which provides the necessary APIs to enable card issuance. This allows banks to adopt a front-end solution while outsourcing compliance functions to fintechs, helping them compete in the digital payments landscape. ISO 8583, the international standard for card transactions, plays a crucial role in this unbundling, as seen in Thredd’s work in Japan, where they introduced a Buy Now, Pay Later (BNPL) product following PayPal’s acquisition of Paidy.
This model enables banks to focus on compliance and data while fintechs handle the customer experience and technology. McCarthy predicts that virtual cards, remittances, and BNPL will see increased demand in 2025, especially in B2B transactions.
Looking Ahead
McCarthy emphasized that merchants’ payment needs are evolving beyond traditional cards, with pay-by-bank options gaining momentum. He cautioned that businesses must be prepared for these shifts or risk being disrupted.